e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
June 30,
2010
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-32875
BURGER KING HOLDINGS,
INC.
(Exact name of Registrant as
Specified in Its Charter)
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Delaware
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75-3095469
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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5505 Blue Lagoon Drive, Miami, Florida
(Address of Principal
Executive Offices)
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33126
(Zip Code)
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Registrants
telephone number, including area code
(305) 378-3000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the Common Stock held by
non-affiliates of the registrant as of December 31, 2009
was $1.7 billion.
The number of shares outstanding of the Registrants Common
Stock as of August 19, 2010 was 135,882,489.
DOCUMENTS
INCORPORATED BY REFERENCE:
Part III incorporates certain information by reference from
Registrants definitive proxy statement for the 2010 annual
meeting of stockholders, which proxy will be filed no later than
120 days after the close of the Registrants fiscal
year ended June 30, 2010.
BURGER
KING HOLDINGS, INC.
2010
FORM 10-K
ANNUAL REPORT
TABLE OF
CONTENTS
Burger
King®,
Whopper®,
Whopper
Jr.®,
Have It Your
Way®,
Burger King Bun Halves and Crescent
Logo®,
BK Burger
Shots®,
BK®
Value Menu,
BK®
Fresh Apple Fries,
BK®
Stacker, BK
Wrapper®,
BK®
Breakfast Muffin Sandwich,
BK®
Kids Meal, Home of the
Whopper®,
Hungry
Jacks®,
BK Positive
Steps®,
Tendercrisp®,
TenderGrill®,
Angry
Whoppertm,
BK Breakfast
Shotstm,
BK
Fusiontm,
BKtm
Positive Steps, Come Como
Reytm,
King
Dealstm,
Long
Chickentm,
Steakhouse
XTtm,
Whoppertm
Bar,
BKtm
Fire-Grilled Ribs,
BBQtm
Stackticon,
BKtm
Ofertas,
BKtm
Breakfast Bowl, Stunner
Dealstm
and Mega Angus
XTtm
are trademarks of Burger King Corporation. References to fiscal
2010, fiscal 2009 and fiscal 2008 in this
Form 10-K
are to the fiscal years ended June 30, 2010, 2009 and 2008,
respectively, and references to fiscal 2011 are to the fiscal
year ending June 30, 2011. Unless the context otherwise
requires, all references to we, us,
our and Company refer to Burger King
Holdings, Inc. and its subsidiaries.
In this document, we rely on and refer to information
regarding the restaurant industry, the quick service restaurant
segment and the fast food hamburger restaurant category that has
been prepared by the industry research firm The NPD Group, Inc.
(which prepares and disseminates Consumer Reported Eating Share
Trends, or CREST data) or compiled from market research reports,
analyst reports and other publicly available information. All
industry and market data that are not cited as being from a
specified source are from internal analysis based upon data
available from known sources or other proprietary research and
analysis.
All financial information within this document has been
rounded to one place past the decimal point.
2
Overview
Burger King Holdings, Inc. (we or the
Company) is a Delaware corporation formed on
July 23, 2002. Our restaurant system includes restaurants
owned by the Company and by franchisees. We are the worlds
second largest fast food hamburger restaurant, or FFHR, chain as
measured by the total number of restaurants and system-wide
sales. As of June 30, 2010, we owned or franchised a total
of 12,174 restaurants in 76 countries and U.S. territories,
of which 1,387 restaurants were Company restaurants and 10,787
were owned by our franchisees. Of these restaurants, 7,258 or
60% were located in the United States and 4,916 or 40% were
located in our international markets. Our restaurants feature
flame-broiled hamburgers, chicken and other specialty
sandwiches, french fries, soft drinks and other
affordably-priced food items. During our more than 50 years
of operating history, we have developed a scalable and
cost-efficient quick service hamburger restaurant model that
offers customers fast food at affordable prices.
We generate revenues from three sources: (1) retail sales
at Company restaurants; (2) franchise revenues, consisting
of royalties based on a percentage of sales reported by
franchise restaurants and franchise fees paid by franchisees;
and (3) property income from restaurants that we lease or
sublease to franchisees. Approximately 90% of our current
restaurants are franchised and we have a higher percentage of
franchise restaurants to Company restaurants than our major
competitors in the FFHR category. We expect that the percentage
of franchise restaurants will increase as franchisees open new
restaurants and as we accelerate sales of Company restaurants to
franchisees, or refranchisings, over the next five
years. We believe that this restaurant ownership mix provides us
with a strategic advantage because the capital required to grow
and maintain the Burger
King®
system is funded primarily by franchisees, while still giving us
a base of Company restaurants to demonstrate credibility with
franchisees in launching new initiatives. As a result of the
high percentage of franchise restaurants in our system, we
believe we have lower capital requirements compared to our major
competitors. However, our franchise dominated business model
also presents a number of drawbacks and risks, such as our
limited control over franchisees and limited ability to
facilitate changes in restaurant ownership. In addition, our
operating results are closely tied to the success of our
franchisees, and we are dependent on franchisees to open new
restaurants as part of our growth strategy.
Our
History
Burger King Corporation, which we refer to as BKC, was founded
in 1954 when James McLamore and David Edgerton opened the
first Burger King restaurant in Miami, Florida. The
Whopper®
sandwich was introduced in 1957. BKC opened its first
international restaurant in the Bahamas in 1966. BKC also
established its brand identity with the introduction of the
bun halves logo in 1969 and the launch of the first
Have It Your
Way®
campaign in 1974. BKC introduced drive-thru service, designed to
satisfy customers
on-the-go
in 1975.
In 1967, Mr. McLamore and Mr. Edgerton sold BKC to
Minneapolis-based The Pillsbury Company, taking it from a small
privately-held franchised chain to a subsidiary of a large food
conglomerate. The Pillsbury Company was purchased by Grand
Metropolitan plc which, in turn, merged with Guinness plc to
form Diageo plc, a British spirits company. In December
2002, BKC was acquired by private equity funds controlled by TPG
Capital, Bain Capital Partners and the Goldman Sachs Funds,
which we refer to as our Sponsors. In May 2006, we
consummated our initial public offering. The private equity
funds controlled by the Sponsors currently own approximately 31%
of our outstanding common stock.
Our
Industry
We operate in the FFHR category of the quick service restaurant,
or QSR, segment of the restaurant industry. In the United
States, the QSR segment is the largest segment of the restaurant
industry and has demonstrated steady growth over a long period
of time. According to The NPD Group, Inc., which prepares and
disseminates CREST data, QSR sales have grown at an annual rate
of 3% over the past 10 years, totaling approximately
$230.5 billion for the
12-month
period ended May 2010 and are projected to increase at an annual
rate of 3% between 2010 and 2015.
3
According to The NPD Group, Inc., the FFHR category is the
largest category in the QSR segment, generating sales of over
$62.6 billion in the United States for the
12-month
period ended May 30, 2010, representing 27% of total QSR
sales. According to The NPD Group, Inc., sales for the FFHR
category are expected to increase at an average rate of 5% per
year over the next five years. For the
12-month
period ended May 2010, Burger King accounted for
approximately 14% of total FFHR sales in the United States.
We believe the QSR segment is generally less vulnerable to
economic downturns than the casual dining segment, due to the
value that QSRs deliver to consumers, as well as some
trading to value by customers from other restaurant
industry segments during adverse economic conditions, as they
seek to preserve the away from home dining
experience on tighter budgets. In the current economic
environment, however, QSR traffic in the United States decreased
1% and sales decreased 0.5% for the quarter ended May 2010,
while the FFHR category declined at an annual rate of 0.5% in
terms of sales during the same period. By comparison, for the
quarter ended May 2010 visits to casual dining chains decreased
3% and to family dining chains decreased 3% while overall
U.S. restaurant traffic decreased 1%.
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 12,174
restaurants operating in 76 countries and U.S. territories,
of which 4,916 are located in our international markets. During
fiscal 2010, our franchisees opened restaurants in two new
international markets, Russia and Oman. We believe that the
demand for new international franchise restaurants remains
strong 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 current
system-wide restaurants are franchised, which is a higher
percentage than that of our major competitors in the FFHR
category and we expect that the percentage of franchise
restaurants will increase as franchisees open new restaurants
and as we manage our portfolio, including our refranchising
efforts. 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 enhance shareholder value. We
believe that the benefits of this restaurant ownership mix
substantially outweigh its drawbacks, which include our limited
influence over franchisees and reliance on franchisees to
implement major initiatives.
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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. During fiscal 2010, we
launched innovative, creative and edgy advertising campaigns,
such as our School of Endorsements campaign featuring NASCAR
driver Tony Stewart and our flagship product, the Whopper
sandwich. We are also reaching out to a broad spectrum of
restaurant guests with movie tie in promotions, such as
Transformers
2tm,
The Twilight Saga: New Moon and Eclipse and
SpongeBob
SquarePantstm
and sports initiatives. In 2010, we also increased our marketing
focus on extreme affordability with the launch of the
1/4 lb.
Double Cheeseburger, the Buck Double and the $1
BK® Breakfast
Muffin Sandwich.
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Experienced management team. We have a
seasoned management team with significant experience.
John Chidsey, our Chairman and Chief Executive Officer, has
extensive experience in managing franchised and branded
businesses, including the Avis
Rent-A-Car
and Budget
Rent-A-Car
systems, Jackson Hewitt Tax Services and PepsiCo. Ben Wells, our
Chief Financial Officer, has over 30 years of finance
experience, including at Compaq Computer Corporation and British
Petroleum. Natalia Franco, our Global Chief Marketing Officer,
has extensive marketing experience, including at The
Coca-Cola
Company and General Mills, Inc. In addition, other members of
our management team have worked at Frito Lay, McDonalds,
Jack-in-the
Box, PepsiCo, Pillsbury and Wendys.
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Our
Business Strategy
We believe that by remaining committed to the success and growth
of our brand and managing our business for the long term, we
will strengthen our competitive position and create sustainable
shareholder value. We consider the best method to effectively
manage our business for the long term is through our continued
focus on the strategic global growth pillars of our True North
business plan: grow the brand; run great restaurants; invest
wisely and focus on our people. Key elements of this business
plan are the following:
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Expand worldwide development: The
expansion of our restaurant network and an increase in the
number of new restaurants are key components of our growth plan.
We expect that most of our new restaurant growth will come from
franchisees. Consequently, our development strategy centers on
ensuring that franchisees in each of our markets have the
resources and incentives to grow. Internationally, we have
developed a detailed global development plan to accelerate
growth over the next five years and forecast our international
restaurant count to be 50% of the total number of Burger King
restaurants within this time frame. We expect to focus our
international expansion plans on (1) markets where we
already have an established presence but which have significant
growth potential, such as Spain, Brazil and Turkey;
(2) markets in which we have a small presence, but which we
believe offer significant opportunities for development, such as
Argentina, Colombia, China, Japan, Indonesia and Italy; and
(3) financially attractive new markets in the Middle East,
Eastern Europe and throughout Asia. In addition, we have
invested in joint ventures with franchisees to drive development
in Taiwan and Northern China, and we expect to continue to use
this strategy in the future to increase our presence globally.
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Invest in our Restaurants to Drive
Growth: We believe that our newly developed
restaurant designs, including our 20/20 design and
the complementary
Whoppertm
Bar design, convey our vision of the Burger King brand
and reinforce the message that Burger King delivers
superior products and a positive guest experience. The classic
and contemporary 20/20 design draws inspiration from
our signature flame-broiled cooking process and incorporates a
variety of new, innovative elements to a backdrop that evokes
the industrial look of corrugated metal, brick, wood and
concrete. To date, more than 300 Burger King restaurants
have adopted the 20/20 design in cities such as Miami,
Vancouver, Mexico City, Edinburgh, Rome, London and Shanghai,
and we plan to reimage 95 Company restaurants using the
20/20 design
during fiscal 2011. Data show that Burger King restaurant
remodels drive traffic and sales with Company restaurants
typically experiencing a double-digit sales lift post reimage
and the Company experiencing strong cash on cash returns for our
investment. In fiscal 2008, we launched a Company restaurant
reimaging program in the United States and Canada, including
remodels and rebuilds, and we are actively encouraging
franchisees to reimage their restaurants to achieve a uniform
and consistent image and improved guest experience.
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Develop innovative products that support both ends of our
barbell menu strategy: We continue to focus
on our barbell menu strategy of balancing innovative premium
products and affordable value products to offer more choices to
our guests, enhance the price/value proposition of our products,
grow our market share and improve our operating margins. As part
of this strategy, in fiscal 2010, we expanded our premium menu
and launched limited time offers, including the premium
Steakhouse
XTtm
burger line, which highlights the brands signature
flame-broiled taste, and
BKtm
Fire-Grilled Ribs, the first authentic bone-in pork ribs sold at
a national FFHR chain. Both of these items are prepared on our
proprietary flexible batch broiler. At the other end of the
barbell menu, we launched value promotions in the U.S., such as
the
1/4
lb. Double Cheeseburger, the Buck Double and the $1
BK Breakfast Muffin Sandwich, and continued to
promote everyday branded value platforms in EMEA and Latin
America such as King
Dealstm
in EMEA and Come Como
Reytm
(Eat Like a King) and
BKtm
Ofertas (King Deals) in Mexico. As a result of current global
economic conditions and weak consumer confidence, during fiscal
2011 we intend to differentiate Burger King restaurants
from our competitors by continuing to offer our guests a balance
of premium products and value offerings, each built upon our
brand equity of flame-broiled taste. We plan to continue to
introduce new products to fill gaps in our breakfast, beverage,
dessert and snack menu offerings, with an emphasis on increasing
our share of the breakfast day part. We intend to roll-out
several new and limited time offer products during fiscal 2011,
including value focused products to promote our affordability
message and premium products to expand our margins.
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Employ innovative marketing
strategies: We intend to continue to employ
innovative and creative marketing strategies to increase our
restaurant traffic and comparable sales. We also plan to launch
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integrated marketing campaigns utilizing social media that we
believe will resonate with our core consumer and expand our
consumer base.
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Enhance restaurant margins and
profitability: We remain committed to
improving margins in our Company and franchise restaurants and
positioning our system-wide restaurant portfolio for long term
growth. We believe that we can drive restaurant profitability by:
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Achieving our comparable sales and average restaurant
sales potential. We believe a component to
improving comparable sales and average restaurant sales is to
enhance the guest experience. Our key guest satisfaction and
operations metrics showed continued improvement in fiscal 2010
and we intend to continue to develop innovative approaches to
improving these metrics. In addition, we believe that by
reducing the gap between our hours of operation and those of our
competitors, we will increase comparable sales and average
restaurant sales in U.S. restaurants. As of June 30,
2010, 238 Company restaurants in the United States were open
24 hours daily.
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Better utilizing our fixed cost base and exploring ways to
mitigate labor, commodity and energy costs. We are
focused on leveraging our fixed cost structure by introducing
higher margin products and creating efficiencies through
continued deployment of equipment and tools aimed at improving
restaurant level performance, such as our point of sale cash
register systems which we believe will reduce labor costs and
waste. As of June 30, 2010, our POS systems had been
installed in all of our Company restaurants and in approximately
57% of franchise restaurants. In the kitchen, our revolutionary
flexible batch broiler maximizes cooking flexibility and
facilitates a broader menu selection while reducing energy
costs. The flexible batch broiler is currently installed in 89%
of our Company restaurants, and the broiler has been ordered or
installed in approximately 68% of franchise restaurants.
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Use proactive portfolio management to drive
growth: We intend to use proactive portfolio
management to drive growth and optimize our restaurant
portfolio. As part of this ongoing strategy, we will focus on
(1) attracting new franchisees to acquire restaurants from
existing franchisees, (2) acquiring restaurants from our
franchisees in strategic markets or for re-allocation to other
franchisees that meet our strategic objectives and
(3) refranchising Company restaurants to new and existing
franchisees to rationalize our Company restaurant portfolio and
provide new opportunities for franchisees. In fiscal 2010, we
sold 37 Company restaurants in Germany and 54 restaurants in the
U.S. and acquired 35 restaurants in Singapore. We expect to
continue our disciplined approach to portfolio management in an
effort to optimize our Company restaurant base, enhance
development agreements with new and existing franchisees, reduce
concentration in certain markets and opportunistically enter new
markets. As it relates to refranchisings, within the next three
to five years, we expect to refranchise up to half of our
current Company restaurant portfolio. We also expect to conclude
our U.S. and Canada restaurant reimaging program within the next
two to three years on our reduced number of Company restaurants.
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Global
Operations
We operate in three reportable segments: (i) the United
States and Canada; (ii) Europe, the Middle East, Africa and
Asia Pacific, or EMEA/APAC; and (iii) Latin America.
Additional financial information about geographic segments is
incorporated herein by reference to Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Part II, Item 7 and Segment
Reporting in Part II, Item 8 in Note 23 of this
Form 10-K.
Our restaurants are limited-service restaurants of distinctive
design and are generally located in high-traffic areas. We
believe our restaurants appeal to a broad spectrum of consumers,
with multiple day parts appealing to different customer groups.
United
States and Canada
United
States and Canada
As of June 30, 2010, we had 987 Company restaurants and
6,562 franchise restaurants operating in the United States
and Canada. We increased our restaurant count in the United
States and Canada by 15 restaurants during fiscal 2010.
6
Company restaurants. Our Company restaurants
in the United States and Canada generated $1.3 billion in
revenues in fiscal 2010, or 76% of our total United States and
Canada revenues and 52% of our total worldwide revenues. Our
Company restaurants in the United States and Canada account for
71% of Company restaurants worldwide.
The following table details the top ten locations of our Company
restaurants in the United States and Canada as of June 30,
2010:
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% of Total U.S. and
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Company Restaurant
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Canada Company
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Rank
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State/Province
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Count
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Restaurants
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1
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Florida
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256
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26
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%
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2
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North Carolina
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112
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11
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%
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3
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Indiana
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69
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7
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%
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4
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Ontario
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57
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6
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%
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5
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Virginia
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50
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5
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%
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6
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Massachusetts
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44
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4
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%
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7
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Georgia
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42
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4
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%
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8
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Nebraska
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42
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4
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%
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9
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Ohio
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39
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4
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%
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10
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Connecticut
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33
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3
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%
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10
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New York
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33
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3
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%
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10
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Quebec
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33
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3
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%
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Franchise Restaurants. We grant franchises to
operate restaurants using Burger King trademarks, trade
dress and other intellectual property, uniform operating
procedures, consistent quality of products and services and
standard procedures for inventory control and management.
Our growth and success have been built, in significant part,
upon our substantial franchise operations. We franchised our
first restaurant in 1961, and as of June 30, 2010, there
were 6,562 franchise restaurants, owned by 738 franchise
operators, in the United States and Canada. We earned
$314.6 million in franchise revenues in the
United States and Canada in fiscal 2010, or 57% of our
total worldwide franchise revenues. Franchisees report gross
sales on a monthly basis and pay royalties based on reported
sales. The five largest franchisees in the United States and
Canada in terms of restaurant count represented in the aggregate
approximately 16% of our franchise restaurants in this segment
as of June 30, 2010.
The following table details the top ten locations of our
franchisees restaurants in the United States and Canada as
of June 30, 2010:
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% of Total U.S. and
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Franchise
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Canada Franchise
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Rank
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State/Province
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Restaurant Count
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Restaurants
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1
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California
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670
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10
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%
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2
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Texas
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457
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7
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%
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3
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Michigan
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329
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5
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%
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4
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New York
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315
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5
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%
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5
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Ohio
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310
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5
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%
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6
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Illinois
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304
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5
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%
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7
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Florida
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294
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4
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%
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8
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Pennsylvania
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238
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4
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%
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9
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Georgia
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215
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3
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%
|
10
|
|
New Jersey
|
|
|
185
|
|
|
|
3
|
%
|
7
The following is a list of the five largest franchisees in terms
of restaurant count in the United States and Canada as of
June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
|
|
|
|
Rank
|
|
Name
|
|
Count
|
|
|
Location
|
|
1
|
|
Carrols Corporation
|
|
|
309
|
|
|
Northeast, Midwest, and Southeast
|
2
|
|
Stategic Restaurants Acquisition Company, LLC
|
|
|
275
|
|
|
West Coast and South-Central
|
3
|
|
Heartland Food Corp.
|
|
|
223
|
|
|
Midwest
|
4
|
|
Army Air Force Exchange Services
|
|
|
132
|
|
|
Multiple USA
|
5
|
|
Bravokilo, Inc./Bravo Grande, Inc.
|
|
|
117
|
|
|
Midwest
|
Europe,
the Middle East and Africa/Asia Pacific
(EMEA/APAC)
EMEA. EMEA is the second largest region in the
Burger King system behind the United States, as measured
by number of restaurants. As of June 30, 2010, EMEA had
2,680 restaurants in 34 countries and territories, including 241
Company restaurants located in Germany, the United Kingdom
(U.K.), Spain, The Netherlands and Italy. We have expanded our
network of restaurants in EMEA over the past two years via
contiguous growth in Central and Eastern Europe and the Middle
East and Africa, including entry into the Czech Republic, Russia
and Oman. While Germany continues to be the largest market in
EMEA with 685 restaurants as of June 30, 2010, Turkey is
one of our fastest growing markets with the opening of 68
restaurants in the past year. Throughout the EMEA region, we
continue to evaluate franchise opportunities and prospective new
franchisees.
APAC. As of June 30, 2010, APAC had 807
restaurants in 13 countries and territories, including China,
Singapore, Malaysia, Thailand, Australia, Philippines, New
Zealand, South Korea, Indonesia and Japan. In APAC, we have 62
Company restaurants, all of which are located in China and
Singapore. Australia is the largest market in APAC, with 340
restaurants as of June 30, 2010, all of which are
franchised and operated under Hungry
Jacks®,
a brand that we own in Australia and New Zealand. Australia
is the only market in which we operate under a brand other than
Burger King. We believe there is significant opportunity
to grow the brand in existing and new markets in APAC. In fiscal
2010, we continued our initiative of projecting brand presence
via gateway airport locations and continued to seed development
in China via joint ventures.
Company restaurants: As of June 30, 2010,
241 (or 9%) of the restaurants in EMEA were Company restaurants.
As of June 30, 2010, there were 62 Company restaurants in
APAC, of which 21 were located in China and 41 in Singapore.
During fiscal 2010, we opened six Company restaurants in
Singapore and acquired 35 restaurants from a franchisee in
Singapore.
The following table details Company restaurant locations in
EMEA/APAC as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
Restaurant
|
|
% of Total EMEA/APAC
|
Rank
|
|
Country
|
|
Count
|
|
Company Restaurants
|
|
1
|
|
Germany
|
|
|
107
|
|
|
|
35
|
%
|
2
|
|
United Kingdom
|
|
|
63
|
|
|
|
21
|
%
|
3
|
|
Spain
|
|
|
45
|
|
|
|
15
|
%
|
4
|
|
Singapore
|
|
|
41
|
|
|
|
14
|
%
|
5
|
|
Netherlands
|
|
|
22
|
|
|
|
7
|
%
|
6
|
|
China
|
|
|
21
|
|
|
|
7
|
%
|
7
|
|
Italy
|
|
|
4
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
303
|
|
|
|
100
|
%
|
Franchise Restaurants: We earned
$186.2 million in franchise revenues in EMEA/APAC during
fiscal 2010, or 33.9% of our total worldwide franchise revenues.
Many of our EMEA/APAC markets, including Hungary, Portugal,
South Korea and the Philippines, are operated by a single
franchisee, while others, such as the U.K., Germany and Spain,
have multiple franchisees.
8
The following is a list of the five largest franchisees in terms
of restaurant count in EMEA/APAC as of June 30, 2010:
|
|
|
|
|
|
|
|
|
Rank
|
|
Name
|
|
Restaurant Count
|
|
|
Location
|
|
1
|
|
Tab Gida
|
|
|
309
|
|
|
Turkey
|
2
|
|
Hungry Jacks Pty Ltd.
|
|
|
276
|
|
|
Australia
|
3
|
|
Olayan Food Service Company
|
|
|
127
|
|
|
Saudi Arabia /UAE/Egypt
|
4
|
|
System Restaurant Service Korea Co. Ltd.
|
|
|
107
|
|
|
Korea
|
5
|
|
Al-Homaizi Foodstuff Company
|
|
|
91
|
|
|
United Kingdom/Kuwait
|
Latin
America
As of June 30, 2010, we had 1,138 restaurants in 27
countries and territories in Latin America. There were 97
Company restaurants in Latin America, all located in Mexico, and
1,041 franchise restaurants in the segment as of June 30,
2010. Mexico is the largest market in this segment, with a total
of 418 restaurants as of June 30, 2010, or 37% of the
region.
We believe that there are significant growth opportunities in
South America. For example, we entered the Brazil market five
years ago, and, as of June 30, 2010, had 93 restaurants in
the country with those open for more than 12 months having
average restaurant sales of $1.8 million on a trailing
twelve-month basis. We currently expect to open approximately
500 restaurants in Latin America over the next five years. For
the fiscal year, we opened 72 new restaurants in Latin America.
The following is a list of the five largest franchisees in terms
of restaurant count in Latin America as of June 30, 2010:
|
|
|
|
|
|
|
|
|
Rank
|
|
Name
|
|
Restaurant Count
|
|
|
Location
|
|
1
|
|
Caribbean Restaurants, Inc.
|
|
|
177
|
|
|
Puerto Rico
|
2
|
|
Alsea and Affiliates
|
|
|
191
|
|
|
Mexico/Argentina/Chile/Colombia
|
3
|
|
Geboy de Tijuana, S.A. de C.V.
|
|
|
66
|
|
|
Mexico
|
4
|
|
Operadora Exe S.A. de C.V.
|
|
|
48
|
|
|
Mexico
|
5
|
|
B & A S.A.
|
|
|
42
|
|
|
Guatemala
|
Franchise
Agreements
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. For each
franchise restaurant, we generally enter into a franchise
agreement covering a standard set of terms and conditions.
Recurring fees consist of monthly royalty and advertising
payments. Franchise agreements are not assignable without our
consent, and we have a right of first refusal if a franchisee
proposes to sell a restaurant. Defaults (including non-payment
of royalties or advertising contributions, or failure to operate
in compliance with the terms of the Manual of Operating Data)
can lead to termination of the franchise agreement. We can
control the growth of our franchisees because we have the right
to approve any restaurant acquisition or new restaurant opening.
These transactions must meet our minimum approval criteria to
ensure that franchisees are adequately capitalized and that they
satisfy certain other requirements.
United States and Canada. In the United States
and Canada, we typically enter into a separate franchise
agreement for each restaurant. The typical franchise agreement
in the United States and Canada has a
20-year term
(for both initial grants and renewals of franchises) and
contemplates a one-time franchise fee of $50,000 which must be
paid in full before the restaurant opens for business, or in the
case of renewal, before expiration of the current franchise
term. In recent years, however, we have offered franchisees
reduced upfront franchise fees
and/or
limited-term royalty reductions to encourage franchisees to open
new restaurants
and/or
reimage their restaurant before the expiration of the agreement.
Most existing franchise restaurants in the United States and
Canada pay a royalty of 3.5% and 4.0% of gross sales,
respectively. Since June 2003, most new franchise restaurants
opened and franchise
9
agreements renewed in the United States generate royalties at
the rate of 4.5% of gross sales for the full franchise term. The
weighted average royalty rate in the United States and Canada
was 3.9% as of June 30, 2010. In addition to their
royalties, franchisees in the United States and Canada are
generally required to make a contribution to the advertising
fund equal to a percentage of gross sales, typically 4.0%, on a
monthly basis.
International. Internationally, we typically
enter into franchise agreements for each restaurant with an up
front franchise fee of $50,000 per restaurant and monthly
royalties and advertising contributions each of up to 5% of
gross sales. However, in many of our international markets, we
have granted either master franchise agreements or development
agreements that provide franchisees broader development rights
and obligations. In each of Australia and Turkey, we have
entered into master franchise agreements with a franchisee in
each country which permits that franchisee to
sub-franchise
restaurants within its particular territory. In New Zealand and
certain Middle East and Persian Gulf countries, we have entered
into arrangements with franchisees under which they have agreed
to nominate third party franchisees to develop and operate
restaurants within their respective territories under franchise
agreements with us. As part of these arrangements, the
franchisees have agreed to provide certain support services to
third party franchisees on our behalf, and we have agreed to
share the franchise fees and, in some cases, royalties paid by
such third party franchisees. We have also entered into
exclusive development agreements with franchisees in a number of
international markets that typically either (1) grant the
franchisee exclusive rights to develop restaurants in a
particular region and contain growth clauses requiring
franchisees to open a minimum number of restaurants within a
specified period or (2) grant the franchisee a right of
first refusal before any other franchisee can open a restaurant
in a particular region. In addition, we have invested in joint
ventures with franchisees to drive development in Taiwan and
Northern China, and we expect to continue to use this strategy
in the future to increase our presence globally.
Franchise Restaurant Leases. Unlike some of
our competitors, we typically do not own the land or the
building associated with our franchise restaurants and our
standard franchise agreement does not contain a lease component.
Rather, to the extent that we lease or sublease the property to
a franchisee, we will enter into a separate lease agreement. For
properties that we lease from third-party landlords and sublease
to franchisees, leases generally provide for fixed rental
payments and may provide for contingent rental payments based on
a restaurants annual gross sales. Franchisees who lease
land only or land and building from us do so on a triple
net basis. Under these triple net leases, the franchisee
is obligated to pay all costs and expenses, including all real
property taxes and assessments, repairs and maintenance and
insurance. As of June 30, 2010, we leased or subleased to
franchisees 981 properties in the United States and Canada and
95 properties in EMEA, primarily sites located in the U.K. and
Germany. These properties represented approximately 15% and 4%,
respectively, of our total franchise restaurant count in such
regions. We do not own or lease any properties to franchisees in
APAC or Latin America.
Product Offerings and Development. Our barbell
menu strategy of expanding our high-margin premium products and
our value products and our goal of expanding the dayparts that
we serve are the core drivers of our product offerings. During
fiscal 2010 and again in fiscal 2011, we intend to focus on
flexing both ends of our barbell menu strategy aimed at driving
average check and traffic. We believe that by balancing higher
margin products with value offerings and our brand equity of
flame-broiled taste, we can differentiate Burger King
from our competitors.
As we expand our hours of operation we have introduced, and
expect to continue to introduce, new breakfast, dessert and
snack menu offerings which will complement our core products.
During fiscal 2010, we introduced the
BK®
Breakfast Muffin Sandwich and, in fiscal 2011, we expect to
launch our enhanced breakfast platform, in the United States and
Canada that will include several new breakfast products and
feature Seattles Best
Coffee®.
We operate product research and development facilities or
test kitchens at our headquarters in Miami and at
certain other regional locations. Independent suppliers also
conduct research and development activities for the benefit of
the Burger King system. 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
believe new product development is critical to our long-term
success.
Company restaurants play a key role in the development of new
products and initiatives because we can use them to test and
perfect new products, equipment and programs before introducing
them to franchisees, which we believe gives us credibility with
our franchisees in launching new initiatives. This strategy also
allows us to keep
10
research and development costs down and simultaneously
facilitates the ability to sell new products and to launch
initiatives both internally to franchisees and externally to
guests.
We have developed a flexible batch broiler that is significantly
smaller, less expensive and easier to maintain than the previous
broiler used in our restaurants. The flexible batch broiler is
currently installed in 89% of our Company restaurants, and the
broiler has been ordered or installed in approximately 68% of
franchise restaurants worldwide. During fiscal 2010 we launched
the Steakhouse XT burger line and BK Fire-Grilled
Ribs in the U.S. prepared on the flexible broiler, and we
expect to launch other innovative products using this new
cooking platform during fiscal 2011. We have filed patent
applications to protect our worldwide rights with respect to the
flexible batch broiler technology. We have licensed one of our
equipment vendors on an exclusive basis to manufacture and
supply the flexible batch broiler to the Burger King
system throughout the world.
As part of our commitment to providing nutritional alternatives
to our customers with children, we joined the Council for Better
Business Bureaus (CBBB) Food and Beverage Advertising
Initiative (CFBAI) in 2007 and pledged to restrict
100 percent of national advertising aimed at children under
12 to
BK®
Kids Meals that meet stringent nutrition criteria. In the
U.S. we currently have three existing BK Kids Meal
lunch/dinner options and in August 2010 introduced a breakfast
meal for children that meets this strict nutritional criteria.
BKC also provides BK Positive
Steps®
nutrition materials in restaurants nationwide, has transitioned
to zero grams of artificial trans fat in all ingredients and
cooking oils in the U.S., and has partnered with USDA to promote
MyPyramid information to both kids and adults.
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 in the U.S. and Canada 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 consistently high
quality products at Burger King restaurants. Among the
requirements contained in the Manual of Operating Data are
standard design, equipment system, color scheme and signage,
operating procedures, hours of operation, value menu and
standards of quality for products and services. Internationally,
Company and franchise restaurants generally adhere to the
standardized operating procedures and requirements; however,
regional and country-specific market conditions often require
some variation in our standards and procedures.
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.
Restaurants in the United States and Canada, subject to
certain exceptions, are required to be open until at least
2 a.m., Friday night and Saturday night and until at least
midnight on the remaining days of the week. Restaurants in the
United States and Canada are required to be open by at least
6 a.m., Monday through Saturday.
Restaurant
Design and Image
System-wide, our restaurants consist of several different
building types with various seating capacities, including
free-standing buildings, as well as restaurants located in
airports, strip malls and shopping malls, toll road rest areas
and educational and sports facilities. The traditional Burger
King restaurant is free-standing, ranging in size from
approximately 1,900 to 4,300 square feet, with seating
capacity of 40 to 120 guests, drive-thru facilities and adjacent
parking areas. In fiscal 2005, we developed new, smaller
restaurant designs that reduce the average building costs by
approximately 20%. The seating capacity for these smaller
restaurant designs is between 40 and 80 guests. We believe this
seating capacity is adequate since approximately 63% of our
U.S. Company restaurant sales are made at the drive-thru.
In todays environment, restaurant experience is now as
important as value and quality. We believe that image
complements visibility via curb appeal driving
capture rates and traffic, while interior image and experience
expands frequency of visit and overall guest satisfaction and
increases comparable sales. Consequently, in fiscal 2008, we
launched a system-wide initiative to roll-out our
20/20 design and the complementary Whopper
Bar design. The classic and contemporary 20/20
design draws inspiration from our signature flame-broiled
cooking process and incorporates a variety of new, innovative
elements to a backdrop that evokes the industrial look of
11
corrugated metal, brick, wood and concrete. The
20/20 design options include a series of liquid
crystal display (LCD) menu screens, graphics that reflect
the famous brand promise, highly visible Home of the
Whopper®
signage, a prominent red flame parapet dining area anchored
by a flame chandelier, and an array of Have it Your Way
seating options bar, banquette, booth, or table.
We have also developed the Whopper Bar, a small-scale,
trendy version of our 20/20 design where guests can
customize our signature burger with the choice of up to 22
different toppings. The Whopper Bar boasts an open
kitchen, a bar-like countertop, and the same red, black, and
gray restaurant design as the 20/20 design. System-wide there
are currently more than 300 restaurants with the new 20/20
design, including over 40 restaurants in the U.S. and
Canada, and eight Whopper Bar restaurants.
New
Restaurant Development
United States and Canada. 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 we
believe provides for quality expansion. We have established a
development committee to oversee all new restaurant development
within the United States and Canada. Our development
committees objective is to ensure that every proposed new
restaurant location is carefully reviewed and that each location
meets the stringent requirements established by the committee,
which include factors such as site accessibility and visibility,
traffic patterns, signage, parking, site size in relation to
building type and certain demographic factors. Our model for
evaluating sites accounts for potential changes to the site,
such as road reconfiguration and traffic pattern alterations.
Each franchisee wishing to develop a new restaurant is
responsible for selecting a new site location and bears the risk
if the new site does not meet the franchisees investment
expectations. However, we work closely with our franchisees to
assist them in selecting sites. Each restaurant site selected is
required to be within an identified trade area and our
development committee reviews all selections, provides input
based on the same factors that it uses to select Company
restaurants, and grants final approval. We have instituted
several initiatives to accelerate restaurant development in the
United States, including reduced royalties and upfront franchise
fees, process simplifications and turnkey development assistance
programs, which reduce the time and uncertainty associated with
opening new restaurants.
International. In those international markets
that are not allocated to a single franchisee, our market
planning and site selection process is managed by 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.
Advertising
and Promotion
We believe sales in the QSR segment can be significantly
affected by the frequency and quality of advertising and
promotional programs. We believe that three of our major
competitive advantages are our strong brand equity, market
position and our global franchise network which allow us to
drive sales through extensive advertising and promotional
programs.
Our current global marketing strategy is based upon marketing
campaigns and menu options that focus on our barbell menu
strategy of innovative premium products, core products like our
flagship Whopper sandwich, and affordable items to offer
more choices to our guests, enhance the price/value proposition
of our products, grow our market share and improve our operating
margins. We concentrate our marketing on television advertising,
which we believe is the most effective way to reach our target
customer, the SuperFan. SuperFans are consumers who reported
eating at a fast food hamburger restaurant nine or more times a
month. The group is comprised of all ages and represents all
household demographics, with over half of them having children.
We also use radio and internet advertising and other marketing
tools on a more limited basis.
In the United States and Canada and those international markets
where we operate Company restaurants, we and our franchisees
make monthly contributions, generally 4% to 5% of restaurant
gross sales, to Company managed advertising funds. In those
markets where we do not have Company restaurants, franchisees
make this contribution into a franchisee managed advertising
fund. As part of our global marketing strategy, we provide these
franchisees with advertising support and guidance in order to
deliver a consistent global brand message. Advertising
contributions are used to pay for expenses relating to
marketing, advertising and promotion, including market research,
production, advertising costs, sales promotions and other
support functions. In addition to the mandated
12
advertising fund contributions, U.S. franchisees may elect
to participate in certain local advertising campaigns at the
Designated Market Area (DMA) level by making contributions
beyond those required for participation in the national
advertising fund. Franchisees in approximately 72% of the DMAs
in the United States agreed to make this additional advertising
contribution during fiscal 2010. We believe that increasing the
level of local advertising makes us more competitive in the FFHR
category.
In the United States and in those other countries where we have
Company restaurants, we coordinate the development, budgeting
and expenditures for all marketing programs, as well as the
allocation of advertising and media contributions, among
national, regional and local markets, subject in the United
States to minimum expenditure requirements for media costs and
certain restrictions as to new media channels. We are required,
however, under our U.S. franchise agreements, to discuss
the types of media in our advertising campaigns and the
percentage of the advertising fund to be spent on media with the
recognized franchisee association, currently the National
Franchisee Association, Inc. In the United States, we typically
conduct a non-binding poll of our franchisees before introducing
any nationally- or locally-advertised price or discount
promotion to gauge the level of support for the campaign.
Supply
and Distribution
We establish the standards and specifications for most of the
goods used in the development and operation of our restaurants
and for the direct and indirect sources of supply of most of
those items. These requirements help us assure the quality and
consistency of the food products sold at our restaurants and
protect and enhance the image of the Burger King system
and the Burger King brand.
In general, we approve the manufacturers of the food, packaging
and equipment products and other products used in Burger King
restaurants, as well as the distributors of these products
to Burger King restaurants. Franchisees are generally
required to purchase these products from approved suppliers. We
consider a range of criteria in evaluating existing and
potential suppliers and distributors, including product and
service consistency, delivery timeliness and financial
condition. Approved suppliers and distributors must maintain
standards and satisfy other criteria on a continuing basis and
are subject to continuing review. Approved suppliers may be
required to bear development, testing and other costs associated
with our evaluation and review.
Restaurant Services, Inc., or RSI, is a
not-for-profit,
independent purchasing cooperative formed in 1992 to leverage
the purchasing power of the Burger King system in the
United States. As the purchasing agent for the Burger King
system in the United States, RSI 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 other franchisees who appoint RSI as
their agent for these purposes. As of June 30, 2010, RSI
was appointed the distribution manager for approximately 94% of
the restaurants in the United States. A subsidiary of RSI acts
as purchasing agent for food and paper products for our Company
and franchise restaurants in Canada under a contract with us. As
of June 30, 2010, four distributors service approximately
85% of the U.S. system restaurants and the loss of any one
of these distributors would likely adversely affect our business.
There is currently no designated purchasing agent that
represents franchisees in our international regions. However, we
are working with our franchisees to implement programs that
leverage our global purchasing power and to negotiate lower
product costs and savings for our restaurants outside of the
United States and Canada. We approve suppliers and use similar
standards and criteria to evaluate international suppliers that
we use for U.S. suppliers. Franchisees may propose
additional suppliers, subject to our approval and established
business criteria.
In fiscal 2000, we entered into long-term exclusive contracts
with The
Coca-Cola
Company and with Dr Pepper/Seven Up, Inc. to supply Company
restaurants and franchise restaurants with their products, which
obligate Burger King restaurants in the United States to
purchase a specified number of gallons of soft drink syrup.
These volume commitments are not subject to any time limit. As
of June 30, 2010, we estimate that it will take
approximately 14 years to complete the
Coca-Cola
and Dr Pepper purchase commitments. If these agreements were
terminated, we would be obligated to pay significant termination
fees and certain other costs, including in the case of the
contract with
Coca-Cola,
the unamortized portion of the cost of installation and the
entire cost of refurbishing
13
and removing the equipment owned by
Coca-Cola
and installed in Company restaurants in the three years prior to
the termination.
Management
Information Systems
Company and franchise restaurants 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 and franchisees have
traditionally reported summary sales data manually, which
limited our ability to verify sales data electronically. We have
the right under our franchise agreement to audit franchisees to
verify sales information provided to us.
In January 2006, we established POS specifications to reduce
costs, improve service and allow better data analysis and
approved three global POS vendors and one regional vendor for
each of our three segments to sell these systems to our
restaurants. As of June 30, 2010, we had installed these
new POS systems in all Company restaurants and in 57% of
franchise restaurants. Once fully implemented, this POS system
will make it possible for restaurants to submit their sales and
transaction level details to us in near-real-time in a common
format, allowing us to maintain one common database of sales
information and to make better marketing and pricing decisions.
Franchisees are required to replace legacy POS systems with the
approved POS system over the next few years, depending on the
age of the legacy system. All franchisees must have the new POS
systems in their restaurants by no later than January 1,
2014.
Quality
Assurance
We are focused on achieving a high level of guest satisfaction
through the periodic monitoring of restaurants for compliance
with our key operations platforms: Clean & Safe,
Hot & Fresh and Friendly & Fast. We measure
our Hot & Fresh and Friendly & Fast
operations platforms principally through Guest
Tracsm,
a rating system based on survey data submitted by our customers.
We review the overall performance of our operations platforms
through an Operations Excellence Review, or OER, which focuses
on evaluating and improving restaurant operations and guest
satisfaction.
We and an independent outside vendor administer the Restaurant
Food Safety certification, which is intended to bring heightened
awareness to food safety, and includes immediate
follow-up
procedures to take any action needed to protect the safety of
our customers.
We have uniform operating standards and specifications relating
to selection of menu items, maintenance and cleanliness of the
premises and employee conduct. In addition, 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
We own valuable intellectual property including trademarks,
service marks, patents, copyrights, trade secrets and other
proprietary information. As of June 30, 2010, we owned
approximately 3,440 trademark and service mark registrations and
applications and approximately 889 domain name registrations
around the world, some of which are of material importance to
our business. Depending on the jurisdiction, trademarks and
service marks generally are valid as long as they are used
and/or
registered. We also have established the standards and
specifications for most of the goods and services used in the
development, improvement and operation of Burger King
restaurants. These proprietary standards, specifications and
restaurant operating procedures are trade secrets owned by us.
14
Additionally, we own certain patents relating to equipment used
in our restaurants and provide proprietary product and labor
management software to our franchisees. Patents are of varying
duration.
Management
Substantially all of our executive management, finance,
marketing, legal and operations support functions are conducted
from our global restaurant support center in Miami, Florida. In
addition, we operate restaurant support centers domestically and
internationally to support both franchised operations and
Company restaurants. In the U.S. 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. Our EMEA
headquarters are located in Zug, Switzerland and our APAC
headquarters are located in Singapore. In addition, we operate
restaurant support centers located in Madrid, London, Munich,
Istanbul, Rotterdam and Gothenburg (for EMEA), and Singapore and
Shanghai (for APAC). These centers are staffed by teams who
support both franchised operations and Company restaurants. Our
Latin American headquarters are located at our corporate offices
in Miami, Florida; however, we operate restaurant support
centers in Mexico and Brazil.
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.
Competition
We operate in the FFHR category of the QSR segment of the
broader restaurant industry. We compete in the United States and
internationally with many well-established food service
companies on the basis of product choice, quality,
affordability, service and location. Our competitors include a
variety of independent local operators, in addition to
well-capitalized regional, national and international restaurant
chains and franchises. In the FFHR industry our principal
competitors are McDonalds Corporation, or McDonalds
and Wendys/Arbys Group, Inc., or Wendys, as
well as regional hamburger restaurant chains, such as
Carls Jr., Jack in the Box and Sonic. To a lesser extent,
we also compete for consumer dining dollars with national,
regional and local (i) quick service restaurants that offer
alternative menus, (ii) casual and fast casual
restaurant chains, and (iii) convenience stores and grocery
stores that offer menu items comparable to those of Burger King
restaurants. Furthermore, the restaurant industry has few
barriers to entry, and therefore new competitors may emerge at
any time.
Government
Regulation
We are subject to various federal, state and local laws
affecting the operation of our business, as are our franchisees.
Each Burger King restaurant is subject to licensing and
regulation by a number of governmental authorities, which
include zoning, health, safety, sanitation, building and fire
agencies in the jurisdiction in which the restaurant is located.
Difficulties in obtaining, or the failure to obtain, required
licenses or approvals can delay or prevent the opening of a new
restaurant in a particular area.
In the United States, we are subject to the rules and
regulations of the Federal Trade Commission, or the FTC, and
various state laws regulating the offer and sale of franchises.
The FTC and various state laws require that we furnish to
certain prospective franchisees a franchise disclosure document
containing prescribed information. A number of states, in which
we are currently franchising, regulate the sale of franchises
and require registration of the franchise disclosure document
with state authorities and the delivery of a franchise
disclosure document to prospective franchisees. We are currently
operating under exemptions from registration in several of these
states based upon our net worth and experience. Substantive
state laws that regulate the franchisor/franchisee relationship
presently exist in a substantial number of states. These state
laws often limit, among other things, the duration and scope of
non-competition provisions, the ability of a franchisor to
terminate or refuse to renew a franchise and the ability of a
franchisor to designate sources of supply.
Company restaurant operations and our relationships with
franchisees are subject to federal and state antitrust laws and
federal and state laws governing such matters as consumer
protection, privacy, wages, union organizing, working
conditions, work authorization requirements, health insurance
and overtime. Some states have set
15
minimum wage requirements higher than the federal level. We are
also subject to the regulations of the U.S. Citizenship and
Immigration Services and U.S. Customs and Immigration
Enforcement.
Our facilities must comply with the federal Fair Labor Standards
Act and the Americans with Disabilities Act, or the ADA, which
requires that all public accommodations and commercial
facilities meet federal requirements related to access and use
by disabled persons. As described more fully under
Item 3. Legal Proceedings, we were sued in
California in an action alleging that all of the Burger King
restaurants in California leased by the Company and operated by
franchisees violated accessibility requirements under federal
and state law.
We are subject to federal and state environmental regulations,
but these laws have not had a material effect on our operations.
Various laws concerning the handling, storage and disposal of
hazardous materials and restaurant waste and the operation of
restaurants in environmentally sensitive locations may impact
aspects of our operations.
As a manufacturer and distributor of food products, we are
subject to a number of food safety regulations, including the
Federal Food, Drug and Cosmetic Act and regulations adopted by
the U.S. Food and Drug Administration. This comprehensive
regulatory framework governs the manufacture (including
composition and ingredients), labeling, packaging and safety of
food in the United States.
In addition, we may become subject to legislation or regulation
seeking to tax
and/or
regulate high-fat, high-calorie and high-sodium foods,
particularly in the United States, the U.K. and Spain. Certain
counties, states and municipalities, such as California, New
York City, and King County, Washington, have approved menu
labeling legislation that requires restaurant chains to provide
caloric information on menu boards, and menu labeling
legislation has also been adopted on the federal level. In
addition, public interest groups have focused attention on the
marketing of high-fat and high-sodium foods to children in a
stated effort to combat childhood obesity. As a result, laws
have been enacted in certain places that limit distribution of
free toy premiums only to customers purchasing kids meals that
meet certain nutritional requirements.
Internationally, our Company and franchise restaurants are
subject to national and local laws and regulations, which are
generally similar to those affecting our U.S. restaurants,
including laws and regulations concerning franchises, labor,
health, privacy, sanitation and safety. For example, regulators
in the U.K. have adopted restrictions on television advertising
of foods high in fat, salt or sugar targeted at children. In
addition, the Spanish government and certain industry
organizations have focused on reducing advertisements that
promote large portion sizes. Regulators in Canada and in other
countries are proposing to take steps to reduce the level of
exposure to acrylamide, a potential carcinogen that naturally
occurs in the preparation of foods such as french fries. The
federal public attorney in Sao Paulo, Brazil has filed a civil
lawsuit against Burger King and other fast food restaurant
companies to prohibit promotional sales of toys in our
restaurants in Brazil. We have signed the EU Pledge, which is a
voluntary commitment to the European Commission to change our
advertising to children under the age of 12 in the European
Union. Our international restaurants are also subject to tariffs
and regulations on imported commodities and equipment and laws
regulating foreign investment.
Environmental
Matters
We are subject to various federal, state, and local
environmental regulations. Compliance with applicable
environmental regulations is not believed to have a material
effect on capital expenditures, financial condition, results of
operations, or our competitive position. However, increased
focus by U.S. and overseas governmental authorities on
environmental matters is likely to lead to new governmental
initiatives, particularly in the area of climate change. To the
extent that these initiatives caused an increase in our supplies
or distribution costs, they may impact our business both
directly and indirectly. Furthermore, climate change may
exacerbate adverse weather conditions which could adversely
impact our operations
and/or
increase the cost of our food and other supplies in ways which
we cannot predict at this time.
Seasonal
Operations
Our business is moderately seasonal. Restaurant sales are
typically higher in the spring and summer months (our fourth and
first fiscal quarters) when weather is warmer than in the fall
and winter months (our second and third fiscal quarters).
Restaurant sales during the winter are typically highest in
December, during the holiday shopping
16
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. Furthermore, adverse weather conditions can
have material adverse effects on restaurant sales. The timing of
religious holidays may also impact restaurant sales. Because our
business is moderately seasonal, results for any one quarter are
not necessarily indicative of the results that may be achieved
for any other quarter or for the full fiscal year.
Our
Employees
As of June 30, 2010, we had approximately
38,884 employees in our Company restaurants, our field
management offices and our global headquarters. As franchisees
are independent business owners, they and their employees are
not included in our employee count. We consider our relationship
with our employees to be good.
Financial
Information about Business Segments and Regions
Financial information about our business segments
(U.S. & Canada, EMEA/APAC and Latin America) is
incorporated herein by reference from Selected Financial Data
in Part II, Item 6; Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Part II, Item 7; and in Financial
Statements and Supplementary Data in Part II,
Item 8 of this
Form 10-K.
Available
Information
The Company makes available free of charge on or through the
Investor Relations section of its internet website at
www.bk.com, this annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
annual proxy statements and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the Exchange
Act), as soon as reasonably practicable after
electronically filing such material with the Securities and
Exchange Commission (SEC). This information is also
available at www.sec.gov, an internet site maintained by
the SEC that contains reports, proxy and information statements,
and other information regarding issuers that file electronically
with the SEC. The material may also be read and copied by
visiting the Public Reference Room of the SEC at
100 F Street, NE, Washington, DC 20549. Information on
the operation of the public reference room may be obtained by
calling the SEC at
1-800-SEC-0330.
The references to our website address and the SECs website
address do not constitute incorporation by reference of the
information contained in these websites and should not be
considered part of this document.
Our Corporate Governance Guidelines, our Code of Business Ethics
and Conduct, our Code of Conduct for Directors and our Code of
Business Ethics and Conduct for Vendors are also located within
the Investor Relations section of our website. Amendments to
these documents or waivers related to our codes of conduct will
be made available on our web site as soon as reasonably
practicable after the effective date of the changes. We have
adopted a Code of Ethics for Executive Officers that applies to
our Chief Executive Officer, Chief Financial Officer and Chief
Accounting Officer. The Code of Ethics for Executive Officers is
located on our internet website at www.bk.com under
Company Info Investor Relations
Corporate Governance Governance Documents. We
intend to provide disclosure of any amendments or waivers of our
Code of Ethics for Executive Officers on our web site within
four business days following the date of the amendment or
waiver. These documents, as well as our SEC filings and copies
of financial and other information, are available in print free
of charge to any shareholder who requests a copy from our
Investor Relations Department. Requests to Investor Relations
may also be made by calling
(305) 378-7696,
or by sending the request to Investor Relations, Burger King
Holdings, Inc., 5505 Blue Lagoon Drive, Miami, FL 33126.
The Companys Chairman and Chief Executive Officer, John W.
Chidsey, certified to the New York Stock Exchange (NYSE) on
December 15, 2009, pursuant to Section 303A.12 of the
NYSEs listing standards, that he was not aware of any
violation by the Company of the NYSEs corporate governance
listing standards as of that date.
17
Executive
Officers of the Registrant
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
John W. Chidsey
|
|
|
48
|
|
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Chairman and Chief Executive Officer
|
Natalia Franco
|
|
|
48
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Global Chief Marketing Officer
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Ben K. Wells
|
|
|
56
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Chief Financial Officer
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Julio A. Ramirez
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|
|
56
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EVP, Global Operations
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Peter C. Smith
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|
|
54
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Chief Human Resources Officer
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Anne Chwat
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|
51
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|
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General Counsel, Chief Ethics and Compliance Officer and
Secretary
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Charles M. Fallon, Jr.
|
|
|
47
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|
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President, North America
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Kevin Higgins
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47
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|
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President, EMEA
|
John W. Chidsey has served as our Chief Executive Officer
and a member of our board since April 2006 and as Chairman of
the Board since July 1, 2009. From September 2005 until
April 2006, he was our President and Chief Financial Officer and
from June 2004 until September 2005, he was our President, North
America. Mr. Chidsey joined us as Executive Vice President,
Chief Administrative and Financial Officer in March 2004 and
held that position until June 2004. From January 1996 to March
2003, Mr. Chidsey served in numerous positions at Cendant
Corporation, most recently as Chief Executive Officer of the
Vehicle Services Division and the Financial Services Division.
Natalia Franco has served as our Global Chief Marketing
Officer, since May 2010. From August 2006 until May 2010, she
was Vice President, Global Marketing and Innovation,
McDonalds Division, at The Coca Cola Company. Before
joining The
Coca-Cola
Company, Ms. Franco served as USA Vice President
Cereal Strategic Growth Channels with the Big G
Cereal Division at General Mills from July 2004 until July 2006.
From November 1995 until July 2004, Ms. Franco held various
marketing responsibilities at General Mills and Pillsbury.
Ben K. Wells has served as our Chief Financial Officer
since April 2006. From May 2005 to April 2006, Mr. Wells
served as our Senior Vice President and Treasurer. From June
2002 to May 2005 he was a Principal and Managing Director at BK
Wells & Co., a corporate treasury advisory firm in
Houston, Texas. From June 1987 to June 2002, he was at Compaq
Computer Corporation, most recently as Vice President, Corporate
Treasurer. Before joining Compaq, Mr. Wells held various
finance and treasury responsibilities over a
10-year
period at British Petroleum.
Julio A. Ramirez has served as our EVP, Global Operations
since September 2008. Mr. Ramirez has worked for Burger
King Corporation for 25 years. From January 2002 to
September 2008, Mr. Ramirez served as our President, Latin
America. During his tenure, Mr. Ramirez has held several
positions, including Senior Vice President of
U.S. Franchise Operations and Development from February
2000 to December 2001 and President, Latin America from 1997 to
2000.
Peter C. Smith has served as our Chief Human Resources
Officer since December 2003. From September 1998 to November
2003, Mr. Smith served as Senior Vice President of Human
Resources at AutoNation.
Anne Chwat has served as our General Counsel, Chief
Ethics and Compliance Officer and Secretary since September
2004. In June 2008, Ms. Chwat also began serving as a board
member and President of the Have It your
Way®
Foundation, the charitable arm of the Burger King system.
From September 2000 to September 2004, Ms. Chwat served in
various positions at BMG Music (now SonyBMG Music
Entertainment), including as Senior Vice President, General
Counsel and Chief Ethics and Compliance Officer.
Charles M. Fallon, Jr. has served as our President,
North America since June 2006. From November 2002 to June 2006,
Mr. Fallon served as Executive Vice President of Revenue
Generation for Cendant Car Rental Group, Inc. Mr. Fallon
served in various positions with Cendant Corporation, including
Executive Vice President of Sales for Avis
Rent-A-Car,
from August 2001 to October 2002.
Kevin Higgins has served as our President, EMEA since
August 2009. From April 2004 through February 2009, he served as
General Manager, Yum! Brands Europe and Russia Franchise
Business Unit. From November 1, 2001 through April 2004,
Mr. Higgins served as Director of Development and Franchise
Recruitment for Yum! Brands Europe.
18
Special
Note Regarding Forward-Looking Statements
Certain statements made in this report that reflect
managements expectations regarding future events and
economic performance are forward-looking in nature and,
accordingly, are subject to risks and uncertainties. These
forward-looking statements include statements regarding our
intent to focus on sales growth and profitability; our ability
to drive sales growth by enhancing the guest experience and
expanding competitive hours of operation; our intent to expand
our international platform and accelerate new restaurant
development; our beliefs and expectations regarding system-wide
average restaurant sales; our beliefs and expectations regarding
the mix of franchise restaurants and Company restaurants,
including our expectations that the percentage of franchise
restaurants will increase over the next few years; our beliefs
and expectations regarding our newly developed restaurant
designs, including their ability to convey our vision of the
Burger King brand and reinforce the message that Burger King
delivers superior products and a positive guest experience; our
beliefs and expectations regarding our ability to develop
innovative products that support both ends of our barbell menu
strategy and our expectation that our barbell menu strategy will
grow our market share and improve our operating margins; our
expectations regarding opportunities to enhance restaurant
profitability and effectively manage margin pressures; our
intention to continue to employ innovative and creative
marketing strategies to increase our restaurant traffic and
comparable sales; our intention to focus on our restaurant
reimaging program; our ability to use proactive portfolio
management to drive growth and optimize our restaurant
portfolio; our expectation regarding our ability to continue our
disciplined approach to portfolio management in an effort to
optimize our Company restaurant base, enhance development
agreements with new and existing franchisees, reduce our
concentration in certain markets and opportunistically enter new
markets; our belief and expectation regarding our ability to
refranchise up to half of our current Company restaurant
portfolio within the next three to five years; our belief and
expectation regarding our ability to fund our U.S. and Canada
restaurant reimaging program and to conclude the program within
the next two to three years, our exploration of initiatives to
reduce the initial investment expense, time and uncertainty of
new builds; our ability to manage fluctuations in foreign
currency exchange and interest rates; our estimates regarding
our liquidity, capital expenditures and sources of both, and our
ability to fund future operations and obligations; our
expectations regarding increasing net restaurant count; our
estimates regarding the fulfillment of certain volume purchase
commitments; our expectations regarding the impact of accounting
pronouncements; our intention to renew hedging contracts; and
our expectations regarding unrecognized tax benefits. These
forward-looking statements are only predictions based on our
current expectations and projections about future events.
Important factors could cause our actual results, level of
activity, performance or achievements to differ materially from
those expressed or implied by these forward-looking statements,
including, but not limited to, the risks and uncertainties
discussed below.
Our
success depends on our ability to compete with our major
competitors.
The restaurant industry is intensely competitive and we compete
in the United States and internationally with many
well-established food service companies on the basis of product
choice, quality, affordability, service and location. Our
competitors include a variety of independent local operators, in
addition to well-capitalized regional, national and
international restaurant chains and franchises. In the FFHR
industry our principal competitors are McDonalds and
Wendys as well as regional hamburger restaurant chains,
such as Carls Jr., Jack in the Box and Sonic. To a lesser
extent, we also compete for consumer dining dollars with
national, regional and local (i) quick service restaurants
that offer alternative menus, (ii) casual and fast
casual restaurant chains, and (iii) convenience
stores and grocery stores that offer menu items comparable to
that of Burger King restaurants. Furthermore, the
restaurant industry has few barriers to entry, and therefore new
competitors may emerge at any time.
Our ability to compete will depend on the success of our plans
to improve existing products, to develop and roll-out new
products and product line extensions, to effectively respond to
consumer preferences and to manage the complexity of our
restaurant operations as well as the impact of our
competitors actions. To the extent that one of our
existing or future competitors offers items that are better
priced or more appealing to consumer tastes, increases the
number of restaurants it operates in one of our key markets, or
has more effective advertising and marketing programs than we
do, this product and price competition could adversely affect
our revenues and those of our franchisees.
19
Some
of our competitors have significantly greater resources than we
do, and therefore we may be at a disadvantage in competing with
them.
Some of our competitors have substantially greater financial
resources, higher revenues and greater economies of scale than
we do. These advantages may allow them to react to changes in
pricing, marketing and the quick service restaurant segment in
general more quickly and more effectively than we can. Some of
these competitors spend significantly more on advertising,
marketing and other promotional activities than we do, which may
give them a competitive advantage through higher levels of brand
awareness among consumers. In addition, our major competitors
may be able to devote greater resources to accelerate their
restaurant remodeling and rebuilding efforts, rapidly expand new
product introductions or implement aggressive product
discounting, which could give them a competitive advantage and
adversely affect traffic, sales or profitability at our system
restaurants. Furthermore, in a difficult economy we believe that
these competitive advantages arising from greater financial
resources and economies of scale may intensify thereby
permitting our competitors to gain market share. Such
competition may adversely affect our revenues and profits by
reducing revenues of Company restaurants and royalty payments
from franchise restaurants.
The market for retail real estate is highly competitive. Based
on their size advantage
and/or their
greater financial resources, some of our competitors may have
the ability to negotiate more favorable ground lease terms than
we can and some landlords and developers may offer priority or
grant exclusivity to some of our competitors for desirable
locations. As a result, we may not be able to obtain new leases
or renew existing leases on acceptable terms, if at all, which
could adversely affect our sales and brand-building initiatives.
Economic
conditions are adversely affecting consumer discretionary
spending and may continue to negatively impact our business and
operating results.
We believe that our sales, guest traffic and profitability are
strongly correlated to consumer discretionary spending, which is
influenced by general economic conditions, unemployment levels,
the availability of discretionary income and, ultimately,
consumer confidence. A protracted economic slowdown, increased
unemployment and underemployment of our customer base, decreased
salaries and wage rates, increased energy prices, inflation,
foreclosures, rising interest rates or other industry-wide cost
pressures adversely affect consumer behavior and decrease
consumer spending for restaurant dining occasions. The current
global economic environment has weakened consumer confidence and
impacted the publics ability and desire to spend
discretionary dollars, resulting in lower levels of guest
traffic in restaurants located in some of our major markets and
a reduction in the average amount guests spend in our
restaurants. This has, in turn, reduced our revenues and
resulted in sales deleverage, spreading fixed costs across a
lower level of sales and causing downward pressure on our
profitability. These factors have also reduced sales at
franchise restaurants, resulting in lower royalty payments from
franchisees, and could reduce profitability of franchise
restaurants.
If this difficult economic situation continues for a prolonged
period of time or deepens in magnitude, our business and results
of operations could be materially and adversely affected.
Specifically, we may be required to incur non-cash impairment or
other charges, reduce the number
and/or
frequency of new restaurant openings, close or sell Company
restaurants,
and/or slow
our Company restaurant reimaging program. As long as the
difficult economic situation continues we expect our sales,
guest traffic, profitability and overall operating results to be
adversely affected.
The
concentration of our restaurants in limited geographic areas
subjects us to additional risk.
Our results of operations are substantially affected not only by
global economic conditions, but also by the local economic
conditions in the markets in which we have significant
operations. In the United States, 50% of our Company restaurants
are located in three states, Florida, North Carolina and
Indiana. In EMEA/APAC, over 70% of our Company restaurants and
40% of our franchise restaurants are located in three countries,
Germany, the U.K. and Spain, with these markets representing 21%
of our total revenues for the fiscal year ended June 30,
2010. In Latin America, 100% of our Company restaurants and
31% of our franchise restaurants are located in Mexico. Many of
the markets in which we and our franchisees operate have been
particularly affected by the economic downturn and the timing
and strength of any economic recovery is uncertain in many of
our most important markets.
20
Our geographic concentration increases vulnerability to general
adverse economic and industry conditions and may have a
disproportionate effect on our overall results of operations as
compared to some of our competitors that may have less
restaurant concentration.
Over the past 18 months, we have experienced, and may
continue to experience, declining sales and operating losses in
Germany, primarily due to weak consumer confidence, lower
discretionary spending and competitive factors. Germany is our
second largest market, and this restaurant concentration has
negatively impacted our operating results. If we are unable to
strengthen the operating performance of the German restaurants,
we could incur a decrease in our revenues and earnings which
could negatively impact our financial condition and our future
revenue growth.
Our
business is subject to fluctuations in foreign currency exchange
and interest rates.
Our international operations are impacted by fluctuations in
currency exchange rates and changes in currency regulations. In
countries outside of the United States where we operate Company
restaurants, we generally generate revenues and incur operating
expenses and selling, general and administrative expenses
denominated in local currencies. These revenues and expenses are
translated using the average rates during the period in which
they are recognized and are impacted by changes in currency
exchange rates. Further, in some of our international markets,
such as Canada, Mexico and the U.K., our suppliers purchase
goods in currencies other than the local currency in which they
operate and pass all or a portion of the currency exchange
impact on to us. In many countries where we do not have Company
restaurants, our franchisees pay royalties to us in currencies
other than the local currency in which they operate. However, as
the royalties are calculated based on local currency sales, our
revenues are still impacted by fluctuations in currency exchange
rates. In fiscal 2010, income from operations would have
decreased or increased $12.5 million if all foreign
currencies uniformly weakened or strengthened by 10% relative to
the U.S. dollar. However, different regions experience
varied currency fluctuations. As a result, if a region in which
we have a high concentration of restaurants experiences a
weakening in its currency, it could adversely affect our income
from operations even if other foreign currencies did not weaken.
Fluctuations in interest rates may also affect our business. We
attempt to minimize this risk and lower our overall borrowing
costs through the utilization of derivative financial
instruments, primarily interest rate swaps. These swaps are
entered into with financial institutions and have reset dates
and critical terms that match those of our forecasted interest
payments. Accordingly, any change in market value associated
with interest rate swaps is offset by the opposite market impact
on the related debt. We do not attempt to hedge all of our debt
and, as a result, may incur higher interest costs for portions
of our debt which are not hedged. In addition, we enter into
forward contracts to reduce our exposure to volatility from
foreign currency fluctuations associated with certain foreign
currency-denominated assets, and from time to time we also hedge
forecasted cash flows denominated in Canadian and Australian
dollars. However, for a variety of reasons, we do not hedge our
revenue exposure in other currencies. Therefore, we are exposed
to volatility in those other currencies, and this volatility may
differ from period to period. As a result, the foreign currency
impact on our operating results for one period may not be
indicative of future results.
As a result of entering into these hedging contracts with major
financial institutions, we may be subject to counterparty
nonperformance risk. Should there be a counterparty default, we
could be exposed to the net losses on the hedged arrangements or
be unable to recover anticipated net gains from the transactions.
Increases
in food and supply costs could harm our profitability and
operating results.
Our profitability depends in part on our ability to anticipate
and react to changes in food and supply costs. Any increase in
food prices, especially those of beef or chicken, could
adversely affect our operating results. The market for beef and
chicken is particularly volatile and is subject to significant
price fluctuations due to seasonal shifts, climate conditions,
demand for corn (a key ingredient of cattle and chicken feed),
industry demand, international commodity markets, food safety
concerns, product recalls, government regulation and other
factors, all of which are beyond our control and, in many
instances unpredictable. If the price of beef, chicken or other
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.
21
Our exposure to risks from increases in food and supply costs
may be greater than that of some of our competitors as we do not
have ultimate control over the purchasing of these products in
the United States or Canada. In the United States, we have
established a cooperative with our franchisees to negotiate food
prices on behalf of all Company and franchise restaurants. This
cooperative does not utilize commodity option or future
contracts to hedge commodity prices for beef or other food
products and does not typically enter into long-term pricing
arrangements. Furthermore, we do not hedge commodity prices in
markets outside the United States. As a result, we typically
purchase beef and many other commodities at market prices, which
fluctuate on a daily basis. Increases in commodity prices could
result in higher restaurant operating costs, and the highly
competitive nature of our industry may limit our ability to pass
increased costs on to our guests.
Increases
in labor costs could slow our growth or harm our
business.
We are an extremely labor intensive business. Consequently, our
success depends in part upon our ability to manage our labor
costs and its impact on our margins. We currently seek to
minimize the long-term trend toward higher wages in both mature
and developing markets through increases in labor efficiencies,
however we may not be successful.
Furthermore, we must 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. Despite
current economic conditions, attracting and retaining qualified
managers and employees remains challenging and our inability to
meet these challenges could require us to pay higher wages
and/or
additional costs associated with high turnover. In addition,
increases in the minimum wage or labor regulations and the
potential impact of union organizing efforts in the countries in
which we operate could increase our labor costs. Additional
labor costs could adversely affect our margins.
Our
operating results depend on the effectiveness of our marketing
and advertising 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 and 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.
Our
future prospects depend on our ability to implement our strategy
of increasing our restaurant portfolio.
One of the four pillars of our growth plan is to significantly
increase worldwide restaurant count. A significant component of
our future growth strategy involves increasing our net
restaurant count in our international markets. We and our
franchisees face many challenges in opening new restaurants,
including, among others:
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the selection and availability of suitable restaurant locations;
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the impact of local tax, zoning, land use and environmental
rules and regulations on our ability to develop restaurants, and
the impact of any material difficulties or failures that we
experience in obtaining the necessary licenses and approvals for
new restaurants;
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the negotiation of acceptable lease terms;
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the availability of bank credit and, for franchise restaurants,
the ability of franchisees to obtain acceptable financing terms;
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securing acceptable suppliers;
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employing and training qualified personnel; and
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consumer preferences and local market conditions.
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We expect that most of our growth will be accomplished through
the opening of additional franchise restaurants. However, our
franchisees may be unwilling or unable to increase their
investment in our system by opening new restaurants,
particularly if their existing restaurants are not generating
positive financial results. Moreover, opening new franchise
restaurants depends, in part, upon the availability of
prospective franchisees with the experience and financial
resources to be effective operators of Burger King
restaurants. In the past, we have approved franchisees that
were unsuccessful in implementing their expansion plans,
particularly in new markets. There can be no assurance that we
will be able to identify franchisees who meet our criteria, or
if we identify such franchisees, that they will successfully
implement their expansion plans.
Approximately
90% of our current restaurants are franchised and this
restaurant ownership mix presents a number of disadvantages and
risks.
Approximately 90% of our current restaurants are franchised and
we expect that the percentage of Company restaurants may be
significantly reduced over the next five years as we accelerate
the pace of refranchisings as part of our portfolio management
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 influence
over franchisees and reliance on franchisees to implement major
initiatives, limited ability to facilitate changes in restaurant
ownership, limitations on enforcement of franchise obligations
due to bankruptcy or insolvency proceedings and inability or
unwillingness of franchisees to participate in our strategic
initiatives. Moreover, as the percentage of franchise
restaurants increases, the problems associated with these
drawbacks may be exacerbated and may present a significant
challenge for management.
Our principal competitors may have greater influence over their
respective restaurant systems than we do because of their
significantly higher percentage of Company restaurants
and/or
ownership of franchisee real estate. McDonalds and Wendys
have a higher percentage of Company restaurants than we do, and,
as a result, they may have a greater ability to implement
operational initiatives and business strategies, including their
marketing and advertising programs.
Franchisee
support of our marketing and advertising programs is critical
for our success.
The support of our franchisees is critical for the success of
our marketing programs and any new capital intensive or other
strategic initiatives we seek to undertake, and the successful
execution of these initiatives will depend on our ability to
maintain alignment with our franchisees. 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. In addition, our efforts to build alignment with
franchisees may result in a delay in the implementation of our
marketing and advertising programs and other key initiatives.
Although we believe that our current relationships with our
franchisees are generally good, there can be no assurance that
our franchisees will continue to support our marketing programs
and strategic initiatives. We have been sued by the National
Franchisee Association, Inc., an organization that represents
over 50% of our franchisees in the United States, and several
individual franchisees over the Companys decision to
require U.S. franchisees to sell the
1/4
lb. Double Cheeseburger and the Buck Double at no more than
$1.00. We were also sued by four franchisees in Florida over
extended hours of operation, which is one of our important
initiatives to drive higher sales. The failure of our
franchisees to support our marketing programs and strategic
initiatives could adversely affect our ability to implement our
business strategy and could materially harm our business,
results of operations and financial condition.
Our
operating results are closely tied to the success of our
franchisees; however, our franchisees are independent operators
and we have limited influence over their restaurant
operations.
Our operating results substantially depend upon our
franchisees sales volumes, restaurant profitability, and
financial viability. However, our franchisees are independent
operators and we cannot control many factors that impact the
profitability of their restaurants. Pursuant to the franchise
agreements and our Manual of Operating Data, we can, among other
things, mandate menu items, signage, equipment, hours of
operation and value menu, establish operating procedures and
approve suppliers, distributors and products. However, the
quality of franchise restaurant operations may be diminished by
any number of factors beyond our control. Consequently,
franchisees may not
23
successfully operate restaurants in a manner consistent with our
standards and requirements, such as our cleanliness standards,
or standards set by federal, state and local governmental laws
and regulations. In addition, franchisees may not hire and train
qualified managers and other restaurant personnel. While we
ultimately can take action to terminate franchisees that do not
comply with the standards contained in our franchise agreements
and our Manual of Operating Data, we may not be able to identify
problems and take action quickly enough and, as a result, our
image and reputation may suffer, and our franchise revenues and
results of operations could decline.
We
have limited influence over the decision of franchisees to
invest in other businesses or incur excessive
indebtedness.
Our franchisees are independent operators and, therefore, we
have limited influence over their ability to invest in other
businesses or incur excessive indebtedness. Some of our
franchisees have invested in other businesses, including other
restaurant concepts. In some cases, these franchisees have used
the cash generated by their Burger King restaurants to
expand their non Burger King businesses or to subsidize
losses incurred by such businesses. Additionally, as independent
operators, franchisees do not require our consent to incur
indebtedness. Consequently, our franchisees have in the past,
and may in the future, experience financial distress as a result
of over-leveraging. To the extent that our franchisees use the
cash from their Burger King restaurants to subsidize
their other businesses or experience financial distress, due to
over-leverage or otherwise, it could negatively affect
(1) our operating results as a result of delayed or reduced
payments of royalties, advertising fund contributions and rents
for properties we lease to them, (2) our future revenue,
earnings and cash flow growth and (3) our financial
condition. In addition, lenders to our franchisees which were
adversely affected by franchisees who defaulted on their
indebtedness may be less likely to provide current or
prospective franchisees necessary financing on favorable terms
or at all.
If we
fail to successfully implement our restaurant reimaging
initiative, our ability to increase our revenues and operating
profits may be adversely affected.
Over the past several years, we have embarked on a program to
remodel or rebuild our Company restaurants in the U.S. and
Canada. In order to maximize the benefits of this program, we
use a methodology to select the Company restaurants in our
portfolio that we expect will achieve the highest return on
investment, thereby optimizing the use of our limited capital
resources. The restaurants that we select may not achieve the
expected return on investment. Additionally, there can be no
assurance that our restaurant remodeling and rebuilding efforts
are targeted at the elements of the restaurant experience that
will best accomplish our goals of efficiently allocating our
capital resources, increasing average restaurant sales and
enhancing the restaurant experience for our guests. Finally, we
plan to use the proceeds from refranchisings as well as cash
flows from on-going operations to fund our reimaging program and
to complete the reimaging projects over the next two to three
years. If we are unable to refranchise a substantial number of
Company restaurants over the next two to three years, we will
not have the funds to reimage the remaining Company restaurants
and to conclude the program without incurring incremental debt,
which may not be available on reasonable terms, if at all. If we
fail to successfully implement our restaurant reimaging
initiative, we will not achieve our anticipated increase in
average restaurant sales or our expected return on investment,
and our ability to increase our revenues and operating profits
would be adversely affected.
Furthermore, our restaurant reimaging initiative depends on the
ability, and willingness, of franchisees to accelerate the
remodeling of their existing restaurants. The average cost to
remodel a stand-alone restaurant in the United States ranges
from $200,000 to $525,000 and the average cost to replace the
existing building with a new building is approximately
$1.0 million. Many of our franchisees will need to borrow
funds in order to finance these capital expenditures. We do not
provide our franchisees with financing and therefore their
ability to access borrowed funds depends on their independent
relationships with various regional and national financial
institutions. If our franchisees are unable to obtain financing
at commercially reasonable rates, or not at all, they may be
unwilling or unable to invest in the reimaging of their existing
restaurants, and our future growth could be adversely affected.
We have in the past offered, and may in the future decide to
offer, our franchisees financial incentives to accelerate our
restaurant development and reimaging initiatives. However, the
cost of these financial incentives may have an adverse impact on
our franchise revenues and operating results.
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Our
portfolio management program may adversely affect our results of
operations and may not yield the long-term financial results
that we expect.
We believe that our future growth and profitability will depend
on our ability to successfully implement our portfolio
management program, including refranchising Company restaurants
and closing underperforming restaurants. As part of our
portfolio management program we expect to accelerate the pace of
refranchisings and sell up to half of our current Company
restaurant portfolio within the next three to five years.
However, refranchisings may have unexpected and negative short
term effects on our results of operations. For example,
(i) our Company restaurant margins could be adversely
affected if the refranchised restaurants were more profitable
than our average Company restaurant, (ii) our general and
administrative expenses may increase as a result of severance
and other termination costs incurred in connection with
refranchisings and may continue to increase as a percentage of
revenues unless we are able to identify costs to eliminate as a
result of the transaction, or (iii) we may be required to
recognize accounting or tax gains or losses on refranchising
transactions, which could adversely affect our results of
operations for a specific period.
Our ability to achieve the long-term benefits of our
refranchising transactions will depend on (i) our ability
to identify new or existing franchisees that are willing and
able to pay commercially reasonable prices for such restaurants,
(ii) our ability to sell Company restaurants in those
markets where we desire to reduce our geographic concentration,
(iii) our ability to reduce our overhead and fixed costs to
reflect our lower restaurant count and (iv) the ability and
willingness of these new and existing franchisees to remodel the
refranchised restaurants and develop new restaurants within the
markets of the refranchised restaurants, and the pace of such
remodeling and development activity. Our ability to recognize
the long term benefits of any acquisition we may make as part of
our portfolio management program will depend on our capacity to
successfully identify acquisition targets, negotiate and close
such transactions on commercially reasonable terms and integrate
the operations of the acquired restaurants into our system. If
we and our new franchisees are not successful, then we may not
achieve the long-term financial results anticipated.
In addition, our ability to implement our portfolio management
program in certain geographical areas may be limited by tax,
accounting or other regulatory considerations.
Our
international operations subject us to additional risks and
costs and may cause our profitability to decline.
As of June 30, 2010, our restaurants were operated,
directly by us or by franchisees, in 76 foreign countries and
U.S. territories (including Guam and Puerto Rico, which are
considered part of our international business). During fiscal
2010, our revenues from international operations represented 38%
of total revenues and we intend to continue expansion of our
international operations. As a result, our business is
increasingly exposed to risks inherent in foreign operations.
These risks, which can vary substantially by market, are
described in many of the risk factors discussed in the section
and include the following:
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governmental laws, regulations and policies adopted to manage
national economic conditions, such as increases in taxes,
austerity measures that impact consumer spending, monetary
policies that may impact inflation rates and currency
fluctuations;
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the risk of single franchisee markets and single distributor
markets;
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the risk of markets in which we have granted subfranchising
rights;
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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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changes in the laws and policies that govern foreign investment
and trade in the countries in which we operate;
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risks and costs associated with political and economic
instability, corruption,
anti-American
sentiment and social and ethnic unrest in the countries in which
we operate; and
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the risks of operating in developing or emerging markets in
which there are significant uncertainties regarding the
interpretation, application and enforceability of laws and
regulations and the enforceability of contract rights and
intellectual property rights.
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These factors may increase in importance as we expect to open
new Company and franchise restaurants in international markets
as part of our growth strategy.
Our
business is affected by changes in consumer preferences and
perceptions.
The restaurant industry is affected by consumer preferences and
perceptions. If prevailing health or dietary preferences and
perceptions cause consumers to avoid our products in favor of
alternative food options, our business could suffer. In
addition, negative publicity about our products could materially
harm our business, results of operations and financial
condition. In recent years, numerous companies in the fast food
industry have introduced products positioned to capitalize on
the growing consumer preference for food products that are, or
are perceived to be, healthful, nutritious, and low in calories,
sodium and fat content. Our success will depend in part on our
ability to anticipate and respond to changing consumer
preferences, tastes and eating and purchasing habits.
Food
safety and food-borne illnesses concerns may have an adverse
affect on our business.
Food safety is a top priority, and we dedicate substantial
resources to ensure that our customers enjoy safe, quality food
products. However, food-borne illnesses, such as E. coli,
hepatitis A, trichinosis or salmonella, and food safety issues
have occurred in the food industry in the past, and could occur
in the future. Furthermore, our reliance on third-party food
suppliers and distributors increases the risk that food-borne
illness incidents could be caused by factors outside of our
control and that multiple locations would be affected rather
than a single restaurant. Any report or publicity linking us or
one of our franchisees to instances of food-borne illness or
other food safety issues, including food tampering or
contamination, could adversely affect our brands and reputation
as well as our revenues and profits. If our customers become ill
from food-borne illnesses, we could also be forced to
temporarily close some restaurants. In addition, instances of
food-borne illness, food tampering or food contamination
occurring solely at restaurants of competitors could adversely
affect our sales as a result of negative publicity about the
foodservice industry generally.
The occurrence of food-borne illnesses or food safety issues
could also adversely affect the price and availability of
affected ingredients, which could result in disruptions in our
supply chain, significantly increase our costs
and/or lower
margins for us and our franchisees.
Our
results can be adversely affected by unforeseen events, such as
adverse weather conditions, natural disasters or catastrophic
events.
Unforeseen events, such as adverse weather conditions, natural
disasters or catastrophic events, can adversely impact our
restaurant sales. Natural disasters such as earthquakes,
hurricanes, and severe adverse weather conditions and health
pandemics, such as the outbreak of the H1N1 flu, whether
occurring in the United States or abroad, can keep customers in
the affected area from dining out and result in lost
opportunities for our restaurants. For example, worldwide
comparable sales in January and February 2010 were severely
impacted by inclement weather conditions in the Northeast
U.S. and Europe, while the outbreak of the H1N1 flu
pandemic in Mexico during fiscal 2009 resulted in the temporary
closure of many of our restaurants in and around Mexico City and
adversely affected our revenues and financial results. Because a
significant portion of our restaurant operating costs is fixed
or semi-fixed in nature, the loss of sales during these periods
hurts our operating margins and can result in restaurant
operating losses.
Shortages
or interruptions in the availability and delivery of food,
beverages and other supplies may increase costs or reduce
revenues.
We and our franchisees are dependent upon third parties to make
frequent deliveries of perishable food products that meet our
specifications. Shortages or interruptions in the supply of food
items and other supplies to our restaurants could adversely
affect the availability, quality and cost of items we buy and
the operations of our restaurants. Such shortages or disruptions
could be caused by inclement weather, natural disasters such as
floods,
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drought and hurricanes, increased demand, problems in production
or distribution, the inability of our vendors to obtain credit,
food safety warnings or advisories or the prospect of such
pronouncements, or other conditions beyond our control. A
shortage or interruption in the availability of certain food
products or supplies could increase costs and limit the
availability of products critical to restaurant operations.
Four distributors service approximately 85% of our
U.S. system restaurants and in many of our international
markets, including the U.K., we have a sole distributor that
delivers products to all of our restaurants. Our distributors
operate in a competitive and low-margin business environment. If
one of our principal distributors is in financial distress and
therefore unable to continue to supply us and our franchisees
with needed products, 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. If a principal distributor for our Company
restaurants
and/or our
franchisees fails to meet its service requirements for any
reason, it could lead to a disruption of service or supply until
a new distributor is engaged, which could have an adverse effect
on our business.
The
loss of key management personnel or our inability to attract and
retain new qualified personnel could hurt our business and
inhibit our ability to operate and grow
successfully.
The success of our business to date has been, and our continuing
success will be, dependent to a large degree on the continued
services of our executive officers, including John Chidsey, our
Chairman and Chief Executive Officer; Natalia Franco, our new
Global Chief Marketing Officer; Ben Wells, our Chief Financial
Officer; Charles M. Fallon, Jr., our President, North
America; and other key personnel who have extensive experience
in the franchising and food industries. If we lose the services
of any of these key personnel and fail to manage a smooth
transition to new personnel, our business could suffer.
Changes
in tax laws and unanticipated tax liabilities could adversely
affect the taxes we pay and our profitability.
We are subject to income and other taxes in the United States
and numerous foreign jurisdictions. Our effective income tax
rate in the future could be adversely affected by a number of
factors, including: changes in the mix of earnings in countries
with different statutory tax rates; changes in the valuation of
deferred tax assets and liabilities; continued losses in certain
international Company restaurant markets that could trigger a
valuation allowance or negatively impact our ability to utilize
foreign tax credits to offset our U.S. income taxes;
changes in tax laws; the outcome of income tax audits in various
jurisdictions around the world; sales of Company restaurants to
franchisees; and any repatriation of
non-U.S. earnings
for which we have not previously provided for U.S. taxes.
In Mexico, we may at some point be required to apply the IETU or
flat tax to our Mexico operations, which would
result in a material write-down of our deferred tax assets
related to Mexico, an increase in our deferred tax liabilities
and an increased consolidated effective tax rate. We regularly
review our deferred tax assets for recoverability based on our
history of earnings, expectations for future earnings and
expected timing of reversals of temporary differences, and we
regularly assess all of these matters to determine the adequacy
of our tax provision, which is subject to significant
discretion. In 2009, the Obama administration proposed
legislation that would change how U.S. multinational
corporations are taxed on their foreign income. If such
legislation is enacted, it may have a material adverse impact to
our tax rate and, in turn, our profitability.
Although we believe our tax estimates are reasonable, the final
determination of tax audits and any related litigation could be
materially different from our historical income tax provisions
and accruals. The results of a tax audit or related litigation
could have a material effect on our income tax provision, net
income or cash flows in the period or periods for which that
determination is made.
Leasing
and ownership of a significant portfolio of real estate exposes
us and our franchisees to possible liabilities and
losses.
Many of our Company and franchise restaurants are presently
located on leased premises. As leases underlying our Company and
franchisee restaurants expire, we or our franchisees may be
unable to negotiate a new lease or lease extension, either on
commercially acceptable terms or at all, which could cause us or
our franchisees to close
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restaurants in desirable locations. As a result, our sales and
our brand building initiatives could be adversely affected.
We generally cannot cancel these leases; therefore, if an
existing or future restaurant is not profitable, and we decide
to close it, we may nonetheless be committed to perform our
obligations under the applicable lease including, among other
things, paying the base rent for the balance of the lease term.
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 32% of
the total assets on our balance sheet as of June 30, 2010,
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. In
the event we are unable to refinance or repay such indebtedness
prior to their maturities, we may need to take certain actions
which could negatively impact our business or dilute our
existing stockholders.
As of June 30, 2010, we had total indebtedness under our
senior secured credit facility of $753.7 million, of which
$87.5 million was under Term Loan A and $666.2 million
was under Term Loan B-1. The maturity dates of Term Loan A, Term
Loan B-1 and any future amounts borrowed under the revolving
credit facility are June 30, 2011, June 30, 2012, and
June 30, 2011, respectively. Our indebtedness could have
important consequences to you.
For example, it could:
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increase our vulnerability to general adverse economic and
industry conditions;
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require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness if we do not
maintain specified financial ratios, thereby reducing the
availability of our cash flow for other purposes;
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limit our ability to implement our growth strategy and strategic
initiatives; or
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate, thereby
placing us at a disadvantage compared to competitors that may
have less indebtedness.
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Our revolving credit facility provides for the issuance of
letters of credit and, at June 30, 2010, we had
$34.2 million of irrevocable standby letters of credit
outstanding under the revolving credit facility. The
beneficiaries under these letters of credit generally require
expiration dates of one year. Since our revolving credit
facility is scheduled to mature within one year, letter of
credit beneficiaries could require us to provide cash deposits
to replace the standby letters of credit we issued under our
revolving credit facility. In such case, we would need to
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dedicate a significant amount of cash to satisfy these
obligations, which would reduce the capital available for our
strategic initiatives and other purposes.
In addition, our senior secured credit facility permits us to
incur substantial additional indebtedness in the future. As of
June 30, 2010, we had $115.8 million, net of the
outstanding letters of credit referred to above, available to us
for additional borrowing under our $150.0 million revolving
credit facility portion of our senior secured credit facility.
If we increase our indebtedness by borrowing under the revolving
credit facility or incur other new indebtedness, the risks
described above would increase.
We anticipate refinancing the indebtedness under our senior
secured credit facility before the maturity date in June 2011.
Current economic conditions have adversely impacted the
availability, cost and terms of debt financing. There can be no
assurance that we will be able to refinance our senior secured
credit facility on terms as favorable as our current senior
secured credit facility, on commercially acceptable terms, or at
all.
In addition, if we refinance this indebtedness before its
maturity, we may not be able to re-designate the current
interest rate swaps which are linked to the maturities of our
senior debt as accounting hedges for new floating rate
obligations, or the swap instruments may be terminated by our
counterparties. In the event we are unable to re-designate our
existing interest rate swap instruments as accounting hedges for
new floating rate obligations, or in the event that our
counterparties exercise their right to terminate the swap
instruments, we could be required to accelerate the income
statement recognition of this obligation at that time,
accelerate cash payments to counterparties, or both. At
June 30, 2010, our aggregate obligation resulting from the
interest rate swaps was $26.1 million.
If we are unable to refinance our senior secured credit
facility, we cannot guarantee that we will generate enough cash
flow from operations or be able to obtain enough capital to
repay our indebtedness, fund the letters of credit and bonds
necessary for the operation of our business or fund our planned
capital expenditures. In such event, we may need to close or
sell restaurants, reduce the number
and/or
frequency of restaurant openings, slow our reimaging of Company
restaurants, issue common stock or securities convertible into
common stock or issue debt securities to repay our indebtedness.
If implemented, these actions could negatively impact our
business or dilute our existing stockholders.
Our
senior secured credit facility has restrictive terms and our
failure to comply with any of these terms could put us in
default, which would have an adverse effect on our business and
prospects.
Our senior secured credit facility contains a number of
significant covenants. These covenants limit our ability and the
ability of our subsidiaries to, among other things:
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incur additional indebtedness;
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make capital expenditures and other investments above a certain
level;
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|
|
merge, consolidate or dispose of our assets or the capital stock
or assets of any subsidiary;
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|
pay dividends, make distributions or redeem capital stock in
certain circumstances;
|
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|
enter into transactions with our affiliates;
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|
grant liens on our assets or the assets of our subsidiaries;
|
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|
enter into the sale and subsequent lease-back of real
property; and
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|
make or repay intercompany loans.
|
Our senior secured credit facility requires us to maintain
specified financial ratios. Our ability to meet these financial
ratios and tests can be affected by events beyond our control,
and we may not meet those ratios. A breach of any of 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.
29
A
change in control, as defined in our senior secured
credit facility, would be an event of default under the
facility.
Under our senior secured credit facility, a change in
control occurs if any person or group, other than the
private equity funds controlled by the Sponsors, acquires more
than (1) 25% of our equity value and (2) the equity
value controlled by the Sponsors. A change in control is an
event of default under our senior secured credit facility. The
Sponsors currently control, in the aggregate, approximately 31%
of our equity value, and it would be possible for another person
or group to effect a change in control without our
consent. If a change in control were to occur, the banks would
have the ability to terminate any commitments under the facility
and/or
accelerate all amounts outstanding. We may not be able to
refinance such outstanding commitments on commercially
reasonable terms, or at all. If we were not able to pay such
accelerated amounts, the banks under the senior secured credit
facility would have the right to foreclose on the stock of BKC
and certain of its subsidiaries.
We
face risks of litigation and pressure tactics, such as strikes,
boycotts and negative publicity from restaurant customers,
franchisees, suppliers, employees and others, which could divert
our financial and management resources and which may negatively
impact our financial condition and results of
operations.
Class action lawsuits have been filed, and may continue to be
filed, against various quick service restaurants alleging, among
other things, that quick service restaurants have failed to
disclose the health risks associated with high-fat or
high-sodium foods and that quick service restaurant marketing
practices have targeted children and encouraged obesity. Adverse
publicity about these allegations may negatively affect us and
our franchisees, regardless of whether the allegations are true,
by discouraging customers from buying our products. In addition,
we face the risk of lawsuits and negative publicity resulting
from illnesses and injuries, including injuries to infants and
children, allegedly caused by our products, toys and other
promotional items available in our restaurants or our playground
equipment.
In addition to decreasing our sales and profitability and
diverting our management resources, adverse publicity or a
substantial judgment against us could negatively impact our
business, results of operations, financial condition and brand
reputation, hindering our ability to attract and retain
franchisees and grow our business in the United States and
internationally.
In addition, activist groups, including animal rights activists
and groups acting on behalf of franchisees, the workers who work
for our suppliers and others, have in the past, and may in the
future, use pressure tactics to generate adverse publicity about
us by alleging, for example, inhumane treatment of animals by
our suppliers, deforestation of the rainforest 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, customer and
other claims in the future based on, among other things,
mismanagement of the system, unfair or unequal treatment,
discrimination, harassment, violations of privacy and consumer
credit laws, wrongful termination, and wage, rest break and meal
break issues, including those relating to overtime compensation.
If one or more of these claims were to be successful or if there
is a significant increase in the number of these claims, our
business, results of operations and financial condition could be
harmed.
Our
products are subject to numerous and changing government
regulations, and failure to comply with such existing or future
government regulations could negatively affect our sales,
revenues and earnings.
Our products are subject to numerous and changing government
regulations, and failure to comply with such existing or future
government regulations could negatively affect our sales,
revenues and earnings. In many of our markets, including the
United States and Europe, we are subject to increasing
regulation regarding our products, which may significantly
increase our cost of doing business.
30
Many governmental bodies, particularly those in the United
States, the U.K. and Spain, have considered or begun to enact
legislation to regulate high-fat, high-calorie and high-sodium
foods as a way of combating concerns about obesity and health.
Public interest groups have also focused attention on the
marketing of high-fat, high-calorie and high-sodium foods to
children in a stated effort to combat childhood obesity.
Further, regulators in the U.K. have adopted restrictions on
television advertising of foods high in fat, salt or sugar
targeted at children. In addition, the Spanish government and
certain industry organizations have focused on reducing
advertisements that promote large portion sizes. We have made
voluntary commitments to change our advertising to children
under the age of 12 in the United States and European Union.
Regulators in Canada and in other countries are proposing to
take steps to reduce the level of exposure to acrylamide, a
potential carcinogen that naturally occurs in the preparation of
foods such as french fries. In the State of California, we are
required to warn about the presence of acrylamide and other
potential carcinogens in our foods. The cost of complying with
these regulations could increase our expenses and the negative
publicity arising from such legislative initiatives could reduce
our future sales.
Changes
in governmental regulations may adversely affect restaurant
operations and our financial results.
In the United States, each of our Company and franchise
restaurants is subject to licensing and regulation by health,
sanitation, safety and other agencies in the state
and/or
municipality in which the restaurant is located. State and local
government authorities may enact laws, rules or regulations that
impact restaurant operations and the cost of conducting those
operations. 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 the Fair Labor Standards Act, which governs such
matters as minimum wage, overtime and other working conditions,
family leave mandates and a variety of other laws enacted by
states that govern these and other employment matters;
|
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|
|
the impact of 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;
|
|
|
|
the impact of recent efforts to require the listing of specified
nutritional information on menus and menu boards on consumer
demand for our products;
|
|
|
|
the risks of operating in foreign markets in which there are
significant uncertainties, including with respect to the
application of legal requirements and the enforceability of laws
and contractual obligations; and
|
|
|
|
the impact of costs of compliance with privacy, consumer
protection and other laws, the impact of 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. Various state and foreign laws regulate certain
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. We recently settled a lawsuit regarding
alleged ADA violations in 10 of the Burger King restaurants that
we lease to franchisees in California, and the plaintiffs in
that case have indicated that they intend to pursue litigation
over the remaining 86 restaurants that we currently lease or
leased in California. In
31
addition, future mandated modifications to our facilities to
make different accommodations for disabled persons and
modifications required under the ADA could result in material
unanticipated expense to us and our franchisees.
If we fail to comply with existing or future laws and
regulations, we may be subject to governmental or judicial fines
or sanctions. In addition, our and our franchisees capital
expenditures could increase due to remediation measures that may
be required if we are found to be noncompliant with any of these
laws or regulations.
We are
subject to risks related to the provision of employee health
care benefits.
We use a combination of insurance and self-insurance for
workers compensation coverage and health care plans. We
record expenses under those plans based on estimates of the
costs of expected claims, administrative costs, stop-loss
insurance premiums and expected health care trends. These
estimates are then adjusted each year to reflect actual costs
incurred. Actual costs under these plans are subject to
variability that is dependent upon participant enrollment,
demographics, and the actual costs of claims made. In the event
our cost estimates differ from actual costs, we could incur
additional unplanned health care costs, which could adversely
impact our financial condition.
In March 2010, comprehensive health care reform legislation
under the Patient Protection and Affordable Care Act (HR
3590) and Health Care Education and Affordability
Reconciliation Act (HR 4872) (collectively, the
Acts) was passed and signed into law. Among other
things, the health reform legislation includes guaranteed
coverage requirements, eliminates pre-existing condition
exclusions and annual and lifetime maximum limits, restricts the
extent to which policies can be rescinded, and imposes new and
significant taxes on health insurers and health care benefits.
Provisions of the health care reform legislation become
effective at various dates over the next several years. The
Department of Health and Human Services, the National
Association of Insurance Commissioners, the Department of Labor
and the Treasury Department have yet to issue necessary enabling
regulations and guidance with respect to the health care reform
legislation.
Due to the breadth and complexity of the health reform
legislation, the lack of implementing regulations and
interpretive guidance, and the phased-in nature of the
implementation, it is difficult to predict the overall impact of
the health reform legislation on our business and the businesses
of our U.S. franchisees over the coming years. Possible
adverse effects of the health reform legislation include reduced
revenues, increased costs, exposure to expanded liability and
requirements for us to revise the ways in which we conduct
business or risk of loss of business. In addition, our results
of operations, financial position and cash flows could be
materially adversely affected. Our U.S. franchisees face
the potential of similar adverse effects, and many of them are
small business owners who may have significant difficulty
absorbing the increased costs.
The
personal information that we collect may be vulnerable to
breach, theft or loss that could adversely affect our
reputation, results of operation and financial
condition.
In the ordinary course of our business, we collect, process,
transmit and retain personal information regarding our employees
and their families, franchisees, vendors and consumers,
including social security numbers, banking and tax ID
information, health care information and credit card
information. Some of this personal information is held and
managed by certain of our vendors. Although we use security and
business controls to limit access and use of personal
information, a third party may be able to circumvent those
security and business controls, which could result in a breach
of employee, consumer or franchisee privacy. A major breach,
theft or loss of personal information regarding our employees
and their families, our franchisees, vendors or consumers that
is held by us or our vendors could result in substantial fines,
penalties and potential litigation against us which could
negatively impact our results of operations and financial
condition. Furthermore, as a result of legislative and
regulatory rules, we may be required to notify the owners of the
personal information of any data breaches, which could harm our
reputation and financial results, as well as subject us to
litigation or actions by regulatory authorities.
Information
technology system failures or interruptions or breaches of our
network security may interrupt our operations, subject us to
increased operating costs and expose us to
litigation.
We rely heavily on our computer systems and network
infrastructure across our operations including, but not limited
to,
point-of-sale
processing at our restaurants. Despite our implementation of
security measures, all of our
32
technology systems are vulnerable to damage, disability or
failures due to physical theft, fire, power loss,
telecommunications failure or other catastrophic events, as well
as from internal and external security breaches, denial of
service attacks, viruses, worms and other disruptive problems
caused by hackers. If our technology systems were to fail, and
we were unable to recover in a timely way, we could experience
an interruption in our operations which could have a material
adverse effect on our financial condition and results of
operations. Furthermore, to the extent that some our worldwide
reporting systems require or rely on manual processes, it could
increase the risk of a breach.
In addition, a number of our systems and processes are not fully
integrated worldwide and, as a result, require us to manually
estimate and consolidate certain information that we use to
manage our business. To the extent that we are not able to
obtain transparency into our operations from our systems, it
could impair the ability of our management to react quickly to
changes in the business or economic environment.
Our
current principal stockholders own a significant amount of our
common stock and have certain contractual rights to appoint
directors, which will allow them to significantly influence all
matters requiring shareholder approval.
The private equity funds controlled by the Sponsors beneficially
own approximately 31% of our outstanding common stock. In
addition, three of our 10 directors are representatives of
the private equity funds controlled by the Sponsors, although
each Sponsor retains the right to nominate two directors,
subject to reduction and elimination based on their respective
stock ownership percentage. In addition, with respect to each
committee of our board other than the audit committee, each
Sponsor has the right to appoint at least one director to each
committee, for Sponsor directors to constitute a majority of the
membership of each committee (subject to NYSE requirements) and
for the chairman of each committee to be a Sponsor director
until the private equity funds controlled by the Sponsors
collectively own less than 30% of our outstanding common stock.
As a result of these contractual rights, the Sponsors will
continue to have significant influence over many of our
corporate actions or our decision to enter into any corporate
transaction. Furthermore, such concentration of voting power
could have the effect of influencing or preventing a change of
control or other business combination or any other transaction
that requires the approval of stockholders, regardless of
whether or not other stockholders believe that such transaction
is in their own best interests.
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, subject to NYSE requirements. Our
board also has the authority to issue debt convertible into
shares of common stock. Issuances of common stock, voting
preferred stock or convertible debt could reduce your influence
over matters on which our stockholders vote, and, in the case of
issuances of preferred stock, would likely result in your
interest in us being subject to the prior rights of holders of
that preferred stock.
Provisions
in our certificate of incorporation could make it more difficult
for a third party to acquire us and could discourage a takeover
and adversely affect existing stockholders.
Our certificate of incorporation authorizes our board of
directors to issue up to 10,000,000 preferred shares and to
determine the powers, preferences, privileges, rights, including
voting rights, qualifications, limitations and restrictions on
those shares, without any further vote or action by our
stockholders. The rights of the holders of our common stock will
be subject to, and may be adversely affected by, the rights of
the holders of any preferred shares that may be issued in the
future. The issuance of preferred shares could have the effect
of delaying, deterring or preventing a change in control and
could adversely affect the voting power or economic value of
your shares.
|
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Item 1B.
|
Unresolved
Staff Comments
|
None.
33
Our global restaurant support center and U.S. headquarters
is located in Miami, Florida and consists of approximately
213,000 square feet which we lease. We extended the Miami
lease for our global restaurant support center in May 2008
through September 2018 with an option to renew for one five-year
period. We lease properties for our EMEA headquarters in Zug,
Switzerland and our APAC headquarters in Singapore. We believe
that our existing headquarters and other leased and owned
facilities are adequate to meet our current requirements.
The following table presents information regarding our
restaurant properties as of June 30, 2010:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
|
|
|
|
|
|
|
|
|
|
|
|
|
Building/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land &
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|
|
Total
|
|
|
|
|
|
|
Owned(1)
|
|
|
Land
|
|
|
Building
|
|
|
Leases
|
|
|
Total
|
|
|
United States and Canada:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurants
|
|
|
322
|
|
|
|
210
|
|
|
|
455
|
|
|
|
665
|
|
|
|
987
|
|
Franchisee-operated properties
|
|
|
457
|
|
|
|
318
|
|
|
|
206
|
|
|
|
524
|
|
|
|
981
|
|
Non-operating restaurant locations
|
|
|
30
|
|
|
|
13
|
|
|
|
15
|
|
|
|
28
|
|
|
|
58
|
|
Offices and other(2)
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
809
|
|
|
|
541
|
|
|
|
682
|
|
|
|
1,223
|
|
|
|
2,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurants
|
|
|
18
|
|
|
|
15
|
|
|
|
367
|
|
|
|
382
|
|
|
|
400
|
|
Franchisee-operated properties
|
|
|
3
|
|
|
|
4
|
|
|
|
88
|
|
|
|
92
|
|
|
|
95
|
|
Non-operating restaurant locations
|
|
|
1
|
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
|
|
11
|
|
Offices and other(2)
|
|
|
1
|
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
23
|
|
|
|
19
|
|
|
|
476
|
|
|
|
495
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
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Owned refers to properties where we own the land and the
building. |
|
(2) |
|
Other properties include a consumer research center and storage
facilities. |
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Item 3.
|
Legal
Proceedings
|
Ramalco Corp. et al. v. Burger King Corporation,
No. 09-43704CA05
(Circuit Court of the Eleventh Judicial Circuit, Dade County,
Florida). On July 30, 2008, we were sued by four Florida
franchisees over our decision to mandate extended operating
hours in the United States. The plaintiffs seek damages,
declaratory relief and injunctive relief. The court dismissed
plaintiffs original complaint in November 2008. In
December 2008, the plaintiffs filed an amended complaint. In
August 2010, the court entered an order reaffirming the legal
bases for dismissal of the original complaint, again holding
that BKC had the authority under its franchise agreements to
mandate extended operating hours. However, BKCs motion to
dismiss the plaintiffs amended complaint is still before
the court.
Castenada v. Burger King Corp. and Burger King Holdings,
Inc.,
No. CV08-4262
(U.S. District Court for the Northern District of
California). On September 10, 2008, a class action lawsuit
was filed against the Company in the United States District
Court for the Northern District of California. The complaint
alleged that all 96 Burger King restaurants in California leased
by the Company and operated by franchisees violate accessibility
requirements under federal and state law. In September 2009, the
court issued a decision on the plaintiffs motion for class
certification. In its decision, the court limited the class
action to the 10 restaurants visited by the named plaintiffs,
with a separate class of plaintiffs for each of the 10
restaurants and 10 separate trials. In March 2010, the Company
agreed to settle the lawsuit with respect to the
10 restaurants and, in July 2010, the court gave final
approval to the settlement. In April 2010, the Company received
a demand from the law firm representing the plaintiffs in the
class action lawsuit, notifying the Company that the firm was
prepared to bring a class action covering the other restaurants.
If a lawsuit is filed, the Company intends to vigorously defend
against all claims in the lawsuit, but the Company is unable to
predict the ultimate outcome of this litigation.
34
National Franchisee Association v. Burger King
Corporation,
No. 09-CV-23435
(U.S. District Court for the Southern District of Florida)
and Family Dining, Inc. v. Burger King Corporation,
No. 10-CV-21964
(U.S. District Court for the Southern District of Florida).
The National Franchisee Association, Inc. and several individual
franchisees filed these class action lawsuits on
November 10, 2009, and June 15, 2010, respectively,
claiming to represent Burger King franchisees. The lawsuits seek
a judicial declaration that the franchise agreements between BKC
and its franchisees do not obligate the franchisees to comply
with maximum price points set by BKC for products on the
BK®
Value Menu sold by the franchisees, specifically the
1/4
lb. Double Cheeseburger and the Buck Double. The Family
Dining case also seeks monetary damages for financial loss
incurred by franchisees who were required to sell those products
for no more than $1.00. In May 2010, the court entered an order
in the NFA v. BKC case granting in
part BKCs motion to dismiss. The court held that BKC
had the authority under its franchise agreements to set maximum
prices but that, for purposes of a motion to dismiss, the NFA
had asserted a plausible claim that BKCs
decision may not have been made in good faith. Both cases have
been consolidated in front of the same judge. While the Company
believes its decision to put the
1/4
lb. Double Cheeseburger and the Buck Double on the BK
Value Menu was made in good faith, the Company is unable to
predict the ultimate outcome of these cases.
From time to time, we are involved in other legal proceedings
arising in the ordinary course of business relating to matters
including, but not limited to, disputes with franchisees,
suppliers, employees and customers, as well as disputes over our
intellectual property.
Part II
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Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
for Our Common Stock
Our common stock trades on the New York Stock Exchange under the
symbol BKC. Trading of our common stock commenced on
May 18, 2006, following the completion of our initial
public offering. Prior to that date, no public market existed
for our common stock. As of August 19, 2010, there were
approximately 524 holders of record of our common stock. The
following table sets forth the high and low sales prices of our
common stock as reported on the New York Stock Exchange and
dividends declared per share of common stock for each of the
quarters in fiscal 2010 and fiscal 2009:
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2010
|
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2009
|
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Dollars per Share:
|
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High
|
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Low
|
|
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Dividend
|
|
|
High
|
|
|
Low
|
|
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Dividend
|
|
|
First Quarter
|
|
$
|
19.50
|
|
|
$
|
15.61
|
|
|
$
|
0.0625
|
|
|
$
|
30.95
|
|
|
$
|
22.77
|
|
|
$
|
0.0625
|
|
Second Quarter
|
|
$
|
19.13
|
|
|
$
|
16.63
|
|
|
$
|
0.0625
|
|
|
$
|
24.93
|
|
|
$
|
16.56
|
|
|
$
|
0.0625
|
|
Third Quarter
|
|
$
|
21.51
|
|
|
$
|
17.10
|
|
|
$
|
0.0625
|
|
|
$
|
24.48
|
|
|
$
|
19.21
|
|
|
$
|
0.0625
|
|
Fourth Quarter
|
|
$
|
22.19
|
|
|
$
|
16.80
|
|
|
$
|
0.0625
|
|
|
$
|
24.10
|
|
|
$
|
15.85
|
|
|
$
|
0.0625
|
|
Issuer
Purchases of Equity Securities
The following table presents information related to the
repurchase of our common stock during the three months ended
June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number (or
|
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
|
Approximate Dollar Value) of
|
|
|
|
Total Number
|
|
|
|
|
|
Purchased as Part of
|
|
|
Shares That May Yet be
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Publicly Announced
|
|
|
Purchased Under
|
|
Period
|
|
Purchased(1)
|
|
|
Paid per Share
|
|
|
Plans or Programs(2)
|
|
|
the Plans or Programs(2)
|
|
|
April 1-30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
200,000,000
|
|
May 1-31, 2010
|
|
|
15,366
|
|
|
$
|
20.07
|
|
|
|
|
|
|
$
|
200,000,000
|
|
June 1-30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
200,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,366
|
|
|
$
|
20.07
|
|
|
|
|
|
|
$
|
200,000,000
|
|
35
|
|
|
(1)
|
|
All shares purchased were in
connection with the Companys obligation to withhold from
restricted stock and option awards the amount of federal
withholding taxes due in respect of such awards.
|
|
(2)
|
|
On March 4, 2009, the
Companys Board of Directors authorized a
$200.0 million share repurchase program pursuant to which
the Company would repurchase shares directly in the open market
consistent with the Companys insider trading policy and
also repurchase shares under plans complying with
Rule 10b5-1
under the Exchange Act during periods when the Company may be
prohibited from making direct share repurchases under such
policy. The program expires on December 31, 2010. To date,
we have not repurchased any shares under the new program.
|
Dividend
Policy
During each quarter of fiscal 2009 and 2010, we paid a quarterly
cash dividend of $0.0625 per share. Although we do not have a
dividend policy, we elected to pay a cash dividend in each of
these quarters because we generated strong cash flow during
these periods, and we expect our cash flow to continue to
strengthen.
The terms of our credit facility limit our ability to pay cash
dividends in certain circumstances. In addition, because we are
a holding company, our ability to pay cash dividends on shares
of our common stock may be limited by restrictions on our
ability to obtain sufficient funds through dividends from our
subsidiaries, including the restrictions under our credit
facility. Subject to the foregoing, the payment of cash
dividends in the future, if any, will be at the discretion of
our board of directors and will depend upon such factors as
earnings levels, capital requirements, our overall financial
condition and any other factors deemed relevant by our board of
directors.
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table presents information regarding equity awards
outstanding under our compensation plans as of June 30,
2010 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
(c)
|
|
|
|
(a)
|
|
|
Average Exercise
|
|
|
Number of
|
|
|
|
Number of
|
|
|
Price of
|
|
|
Securities Remaining Available for
|
|
|
|
Securities to be Issued Upon
|
|
|
Outstanding
|
|
|
Future Issuance under Equity
|
|
|
|
Exercise of Outstanding
|
|
|
Options, Warrants
|
|
|
Compensation Plans (Excluding
|
|
Plan Category
|
|
Options, Warrants and Rights
|
|
|
and Rights
|
|
|
Securities Reflected in Column (a))
|
|
|
Equity Compensation Plans
Approved by Security Holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Omnibus Incentive Plan
|
|
|
3,704.7
|
|
|
$
|
17.10
|
|
|
|
2,670.4
|
|
Burger King Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive Plan
|
|
|
4,297.8
|
|
|
$
|
17.24
|
|
|
|
935.1
|
|
Equity Compensation Plans Not Approved by Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
8,002.5
|
|
|
|
|
|
|
|
3,605.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the 8.0 million total number of securities in
column (a) above are approximately 1.6 million
restricted stock units, performance-based restricted stock and
stock units and deferred stock. The weighted average exercise
price in column (b) is based only on stock options as
restricted stock units, performance-based restricted stock
awards and deferred stock awards have no exercise price. The
Company does not currently have warrants or rights outstanding.
36
Stock
Performance Graph
This graph compares the cumulative total return of the
Companys common stock to the cumulative total return of
the S&P 500 Stock Index and the S&P Restaurant Index
for the period from May 18, 2006 through June 30,
2010, the last trading day of the Companys fiscal year.
The graph assumes an investment in the Companys common
stock and the indices of $100 at May 18, 2006 and that all
dividends were reinvested.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/18/2006
|
|
|
6/30/2006
|
|
|
6/29/2007
|
|
|
6/30/2008
|
|
|
6/30/2009
|
|
|
6/30/2010
|
BKC
|
|
|
$
|
100
|
|
|
|
$
|
90
|
|
|
|
$
|
151
|
|
|
|
$
|
155
|
|
|
|
$
|
101
|
|
|
|
$
|
100
|
|
S&P 500 Index
|
|
|
$
|
100
|
|
|
|
$
|
101
|
|
|
|
$
|
122
|
|
|
|
$
|
106
|
|
|
|
$
|
78
|
|
|
|
$
|
89
|
|
S&P Restaurant Index
|
|
|
$
|
100
|
|
|
|
$
|
100
|
|
|
|
$
|
122
|
|
|
|
$
|
122
|
|
|
|
$
|
124
|
|
|
|
$
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All amounts rounded to nearest dollar.
|
|
Item 6.
|
Selected
Financial Data
|
The following tables present selected consolidated financial and
other data for each of the periods indicated. The selected
historical financial data as of June 30, 2010 and 2009 and
for the fiscal years ended June 30, 2010, 2009 and 2008
have been derived from our audited consolidated financial
statements and the notes thereto included in this report. The
selected historical financial data for fiscal years ended
June 30, 2007 and 2006 have been derived from our audited
consolidated financial statements and the notes thereto, which
are not included in this report.
37
The selected historical consolidated financial and other
operating data included below and elsewhere in this report are
not necessarily indicative of future results. The information
presented below should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations in Part II,
Item 7 and Financial Statements and Supplementary
Data in Part II, Item 8 of this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions, except per share data)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$
|
1,839.3
|
|
|
$
|
1,880.5
|
|
|
$
|
1,795.9
|
|
|
$
|
1,658.0
|
|
|
$
|
1,515.6
|
|
Franchise revenues
|
|
|
549.2
|
|
|
|
543.4
|
|
|
|
537.2
|
|
|
|
459.5
|
|
|
|
419.8
|
|
Property revenues
|
|
|
113.7
|
|
|
|
113.5
|
|
|
|
121.6
|
|
|
|
116.2
|
|
|
|
112.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,502.2
|
|
|
|
2,537.4
|
|
|
|
2,454.7
|
|
|
|
2,233.7
|
|
|
|
2,047.8
|
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
585.0
|
|
|
|
603.7
|
|
|
|
564.3
|
|
|
|
499.3
|
|
|
|
469.5
|
|
Payroll and employee benefits
|
|
|
568.7
|
|
|
|
582.2
|
|
|
|
534.7
|
|
|
|
492.1
|
|
|
|
446.3
|
|
Occupancy and other operating costs
|
|
|
461.1
|
|
|
|
457.8
|
|
|
|
439.0
|
|
|
|
418.0
|
|
|
|
380.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses
|
|
|
1,614.8
|
|
|
|
1,643.7
|
|
|
|
1,538.0
|
|
|
|
1,409.4
|
|
|
|
1,295.9
|
|
Selling, general and administrative expenses(1),(3)
|
|
|
495.8
|
|
|
|
494.3
|
|
|
|
501.0
|
|
|
|
473.5
|
|
|
|
487.9
|
|
Property expenses
|
|
|
59.4
|
|
|
|
58.1
|
|
|
|
62.1
|
|
|
|
60.6
|
|
|
|
57.4
|
|
Fees paid to affiliates(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.9
|
|
Other operating (income) expenses, net(3)
|
|
|
(0.7
|
)
|
|
|
1.9
|
|
|
|
(0.6
|
)
|
|
|
(4.4
|
)
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
2,169.3
|
|
|
|
2,198.0
|
|
|
|
2,100.5
|
|
|
|
1,939.1
|
|
|
|
1,876.5
|
|
Income from operations
|
|
|
332.9
|
|
|
|
339.4
|
|
|
|
354.2
|
|
|
|
294.6
|
|
|
|
171.3
|
|
Interest expense, net
|
|
|
48.6
|
|
|
|
54.6
|
|
|
|
61.2
|
|
|
|
67.0
|
|
|
|
72.0
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
17.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
284.3
|
|
|
|
284.8
|
|
|
|
293.0
|
|
|
|
226.8
|
|
|
|
81.5
|
|
Income tax expense
|
|
|
97.5
|
|
|
|
84.7
|
|
|
|
103.4
|
|
|
|
78.7
|
|
|
|
54.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
186.8
|
|
|
$
|
200.1
|
|
|
$
|
189.6
|
|
|
$
|
148.1
|
|
|
$
|
27.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic
|
|
$
|
1.38
|
|
|
$
|
1.48
|
|
|
$
|
1.40
|
|
|
$
|
1.11
|
|
|
$
|
0.24
|
|
Earnings per share diluted
|
|
$
|
1.36
|
|
|
$
|
1.46
|
|
|
$
|
1.38
|
|
|
$
|
1.08
|
|
|
$
|
0.24
|
|
Weighted average shares outstanding- basic
|
|
|
135.4
|
|
|
|
134.8
|
|
|
|
135.1
|
|
|
|
133.9
|
|
|
|
110.3
|
|
Weighted average shares outstanding- diluted
|
|
|
137.2
|
|
|
|
136.8
|
|
|
|
137.6
|
|
|
|
136.8
|
|
|
|
114.7
|
|
Cash dividends per common share(4)
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.13
|
|
|
$
|
3.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
310.4
|
|
|
$
|
310.8
|
|
|
$
|
243.4
|
|
|
$
|
110.4
|
|
|
$
|
67.0
|
|
Net cash used for investing activities
|
|
|
(134.9
|
)
|
|
|
(242.0
|
)
|
|
|
(199.3
|
)
|
|
|
(77.4
|
)
|
|
|
(66.7
|
)
|
Net cash used for financing activities
|
|
|
(96.9
|
)
|
|
|
(105.5
|
)
|
|
|
(62.0
|
)
|
|
|
(126.9
|
)
|
|
|
(172.6
|
)
|
Capital expenditures
|
|
|
150.3
|
|
|
|
204.0
|
|
|
|
178.2
|
|
|
|
87.3
|
|
|
|
85.1
|
|
EBITDA(5)
|
|
$
|
444.6
|
|
|
$
|
437.5
|
|
|
$
|
449.8
|
|
|
$
|
383.4
|
|
|
$
|
259.2
|
|
38
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In millions)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
187.6
|
|
|
$
|
121.7
|
|
Total assets
|
|
|
2,747.2
|
|
|
|
2,707.1
|
|
Total debt and capital lease obligations
|
|
|
826.3
|
|
|
|
888.9
|
|
Total liabilities
|
|
|
1,618.8
|
|
|
|
1,732.3
|
|
Total stockholders equity
|
|
$
|
1,128.4
|
|
|
$
|
974.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Other Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable sales growth(6)(7)(8)
|
|
|
(2.3
|
)%
|
|
|
1.2
|
%
|
|
|
5.4
|
%
|
|
|
3.4
|
%
|
|
|
1.9
|
%
|
Sales growth(6)(7)
|
|
|
2.1
|
%
|
|
|
4.2
|
%
|
|
|
8.3
|
%
|
|
|
4.9
|
%
|
|
|
2.1
|
%
|
Average restaurant sales (in thousands)(7)
|
|
$
|
1,244
|
|
|
$
|
1,259
|
|
|
$
|
1,301
|
|
|
$
|
1,193
|
|
|
$
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Segment Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
1,289.5
|
|
|
$
|
1,331.8
|
|
|
$
|
1,171.9
|
|
EMEA/APAC(9)
|
|
|
489.2
|
|
|
|
488.6
|
|
|
|
554.9
|
|
Latin America(10)
|
|
|
60.6
|
|
|
|
60.1
|
|
|
|
69.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant revenues
|
|
$
|
1,839.3
|
|
|
$
|
1,880.5
|
|
|
$
|
1,795.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and products costs
|
|
|
32.5
|
%
|
|
|
33.0
|
%
|
|
|
32.5
|
%
|
Payroll and employee benefits
|
|
|
31.1
|
%
|
|
|
31.1
|
%
|
|
|
30.5
|
%
|
Occupancy and other operating costs
|
|
|
23.2
|
%
|
|
|
23.1
|
%
|
|
|
23.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses
|
|
|
86.8
|
%
|
|
|
87.2
|
%
|
|
|
86.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA/APAC(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and products costs
|
|
|
29.0
|
%
|
|
|
28.8
|
%
|
|
|
28.5
|
%
|
Payroll and employee benefits
|
|
|
32.8
|
%
|
|
|
32.7
|
%
|
|
|
30.5
|
%
|
Occupancy and other operating costs
|
|
|
29.6
|
%
|
|
|
27.3
|
%
|
|
|
27.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses
|
|
|
91.4
|
%
|
|
|
88.8
|
%
|
|
|
86.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin America(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and products costs
|
|
|
38.9
|
%
|
|
|
38.4
|
%
|
|
|
36.7
|
%
|
Payroll and employee benefits
|
|
|
12.2
|
%
|
|
|
12.3
|
%
|
|
|
11.8
|
%
|
Occupancy and other operating costs
|
|
|
29.4
|
%
|
|
|
29.7
|
%
|
|
|
26.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses
|
|
|
80.5
|
%
|
|
|
80.4
|
%
|
|
|
74.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and products costs
|
|
|
31.8
|
%
|
|
|
32.1
|
%
|
|
|
31.4
|
%
|
Payroll and employee benefits
|
|
|
30.9
|
%
|
|
|
31.0
|
%
|
|
|
29.8
|
%
|
Occupancy and other operating costs
|
|
|
25.1
|
%
|
|
|
24.3
|
%
|
|
|
24.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses
|
|
|
87.8
|
%
|
|
|
87.4
|
%
|
|
|
85.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Franchise revenues (in millions)(11):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
314.6
|
|
|
$
|
323.1
|
|
|
$
|
317.9
|
|
EMEA/APAC(9)
|
|
|
186.2
|
|
|
|
173.4
|
|
|
|
173.0
|
|
Latin America(10)
|
|
|
48.4
|
|
|
|
46.9
|
|
|
|
46.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total franchise revenues
|
|
$
|
549.2
|
|
|
$
|
543.4
|
|
|
$
|
537.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
346.7
|
|
|
$
|
345.7
|
|
|
$
|
349.7
|
|
EMEA/APAC(9)
|
|
|
84.6
|
|
|
|
83.6
|
|
|
|
91.8
|
|
Latin America(10)
|
|
|
38.2
|
|
|
|
37.8
|
|
|
|
41.4
|
|
Unallocated(12)
|
|
|
(136.6
|
)
|
|
|
(127.7
|
)
|
|
|
(128.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from operations
|
|
$
|
332.9
|
|
|
$
|
339.4
|
|
|
$
|
354.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Selling, general and administrative
expenses for fiscal 2006 includes compensation expense and taxes
related to a $34.4 million compensatory make-whole payment
made on February 21, 2006 to holders of options and
restricted stock unit awards, primarily members of senior
management.
|
|
(2)
|
|
Fees paid to affiliates consist of
management fees we paid to the Sponsors under a management
agreement. Fees paid to affiliates in fiscal 2006 also include a
$30.0 million fee that we paid to terminate the management
agreement with the Sponsors.
|
|
(3)
|
|
See Note 2 to the Consolidated
Financial Statements in Part II, Item 8 of this
Form 10-
K for information about reclassification of the net (gains)
losses related to change in value of the investments held in a
rabbi trust (the rabbi trust) from other operating
(income) expenses, net to Selling, General and Administrative
expenses for the fiscal years ended June 30, 2009 and 2008.
The net (gains) losses related to the change in value of these
investments are fully offset by the increase (decrease) in
deferred compensation, in selling, general and administrative
expenses in the accompanying consolidated statements of income.
For the fiscal years ended June 30, 2009 and 2008, we
reclassified $3.9 million and $1.5 million of loss,
respectively, from other operating (income) expenses, net to
Selling, General and Administrative expenses related to the
reclassification.
|
|
(4)
|
|
The cash dividend paid in fiscal
2006 represents a special dividend paid prior to our initial
public offering.
|
|
(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. We also use EBITDA as a measure to calculate
certain incentive based compensation and certain financial
covenants related to our credit facility and as a factor in our
tangible and intangible asset impairment test. Management
believes EBITDA is a useful measure of operating performance.
|
|
|
|
The following table is a
reconciliation of our net income to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Net income
|
|
$
|
186.8
|
|
|
$
|
200.1
|
|
|
$
|
189.6
|
|
|
$
|
148.1
|
|
|
$
|
27.1
|
|
Interest expense, net
|
|
|
48.6
|
|
|
|
54.6
|
|
|
|
61.2
|
|
|
|
67.0
|
|
|
|
72.0
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
17.8
|
|
Income tax expense
|
|
|
97.5
|
|
|
|
84.7
|
|
|
|
103.4
|
|
|
|
78.7
|
|
|
|
54.4
|
|
Depreciation and amortization
|
|
|
111.7
|
|
|
|
98.1
|
|
|
|
95.6
|
|
|
|
88.8
|
|
|
|
87.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
444.6
|
|
|
$
|
437.5
|
|
|
$
|
449.8
|
|
|
$
|
383.4
|
|
|
$
|
259.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6)
|
|
Comparable sales growth and sales
growth are analyzed on a constant currency basis, which means
they are calculated using by translating current year results at
prior year average exchange rates, to remove the effects of
currency fluctuations from these trend analyses. We believe
these constant currency measures provide a more meaningful
analysis of our business by identifying the underlying business
trends, without distortion from the effect of foreign currency
movements.
|
|
(7)
|
|
Unless otherwise stated, comparable
sales growth, sales growth and average restaurant sales are
presented on a system-wide basis, which means they include
Company restaurants and franchise restaurants. Franchise sales
represent sales at all franchise restaurants and are revenues to
our franchisees. We do not record franchise sales as revenues.
However, our royalty revenues are calculated based on a
percentage of franchise sales. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Key Business Measures.
|
|
(8)
|
|
Comparable sales growth refers to
the change in restaurant sales in one period from a comparable
period for restaurants that have been open for thirteen months
or longer.
|
|
(9)
|
|
Refers to our operations in Europe,
the Middle East, Africa and Asia Pacific.
|
40
|
|
|
(10)
|
|
Refers to our operations in Mexico,
Central and South America, the Caribbean and Puerto Rico.
|
|
(11)
|
|
Franchise revenues consist
primarily of royalties paid by franchisees. Royalties earned are
based on a percentage of franchise sales, which were
$13.1 billion, $12.8 billion and $12.9 billion
for fiscal 2010, 2009, and 2008, respectively. Franchise sales
are sales at all franchise restaurants and are revenues to our
franchisees. We do not record franchise sales as revenues.
|
|
(12)
|
|
Unallocated includes corporate
support costs in areas such as facilities, finance, human
resources, information technology, legal, marketing, and supply
chain management, which benefit all of the Companys
geographic segments and system-wide restaurants and are not
allocated specifically to any of the geographic segments.
|
Burger
King Holdings, Inc. and Subsidiaries Restaurant Count
The following table presents information relating to the
analysis of our restaurant count for the geographic areas and
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
|
(Unaudited)
|
|
|
Number of Company restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada
|
|
|
987
|
|
|
|
1,043
|
|
|
|
(56
|
)
|
EMEA/APAC
|
|
|
303
|
|
|
|
294
|
|
|
|
9
|
|
Latin America
|
|
|
97
|
|
|
|
92
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurants
|
|
|
1,387
|
|
|
|
1,429
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of franchise restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada
|
|
|
6,562
|
|
|
|
6,491
|
|
|
|
71
|
|
EMEA/APAC
|
|
|
3,184
|
|
|
|
3,019
|
|
|
|
165
|
|
Latin America
|
|
|
1,041
|
|
|
|
986
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total franchise restaurants
|
|
|
10,787
|
|
|
|
10,496
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of system-wide restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada
|
|
|
7,549
|
|
|
|
7,534
|
|
|
|
15
|
|
EMEA/APAC
|
|
|
3,487
|
|
|
|
3,313
|
|
|
|
174
|
|
Latin America
|
|
|
1,138
|
|
|
|
1,078
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total system-wide restaurants
|
|
|
12,174
|
|
|
|
11,925
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
You should read the following discussion together with
Part II, Item 6 Selected Financial Data
and our audited consolidated financial statements and the
related notes thereto included in Item 8 Financial
Statements and Supplementary Data. In addition to
historical consolidated financial information, this discussion
contains forward-looking statements that reflect our plans,
estimates and beliefs. Actual results could differ from these
expectations as a result of factors including those described
under Item 1A, Risk Factors, Special Note
Regarding Forward-Looking Statements and elsewhere in this
Form 10-K.
References to fiscal 2011, fiscal 2010, fiscal 2009 and
fiscal 2008 in this section are to our fiscal year ending
June 30, 2011 and our fiscal years ended June 30,
2010, 2009 and 2008, respectively. Unless otherwise stated,
comparable sales growth, average restaurant sales and sales
growth are presented on a system-wide basis, which means that
these measures include sales at both Company restaurants and
franchise restaurants. Franchise sales represent sales at all
franchise restaurants and are revenues to our franchisees. We do
not record franchise sales as revenues; however, our franchise
revenues include royalties based on franchise sales. System-wide
results are driven primarily by our franchise restaurants, as
approximately 90% of our current system-wide restaurants are
franchised.
41
Overview
We operate in the fast food hamburger restaurant, or FFHR,
category of the quick service restaurant, or QSR, segment of the
restaurant industry. We are the second largest FFHR chain in the
world as measured by number of restaurants and system-wide
sales. Our system of restaurants includes restaurants owned by
us, as well as our franchisees. Our business operates in three
reportable segments: (1) the United States and Canada;
(2) Europe, the Middle East, Africa and Asia Pacific, or
EMEA/APAC; and (3) Latin America.
Approximately 90% of our current restaurants are franchised, but
we expect the percentage of franchise restaurants to increase
significantly as we implement our portfolio management strategy
of refranchising up to half of our Company restaurants within
the next three to five years. The current 90/10 ratio of
franchise restaurants to Company restaurants applies on a
worldwide basis, but may not reflect the ratio of franchise
restaurants to Company restaurants in any specific market or
region. We believe that a restaurant ownership mix that is
heavily weighted to franchise restaurants is beneficial to us
because the capital required to grow and maintain our system is
funded primarily by franchisees while giving us a base of
Company restaurants to demonstrate credibility with franchisees
in launching new initiatives. However, our franchise dominated
business model also presents a number of drawbacks and risks,
such as our limited control over franchisees and limited ability
to facilitate changes in restaurant ownership. In addition, our
operating results are closely tied to the success of our
franchisees, and we are dependent on franchisees to open new
restaurants as part of our growth strategy.
Our international operations are impacted by fluctuations in
currency exchange rates. In Company markets located outside of
the U.S., we generate revenues and incur expenses denominated in
local currencies. These revenues and expenses are translated
using the average rates during the period in which they are
recognized, and are impacted by changes in currency exchange
rates. In many of our franchise markets, our franchisees pay
royalties to us in currencies other than the local currency in
which they operate; however, as the royalties are calculated
based on local currency sales, our revenues are still impacted
by fluctuations in currency exchange rates. We review and
analyze business results excluding the effect of currency
translation and calculate certain incentive compensation for
management and corporate level employees based on these results
believing this better represents our underlying business trends.
Revenues
In fiscal 2010, segment revenues and income from operations,
excluding unallocated corporate general and administrative
expenses, were allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Income from Operations
|
|
|
Segment:
|
|
|
|
|
|
|
|
|
U.S. & Canada
|
|
|
68
|
%
|
|
|
74
|
%
|
EMEA/APAC
|
|
|
28
|
%
|
|
|
18
|
%
|
Latin America
|
|
|
4
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
We generate revenues from three sources: retail sales at Company
restaurants; franchise revenues, consisting of royalties based
on a percentage of sales reported by franchise restaurants and
franchise fees paid to us by our franchisees; and property
income from restaurants that we lease or sublease to
franchisees. In fiscal 2010, Company restaurant revenues and
franchise revenues represented 73.5% and 22.0% of total
revenues, respectively. The remaining 4.5% of total revenues was
derived from property income.
Restaurant sales are typically higher in the spring and summer
months (our fourth and first fiscal quarters) when weather is
warmer than in the fall and winter months (our second and third
fiscal quarters). Restaurant sales during the winter are
typically highest in December, during the holiday shopping
season. Our restaurant sales and Company restaurant margins are
typically lowest during our third fiscal quarter, which occurs
during the winter months and includes February, the shortest
month of the year. Furthermore, adverse weather conditions which
42
typically occur in the winter months can have material adverse
effects on restaurant sales. The timing of religious holidays
may also impact restaurant sales.
Our sales are heavily influenced by brand advertising, menu
selection and initiatives to improve restaurant operations.
Company restaurant revenues are affected by comparable sales,
timing of Company restaurant openings and closures, acquisitions
by us of franchise restaurants and sales of Company restaurants
to franchisees, or refranchisings. In fiscal 2010,
franchise restaurants generated 87.7% of system-wide sales. We
do not record franchise sales as revenues. However, royalties
paid by franchisees are based on a percentage of franchise sales
and are recorded as franchise revenues.
Expenses
Company restaurants incur three types of operating expenses:
(i) food, paper and other product costs, which represent
the costs of the products that we sell to customers in Company
restaurants; (ii) payroll and employee benefits costs,
which represent the wages paid to Company restaurant managers
and staff, as well as the cost of their health insurance, other
benefits and training; and (iii) occupancy and other
operating costs, which represent rent, utility costs, insurance,
repair and maintenance costs, depreciation for restaurant
property and other operating costs. Company restaurant expenses
exclude selling expenses and general and administrative expenses
necessary to manage our Company restaurant portfolio. 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 long-term improved profitability to our
restaurants system-wide. However, a significant reduction in
sales will result in sales deleverage, spreading fixed costs
across a lower level of sales and causing downward pressure on
our profitability.
We promote our brand and products by advertising in all the
countries and territories in which we operate. In countries
where we have Company restaurants, such as the United States,
Canada, the U.K. and Germany, we manage an advertising fund for
that country by collecting required advertising contributions
from Company and franchise restaurants and purchasing
advertising and other marketing initiatives on behalf of all
Burger King restaurants in that country. These
advertising contributions are based on a percentage of sales at
Company and franchise restaurants. We do not record
advertising contributions collected from franchisees as
revenues, or expenditures of these contributions as expenses.
Amounts which are contributed to the advertising funds by
Company restaurants are recorded as selling expenses. In
countries where we manage an advertising fund, we plan the
marketing calendar in advance based on expected contributions
into the fund for that year. To the extent that contributions
received exceed advertising and promotional expenditures, the
excess contributions are recorded as accrued advertising
liability on our consolidated balance sheets. We may also make
discretionary contributions into these funds, which are also
recorded as selling expenses. In the past, we have made
discretionary contributions to fund deficit balances of the
advertising funds.
Our selling, general and administrative expenses include the
costs of field management for Company and franchise restaurants;
costs of our operational excellence programs (including program
staffing, training and Restaurant Food Safety certifications);
corporate overhead, including corporate salaries and facilities;
advertising and bad debt expenses, net of recoveries; and
amortization of intangible assets. We believe that our current
staffing and structure will allow us to expand our business
globally without increasing general and administrative expenses
significantly.
Property expenses include costs of depreciation and rent on
properties we lease and sublease to franchisees.
Other operating (income) expenses, net include income and
expenses that are not directly derived from the Companys
primary business such as gains and losses on asset and business
disposals, write-offs associated with Company restaurant
closures, impairment charges, charges recorded in connection
with acquisitions of franchise operations, gains and losses on
foreign currency transactions, gains and losses on foreign
currency forward contracts and other miscellaneous items.
43
Fiscal
2010 Highlights
Highlights of our fiscal 2010 performance include:
|
|
|
|
|
continued acceleration of system-wide restaurant growth with
249 net new openings during fiscal 2010; positive net
restaurant growth across all segments with over 90% of the
increase realized outside of the United States and Canada;
|
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|
|
worldwide revenues of $2.5 billion for fiscal 2010;
|
|
|
|
worldwide average restaurant sales for fiscal 2010 of
$1.2 million system-wide, which includes the favorable
impact of currency exchange rates of $15,000;
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|
|
net growth of 15 restaurants in the United States and Canada,
the third year in a row that we have increased our restaurant
count in this segment;
|
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|
|
worldwide system restaurant count of 12,174 at June 30,
2010, our highest restaurant count in the history of the brand;
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|
|
entry into Russia with the opening of six restaurants in Moscow
in fiscal 2010;
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|
|
successful execution of our portfolio management strategy,
including strategic acquisitions of 39 restaurants and 91
refranchisings;
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|
|
continued focus on our barbell menu strategy with premium
offerings such as the Steakhouse XT burger line and
BK Fire-Grilled Ribs limited-time offer and affordable
value offerings such as the
1/4
lb. Double Cheeseburger and Buck Double; and
|
|
|
|
paid down $67.7 million of debt and capital leases.
|
Key
Business Measures
We use three key business measures as indicators of the
Companys operational performance: comparable sales growth,
average restaurant sales and sales growth. These measures are
important indicators of the overall direction, trends of sales
and the effectiveness of the Companys advertising,
marketing and operating initiatives and the impact of these on
the entire Burger King system. Comparable sales growth
and sales growth are provided by reportable segments and are
analyzed on a constant currency basis, which means they are
calculated by translating current year results at prior year
average exchange rates to remove the effects of currency
fluctuations from these trend analyses. We believe these
constant currency measures provide a more meaningful analysis of
our business by identifying the underlying business trend,
without distortion from the effect of currency movements.
44
Comparable
Sales Growth
Comparable sales growth refers to the change in restaurant sales
in one period from a comparable period in the prior year for
restaurants that have been open for 13 months or longer as
of the end of the most recent period. Company comparable sales
growth refers to comparable sales growth for Company restaurants
and franchise comparable sales growth refers to comparable sales
growth for franchise restaurants. We believe comparable sales
growth is a key indicator of our performance, as influenced by
our strategic initiatives and those of our competitors.
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|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In constant currencies)
|
|
|
Company Comparable Sales Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States & Canada
|
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|
(2.4
|
)%
|
|
|
0.5
|
%
|
|
|
2.6
|
%
|
EMEA/APAC
|
|
|
(2.1
|
)%
|
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|
0.1
|
%
|
|
|
3.8
|
%
|
Latin America
|
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|
(4.1
|
)%
|
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|
(3.2
|
)%
|
|
|
1.8
|
%
|
Total Company Comparable Sales Growth
|
|
|
(2.4
|
)%
|
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|
0.3
|
%
|
|
|
2.9
|
%
|
Franchise Comparable Sales Growth:
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|
United States & Canada
|
|
|
(4.1
|
)%
|
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|
0.4
|
%
|
|
|
5.8
|
%
|
EMEA/APAC
|
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|
1.2
|
%
|
|
|
3.3
|
%
|
|
|
5.6
|
%
|
Latin America
|
|
|
(1.1
|
)%
|
|
|
2.3
|
%
|
|
|
4.5
|
%
|
Total Franchise Comparable Sales Growth
|
|
|
(2.3
|
)%
|
|
|
1.4
|
%
|
|
|
5.7
|
%
|
System-wide Comparable Sales Growth:
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|
|
|
|
|
|
|
|
|
|
|
U.S. & Canada
|
|
|
(3.9
|
)%
|
|
|
0.4
|
%
|
|
|
5.4
|
%
|
EMEA/APAC
|
|
|
0.8
|
%
|
|
|
2.9
|
%
|
|
|
5.4
|
%
|
Latin America
|
|
|
(1.3
|
)%
|
|
|
1.9
|
%
|
|
|
4.3
|
%
|
Total System-wide Comparable Sales Growth
|
|
|
(2.3
|
)%
|
|
|
1.2
|
%
|
|
|
5.4
|
%
|
Negative worldwide comparable sales growth of 2.3% (in constant
currencies) for the fiscal year ended June 30, 2010, was
primarily driven by negative comparable sales growth in the
U.S. and Canada segment, resulting from continued
macroeconomic weakness, including high levels of unemployment
and underemployment, and lower average check as consumer
purchases shifted toward value menu options and value promotions
in the U.S., such as the
1/4
lb. Double Cheeseburger, Buck Double and $1
BK Breakfast Muffin Sandwich promotions. These
factors were partially offset by increased traffic and the
successful introduction of higher-priced premium products, such
as the Steakhouse XT burger line, BK Fire-Grilled
Ribs limited-time offer and
BKtm
Breakfast Bowl. In addition, worldwide comparable sales growth
for the fiscal year was adversely affected by negative
comparable sales growth in the Latin America segment and adverse
weather conditions in the U.S., U.K. and Germany, which severely
impacted sales and traffic during the months of January and
February. Negative comparable sales growth in the U.S. and
Canada and Latin America segments was partially offset by
positive comparable sales growth in EMEA/APAC, primarily driven
by positive comparable sales growth in Spain, the UK, Turkey,
Australia and New Zealand, partially offset by negative
comparable sales growth in Germany.
Negative comparable sales growth in the U.S. and Canada of
3.9% (in constant currencies) for the fiscal year ended
June 30, 2010, continued to be negatively impacted by high
levels of unemployment and weak consumer confidence. As a
result, we experienced lower average check as consumers shifted
purchases to value menu options and value promotions in the
U.S., partially offset by positive traffic in the U.S.,
primarily due to the
1/4
lb. Double Cheeseburger and Buck Double promotions. Adverse
weather conditions in the U.S. also severely impacted sales
during the months of January and February. During the period, we
featured two multifaceted promotions with The Twilight Saga:
New Moon and The Twilight Saga: Eclipse, which
focused on broadening our brands appeal with female
SuperFans, value-focused promotions, such as the $1 Whopper
Jr.®
sandwich, 2 for $4 Original Chicken sandwiches,
Whopper®
sandwich limited time offers and the roll-out of the premium
Steakhouse
XTtm
burger line, as well as SuperFamily promotions including
SpongeBob
SquarePantstm,
Planet
51tm
, G.I.
Joetm,
Cloudy with a
45
Chance of
Meatballstm,
Transformerstm
2, Hoodwinked
Tootm,
The Spectacular
Spidermantm,
Polly
Pockettm
and
Pinkalicioustm
which were also leveraged across many international markets.
Positive comparable sales growth in EMEA/APAC of 0.8% (in
constant currencies) for the fiscal year ended June 30,
2010, was driven by the strength of Spain, Turkey and our major
APAC markets, including Australia, New Zealand and Korea.
Comparable sales growth was positive despite the fact that
Germany, one of our major markets in this segment, experienced
negative comparable sales growth due to traffic declines caused
by lower discretionary spending, weak consumer confidence and
competitive factors. Although positive for the fiscal year,
comparable sales growth in the U.K. was negative during second
half of the year due to deteriorating macroeconomic conditions,
adverse weather conditions and the fact that the U.K. market was
lapping over strong comparable sales growth in the prior fiscal
year. During the period, we focused in EMEA/APAC on promoting
our barbell menu strategy with a combination of value and
premium offerings, such as value-oriented King
Dealstm,
Stunner
Dealstm
and the Chili Cheese Burger limited time offer and higher margin
premium products including the Chicken
TenderCrisp®
sandwich, Chicken
TenderGrill®
sandwich,
Whopper®
sandwich promotions and various limited time offers.
Negative comparable sales growth in Latin America of 1.3% (in
constant currencies) for the fiscal year ended June 30,
2010, was the result of a decline in traffic compared to the
prior fiscal year, particularly in Mexico and Central America,
driven by continued adverse socioeconomic conditions. During the
fiscal year we continued to leverage our barbell menu strategy
with everyday branded value platforms such as Come Como
Reytm
(Eat Like a King),
BKtm
Ofertas (King Deals) and premium promotional products, such as
the Bourbon
Whopper®
sandwich, in addition to the national launch of the Mega
Angus
XTtm
sandwich in Mexico, the
Transformerstm
BBQ
Stackticontm
and
Whopper®
Furioso (aka Angry
Whopper®)
promotion burgers regionally, the
Whopper®
Jackpot sweepstakes as well as strong kids properties,
such as
Transformerstm,
Pokémontm,
G.I.
Joetm,
Cloudy with a Chance of
Meatballstm,
SpongeBob
SquarePantstm,
Planet
51tm
and Iron
Mantm
2.
Comparable sales growth in the United States and Canada for the
fiscal year ended June 30, 2009, was driven primarily by
our strategic pricing initiatives and barbell menu strategy
focusing on premium products and value offerings. However,
comparable sales for the period were negatively impacted by
significant traffic declines during the third and fourth
quarters, driven by continued adverse macroeconomic conditions,
including higher unemployment, more customers eating at home and
heavy discounting by other restaurant chains. Products and
promotions featured during fiscal 2009 include BK Burger
Shots®
and BK Breakfast
Shotstm,
Whopper sandwich limited time offers, such as
Transform your Whopper, the introduction of
the new
BK®
Kids Meal (including
Kraft®
Macaroni and Cheese and
BK®
Fresh Apple Fries), the Angry
Whoppertm
sandwich, the Steakhouse Burger, the Spicy Chicken BK
Wrapper®
and the Whopper Virgins and Whopper Sacrifice
marketing campaigns. SuperFamily promotions, such as Star
Trektm,
Transformerstm2,
Pokémontm,
Sponge Bob
SquarePantstm,
The
Simpsonstm,
iDogtm
and a
Nintendotm
giveaway promotional tie-in with the
BK®
Crown Card, also contributed to positive comparable sales.
Comparable sales growth in EMEA/APAC for the fiscal year ended
June 30, 2009, reflected positive sales performance in most
major countries in this segment, with the exception of Germany,
which experienced negative comparable sales growth during the
period due to significant traffic declines in the third and
fourth quarters caused by adverse economic conditions and heavy
discounting by our major competitor in Germany. Positive
comparable sales were driven primarily by our strategic pricing
initiatives, operational improvements, value-driven promotions
such as the King Deals in Germany, the U.K. and Spain and
the Whopper sandwich and Whopper Jr. sandwich
value meal promotions in Australia, as well as high quality
premium products such as Whopper sandwich limited time
offers throughout the segment, BK
Fusiontm
Real Ice Cream and the Long
Chickentm
sandwich limited time offer in Spain. SuperFamily promotions,
such as The
Simpsonstm,
iDogtm,
Crayolatm
and Secret
Palazztm,
positively impacted comparable sales for the fiscal year.
Comparable sales in EMEA/APAC for fiscal 2009 were negatively
impacted by traffic declines during the third and fourth
quarters, particularly in Germany.
Although comparable sales increased in Latin America for the
fiscal year ended June 30, 2009, our sales performance was
negatively impacted by significant traffic declines in the third
and fourth quarters, particularly in Mexico, due to continued
adverse socioeconomic conditions and the resulting slowdown in
tourism, the H1N1 flu pandemic in Mexico and South America, the
devaluation of local currencies and lower influx of remittances
from
46
the U.S. Comparable sales in fiscal 2009 were also
adversely affected by softer performance in Puerto Rico due to
the introduction of a VAT tax, which has negatively affected
disposable income. Products and promotions featured during the
fiscal year include the introduction of the Angry Whopper
sandwich throughout the region, the Chipotle Whopper
in Mexico, the
BK®
Stacker promotion in Argentina and Chile, the Crown
Whopper Jr. and Whopper Jackpot sweepstakes in
Puerto Rico, the Steakhouse Burger platform, including the
Mushroom & Swiss Steakhouse Burger in Central America,
Puerto Rico and the Caribbean and the new
BK®
Fish Wrap for the Lenten season. We continued to focus on value
with the Come Como Rey (Eat Like a King) everyday value
menu in Mexico, Central America and the Caribbean, the XL double
burger value promotion in Argentina, Chile and the Dominican
Republic and the double and triple Crown Whopper Jr.
sandwich promotion in Puerto Rico. In addition, our regional
Latin Billboard music promotion in selected markets in the
region, the successful breakfast relaunch in Puerto Rico and
strong kids properties such as Star
Trektm,
Pokémontm,
Cabbage Patch
Kidstm,
Monster
Jamtm
and The Pink
Panthertm
positively impacted comparable sales.
Average
Restaurant Sales
Average restaurant sales, or ARS, is an important measure of the
financial performance of our restaurants and changes in the
overall direction and trends of sales. ARS is influenced mostly
by comparable sales performance and restaurant openings and
closures and also includes the impact of movement in currency
exchange rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Average Restaurant Sales
|
|
$
|
1,244
|
|
|
$
|
1,259
|
|
|
$
|
1,301
|
|
Our ARS decreased during fiscal 2010, primarily as a result of
negative worldwide comparable sales growth of 2.3% (in constant
currencies) partially offset by $15,000 favorable impact from
the movement of currency exchange rates.
Our ARS decreased during fiscal 2009, primarily a result of a
$55,000 unfavorable impact from the movement of currency
exchange rates, partially offset by worldwide comparable sales
growth of 1.2% (in constant currencies).
Sales
Growth
Sales growth refers to the change in sales at all Company and
franchise restaurants from one period to another. Sales growth
is an important indicator of the overall direction and trends of
sales and income from operations on a system-wide basis. Sales
growth is influenced by restaurant openings and closures and
comparable sales growth, as well as the effectiveness of our
advertising and marketing initiatives and featured products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
Fiscal Years Ended
|
|
|
June 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(In constant currencies)
|
|
Sales Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
(3.1
|
)%
|
|
|
1.2
|
%
|
|
|
6.0
|
%
|
EMEA/APAC
|
|
|
13.1
|
%
|
|
|
9.7
|
%
|
|
|
12.6
|
%
|
Latin America
|
|
|
4.8
|
%
|
|
|
8.5
|
%
|
|
|
13.1
|
%
|
Total System-wide Sales Growth
|
|
|
2.1
|
%
|
|
|
4.2
|
%
|
|
|
8.3
|
%
|
Worldwide sales growth for the fiscal year ended June 30,
2010 was positive, primarily as result of a net increase of 249
restaurants in fiscal 2010 and positive comparable sales growth
in EMEA/APAC, partially offset by negative comparable sales
growth in the U.S. and Canada and Latin America.
The U.S. and Canada experienced negative sales growth for
the fiscal year ended June 30, 2010, reflecting the impact
of negative comparable sales, partially offset by a net increase
of 15 restaurants. We had 7,549 restaurants in the U.S. and
Canada as of June 30, 2010, compared to 7,534 restaurants
as of June 30, 2009, reflecting an increase in the number
of restaurants of less than 1%.
47
Our sales growth in the United States and Canada for the fiscal
year ended June 30, 2009 reflects comparable sales growth
and the net increase in the number of restaurants. We had 7,534
restaurants in the United States and Canada as of June 30,
2009, compared to 7,512 restaurants as of June 30, 2008,
reflecting a less than 1% increase in the number of restaurants.
EMEA/APAC demonstrated sales growth for the fiscal year ended
June 30, 2010, reflecting openings of new restaurants and
positive comparable sales, primarily driven by Spain, Turkey and
our major APAC markets, including Australia, New Zealand and
Korea. We had 3,487 restaurants in EMEA/APAC as of June 30,
2010, compared to 3,313 restaurants as of June 30, 2009,
reflecting a 5% increase in the number of restaurants.
EMEA/APAC demonstrated sales growth for the fiscal year ended
June 30, 2009, reflecting net openings of new restaurants
and comparable sales growth in most major markets with the
exception of Germany, where adverse macroeconomic conditions
have resulted in negative comparable sales growth. We had 3,313
restaurants in EMEA/APAC as of June 30, 2009, compared to
3,051 restaurants as of June 30, 2008, a 9% increase in the
number of restaurants.
Latin America experienced positive sales growth for the fiscal
year ended June 30, 2010, reflecting openings of new
restaurants, partially offset by negative comparable sales
growth, primarily driven by Mexico. We had 1,138 restaurants in
Latin America as of June 30, 2010, compared to 1,078
restaurants as of June 30, 2009, reflecting a 6% increase
in the number of restaurants.
Latin Americas sales growth was driven by new restaurant
openings and positive comparable sales for the fiscal year ended
June 30, 2009. We had 1,078 restaurants in Latin America as
of June 30, 2009, compared to 1,002 restaurants as of
June 30, 2008, an 8% increase in the number of restaurants.
Results
of Operations
The following table presents our results of operations for the
periods indicated:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
|
|
Increase/
|
|
|
|
Amount
|
|
|
Amount
|
|
|
(Decrease)
|
|
|
Amount
|
|
|
(Decrease)
|
|
|
|
(In millions, except percentages)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$
|
1,839.3
|
|
|
$
|
1,880.5
|
|
|
|
(2
|
)%
|
|
$
|
1,795.9
|
|
|
|
5
|
%
|
Franchise revenues
|
|
|
549.2
|
|
|
|
543.4
|
|
|
|
1
|
%
|
|
|
537.2
|
|
|
|
1
|
%
|
Property revenues
|
|
|
113.7
|
|
|
|
113.5
|
|
|
|
0
|
%
|
|
|
121.6
|
|
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,502.2
|
|
|
|
2,537.4
|
|
|
|
(1
|
)%
|
|
|
2,454.7
|
|
|
|
3
|
%
|
Company restaurant expenses
|
|
|
1,614.8
|
|
|
|
1,643.7
|
|
|
|
(2
|
)%
|
|
|
1,538.0
|
|
|
|
7
|
%
|
Selling, general and administrative expenses(1)
|
|
|
495.8
|
|
|
|
494.3
|
|
|
|
0
|
%
|
|
|
501.0
|
|
|
|
(1
|
)%
|
Property expenses
|
|
|
59.4
|
|
|
|
58.1
|
|
|
|
2
|
%
|
|
|
62.1
|
|
|
|
(6
|
)%
|
Other operating (income) expenses, net(1)
|
|
|
(0.7
|
)
|
|
|
1.9
|
|
|
|
NM
|
|
|
|
(0.6
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
2,169.3
|
|
|
|
2,198.0
|
|
|
|
(1
|
)%
|
|
|
2,100.5
|
|
|
|
5
|
%
|
Income from operations
|
|
|
332.9
|
|
|
|
339.4
|
|
|
|
(2
|
)%
|
|
|
354.2
|
|
|
|
(4
|
)%
|
Interest expense, net
|
|
|
48.6
|
|
|
|
54.6
|
|
|
|
(11
|
)%
|
|
|
61.2
|
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
284.3
|
|
|
|
284.8
|
|
|
|
(0
|
)%
|
|
|
293.0
|
|
|
|
(3
|
)%
|
Income tax expense
|
|
|
97.5
|
|
|
|
84.7
|
|
|
|
15
|
%
|
|
|
103.4
|
|
|
|
(18
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
186.8
|
|
|
$
|
200.1
|
|
|
|
(7
|
)%
|
|
$
|
189.6
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
(1) |
|
Certain prior year amounts have been reclassified from other
operating (income) expense, net to selling, general and
administrative expenses. |
Fiscal
Year Ended June 30, 2010 Compared to Fiscal Year Ended
June 30, 2009
Revenues
Company
restaurant revenues
Total Company restaurant revenues decreased by
$41.2 million, or 2%, to $1,839.3 million for the
fiscal year ended June 30, 2010, compared to the prior
fiscal year, primarily due to negative worldwide Company
comparable sales growth of 2.4% (in constant currencies) for the
period and the impact of a net decrease in the number of Company
restaurants during the fiscal year ended June 30, 2010,
principally due to the refranchising of 91 restaurants,
primarily in the U.S. and Germany, during the fiscal year
ended June 30, 2010. These factors were partially offset by
a $15.1 million favorable impact from the movement of
currency exchange rates for the period.
In the U.S. and Canada, Company restaurant revenues
decreased by $42.3 million, or 3%, to
$1,289.5 million, for the fiscal year ended June 30,
2010, compared to the prior fiscal year. The decrease was the
result of negative Company comparable sales growth in the
U.S. and Canada segment of 2.4% (in constant currencies)
for the fiscal year ended June 30, 2010, primarily driven
by negative Company comparable sales growth in the U.S.,
partially offset by positive Company comparable sales growth in
Canada. Company restaurant revenues also declined due to the
impact of a net decrease in the number of Company restaurants
during the fiscal year ended June 30, 2010 compared to the
prior fiscal year, driven primarily by the refranchising of 54
restaurants in the U.S. during fiscal 2010. These factors
were partially offset by the favorable impact of
$12.2 million from the movement of currency exchange rates
in Canada for the period.
Company restaurant revenues in EMEA/APAC remained relatively
unchanged at $489.2 million for the fiscal year ended
June 30, 2010, compared to the prior fiscal year, due to a
$4.6 million favorable impact from the movement of currency
exchange rates and the impact of a net increase in the number of
Company restaurants during the fiscal year. These factors were
partially offset by negative Company comparable sales growth in
EMEA/APAC of 2.1% (in constant currencies), primarily driven by
negative Company comparable sales growth in Germany, partially
offset by positive Company comparable sales growth in China,
Spain and the U.K.
In Latin America, where all Company restaurants are located in
Mexico, Company restaurant revenues increased by
$0.5 million, or 1%, to $60.6 million for the fiscal
year ended June 30, 2010, compared to the prior fiscal
year. The increase was primarily the result of the impact of a
net increase in the number of Company restaurants during the
fiscal year ended June 30, 2010, partially offset by
negative Company comparable sales growth of 4.1% (in constant
currencies) and a $1.7 million unfavorable impact from the
movement of currency exchange rates for the period.
Franchise
revenues
Total franchise revenues increased by $5.8 million, or 1%,
to $549.2 million for the fiscal year ended June 30,
2010, compared to the prior fiscal year. Total franchise
revenues increased as a result of a $5.6 million favorable
impact from the movement of currency exchange rates for the
period, the impact of a net increase in the number of franchise
restaurants during the fiscal year ended June 30, 2010 and
a higher effective royalty rate in the U.S., partially offset by
the unfavorable impact of negative worldwide franchise
comparable sales growth of 2.3% (in constant currencies) for the
period. Additionally, renewal franchise fees decreased by
$3.2 million, or 31%, compared to the prior fiscal year,
primarily due to fewer franchise agreement expirations and
temporary extensions of expired franchise agreements in the
U.S. Initial franchise fees decreased by $2.3 million,
or 16%, compared to the prior fiscal year, due to fewer
franchise restaurant openings, particularly in EMEA/APAC,
primarily as a result of a slow-down in commercial construction
due to the global recession.
In the U.S. and Canada, franchise revenues decreased by
$8.5 million, or 3%, to $314.6 million for fiscal year
ended June 30, 2010, compared to the prior fiscal year. The
decrease was primarily the result of negative franchise
comparable sales growth in the U.S. and Canada segment of
4.1% (in constant currencies) for the fiscal year ended
49
June 30, 2010, and a reduction in renewal franchise fees of
$2.9 million, or 31%, for the fiscal year ended
June 30, 2010, compared to the prior fiscal year. Renewal
franchise fees decreased primarily due to fewer franchise
agreement expirations and temporary extensions of expired
franchise agreements in the U.S. as discussed above. These
factors were partially offset by the impact of a net increase in
the number of franchise restaurants during the fiscal year ended
June 30, 2010 as well as an increase in the effective
royalty rate in the U.S. The impact from the movement of
currency exchange rates was not significant in this segment for
the period.
Franchise revenues in EMEA/APAC increased by $12.8 million,
or 7%, to $186.2 million for the fiscal year ended
June 30, 2010, compared to the prior fiscal year, due to
positive franchise comparable sales growth in EMEA/APAC of 1.2%
(in constant currencies), reflecting strong performance in
markets such as Turkey, Spain, Italy, Australia, New Zealand,
and Korea, a $4.3 million favorable impact from the
movement of currency exchange rates and the impact of a net
increase in the number of franchise restaurants during fiscal
2010. Partially offsetting these factors were negative franchise
comparable sales growth in Germany and the Netherlands and a
$2.0 million decrease in initial franchise fees due to
fewer franchise restaurant openings compared to the prior fiscal
year.
Latin America franchise revenues increased by $1.5 million,
or 3%, to $48.4 million for the fiscal year ended
June 30, 2010, compared to the prior fiscal year. The
increase was primarily the result of the favorable impact of
$0.7 million from the movement of currency exchange rates
for the fiscal year ended June 30, 2010, and the impact of
a net increase in the number of franchise restaurants during
fiscal 2010.
Property
Revenues
Total property revenues for the fiscal year ended June 30,
2010, remained relatively unchanged compared to the prior fiscal
year, reflecting the net effect of changes to our property
portfolio, which includes the impact of refranchising certain
Company restaurants and opening new restaurants leased or
subleased to franchisees, offset by reduced revenues from
percentage rents as a result of negative franchise comparable
sales growth in the U.S.
In the U.S. and Canada, property revenues increased by
$3.0 million, or 3%, to $91.1 million for the fiscal
year ended June 30, 2010, compared to the prior fiscal
year. The increase was primarily due to an increase in the
number of properties in our property portfolio in the
U.S. during the fiscal year, resulting primarily from
refranchisings and the favorable impact of $0.5 million
from the movement of currency exchange rates in Canada,
partially offset by decreased revenues from percentage rents
resulting from negative franchise comparable sales growth in the
U.S.
Property revenues in EMEA/APAC decreased by $2.8 million,
or 11%, to $22.6 million for the fiscal year ended
June 30, 2010, compared to the prior fiscal year. The
decrease was primarily driven by a reduction in the number of
properties in our property portfolio and a $0.3 million
unfavorable impact from the movement of currency exchange rates
for the period.
Operating
Costs and Expenses
Food,
paper and product costs
Total food, paper and product costs decreased by
$18.7 million, or 3%, to $585.0 million for the fiscal
year ended June 30, 2010, compared to the prior fiscal
year, primarily due to the reduction in Company restaurant
revenues discussed above and net decreases in commodity costs in
the U.S. and Canada segment for the fiscal year. These
factors were partially offset by the unfavorable impact from the
movement of currency exchange rates of $4.6 million. As a
percentage of Company restaurant revenues, total food, paper and
product costs decreased by 0.3% to 31.8% for the fiscal year
ended June 30, 2010, primarily due to lower commodity costs
in the U.S. and Canada segment and the benefits realized
from strategic pricing initiatives across all segments.
In the U.S. and Canada, food, paper and product costs
decreased by $20.4 million, or 5% to $419.6 million
for the fiscal year ended June 30, 2010, compared to the
prior fiscal year. The decrease was primarily due to the
reduction in Company restaurant revenues discussed above and
lower commodity costs in the U.S. for the fiscal
50
year. These factors were partially offset by the unfavorable
impact from the movement of currency exchange rates in Canada of
$4.0 million. Food, paper and product costs in the
U.S. and Canada as a percentage of Company restaurant
revenues decreased by 0.5% to 32.5%, primarily due to lower
commodity costs and the benefits realized from strategic pricing
initiatives.
In EMEA/APAC, food, paper and product costs increased by
$1.2 million, or 1%, to $141.8 million for the fiscal
year ended June 30, 2010, compared to the prior fiscal
year, primarily due to the unfavorable impact from the movement
of currency exchange rates of $1.3 million and a net
increase in the number of Company restaurants during the fiscal
year ended June 30, 2010. Food, paper and product costs as
a percentage of Company restaurant revenues remained relatively
unchanged at 29.0%.
In Latin America, food, paper and product costs increased
$0.5 million, or 2%, to $23.6 million for the fiscal
year ended June 30, 2010, compared to the same period in
the prior year, primarily as a result of the increase in Company
restaurant revenues discussed above and the favorable impact
from the movement of currency exchange rates of
$0.7 million, partially offset by increased commodity
costs. Food, paper and product costs as a percentage of Company
restaurant revenues increased by 0.5% to 38.9%, primarily as a
result of the higher commodity costs noted above, partially
offset by the benefits realized from strategic pricing
initiatives.
Payroll
and employee benefits costs
Total payroll and employee benefits costs decreased by
$13.5 million, or 2%, to $568.7 million for the fiscal
year ended June 30, 2010, compared to the prior fiscal
year. The decrease was primarily due to efficiencies gained from
improvements in variable labor controls and scheduling in our
U.S. and Canada segment and a net decrease in the number of
Company restaurants during the fiscal year ended June 30,
2010, partially offset by the unfavorable impact from the
movement of currency exchange rates of $5.2 million. As a
percentage of Company restaurant revenues, total payroll and
employee benefits costs remained relatively unchanged at 30.9%
during the fiscal year ended June 30, 2010. The adverse
impact of sales deleverage on our fixed labor costs due to
negative Company comparable sales across all segments was offset
by the improvements in variable labor controls and scheduling in
our U.S. and Canada segment as noted above and labor
efficiencies in our EMEA/APAC segment.
In the U.S. and Canada, payroll and employee benefits costs
decreased by $14.1 million, or 3%, to $400.8 million
for the fiscal year ended June 30, 3010, compared to the
prior fiscal year, primarily due to a net decrease in the number
of Company restaurants and efficiencies gained from improvements
in variable labor controls in our U.S. Company restaurants.
Partially offsetting these factors was the unfavorable impact
from the movement of currency exchange rates of
$4.0 million in Canada and minimum wage increases in
certain U.S. markets. As a percentage of Company restaurant
revenues, payroll and employee benefits costs remained unchanged
at 31.1% due to the improvements in variable labor controls
noted above which were offset by the unfavorable impact of sales
deleverage on our fixed costs due to negative Company comparable
sales growth in the U.S. and minimum wage increases in
certain markets.
In EMEA/APAC, payroll and employee benefits costs increased by
$0.6 million, or 0.4%, to $160.5 million for the
fiscal year ended June 30, 2010, compared to the prior
fiscal year, primarily due to a $1.5 million unfavorable
impact from the movement of currency exchange rates, primarily
in EMEA, and a net increase in the number of Company restaurants
during the fiscal year as noted above. As a percentage of
Company restaurant revenues, payroll and employee benefit costs
increased by 0.1% to 32.8%, primarily due to the adverse impact
of sales deleverage on our fixed labor costs due to negative
comparable sales in Germany, partially offset by improved labor
productivity, primarily in APAC.
There was no significant change in payroll and employee benefits
costs in Latin America for the fiscal year ended June 30,
2010, compared to the prior fiscal year.
Occupancy
and other operating costs
Total occupancy and other operating costs increased by
$3.3 million, or 1%, to $461.1 million for the fiscal
year ended June 30, 2010, compared to the prior fiscal
year, primarily due to a $4.0 million unfavorable impact
from the movement of currency exchange rates, additional
depreciation expense resulting from an increase in depreciable
51
assets and accelerated depreciation associated with strategic
initiatives, such as our restaurant reimaging program and our
new POS system. These factors were partially offset by a net
decrease in the number of Company restaurants during the fiscal
year ended June 30, 2010, favorable adjustments to the
self-insurance reserve in the U.S., lower utility costs and
lower
start-up
expenses as a result of fewer Company restaurant openings and
acquisitions.
As a percentage of Company restaurant revenues, occupancy and
other operating costs increased by 0.8% to 25.1% for the fiscal
year ended June 30, 2010, compared to the prior fiscal
year, primarily as a result of the adverse impact of sales
deleverage on our fixed occupancy and other operating costs due
to negative Company comparable sales across all segments and the
increases in occupancy and other operating costs discussed
above. These factors were partially offset by the benefits
realized from favorable adjustments to the self-insurance
reserve in the U.S. as noted above.
In the U.S. and Canada, occupancy and other operating costs
decreased by $8.2 million, or 3%, to $298.6 million
for the fiscal year ended June 30, 2010, compared to the
prior fiscal year. The decrease was primarily driven by a net
reduction in the number of Company restaurants during the fiscal
year, favorable adjustments to the self-insurance reserve in the
U.S., lower utility costs and lower
start-up
expenses as a result of fewer Company restaurant openings and
acquisitions. These factors were partially offset by additional
depreciation expense resulting from an increase in depreciable
assets and accelerated depreciation associated with the
strategic initiatives discussed above, and a $3.0 million
unfavorable impact from the movement of currency exchange rates.
As a percentage of Company restaurant revenues, occupancy and
other operating costs increased by 0.1% to 23.2%, primarily due
to the adverse impact of sales deleverage on our fixed occupancy
and other operating costs and increased depreciation expense as
noted above, partially offset by the benefits realized from
adjustments to the self-insurance reserve in the U.S.
In EMEA/APAC, occupancy and other operating costs increased by
$11.5 million, or 9%, to $144.7 million for the fiscal
year ended June 30, 2010, compared to the prior fiscal
year. The increase was primarily due to a net increase in the
number of Company restaurants during the fiscal year, a
$1.4 million unfavorable impact from the movement of
currency exchange rates, primarily in EMEA, an increase in
start-up
expenses related to new restaurant openings and higher repair
and maintenance costs, primarily in Germany in conjunction with
our refranchising initiative. As a percentage of Company
restaurant revenues, occupancy and other operating costs
increased by 2.3% to 29.6%, primarily due to the adverse impact
of sales deleverage on our fixed occupancy and other operating
costs.
There was no significant change in occupancy and other operating
costs in Latin America for the fiscal year ended June 30,
2010, compared to the prior fiscal year.
Selling,
general and administrative expenses
Selling expenses decreased by $2.0 million, or 2%, to
$91.3 million for the fiscal year ended June 30, 2010,
compared to the prior fiscal year, primarily due to a
$3.5 million reduction in contributions to the marketing
funds in our Company restaurant markets as a result of lower
Company restaurants revenues. Partially offsetting this decrease
was an increase of $1.0 million of higher local marketing
expenditures aimed at driving incremental sales and
$0.6 million from the movement of currency exchange rates
for the period.
General and administrative expenses increased by
$3.5 million, or 1%, to $404.5 million for the fiscal
year ended June 30, 2010, compared to the prior fiscal
year, largely driven by an increase in professional fees of
$4.7 million, primarily related to information technology
initiatives, incremental depreciation expense of
$2.6 million due to a higher depreciable asset base
compared to prior year, and higher salary and fringe benefit
costs of $3.0 million including share-based compensation.
These items were partially offset by savings from reductions in
travel and meetings of $4.1 million and office operating
expenses of $3.2 million. These fluctuations include the
unfavorable impact form the movement of currency exchange rates
of $4.3 million for the fiscal year ended June 30,
2010.
Property
Expenses
Total property expenses increased by $1.3 million, or 2%,
to $59.4 million for the fiscal year ended June 30,
2010, compared to the prior fiscal year, primarily attributable
to increased rent expense resulting from the net effect
52
of changes to our property portfolio in the U.S. &
Canada segment, which includes the impact of refranchisings of
Company restaurants and opening new restaurants leased to
franchisees. These factors were partially offset by decreased
rent expense from a reduction in the number of properties leased
to franchisees in EMEA.
Other
operating (income) expense, net
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years
|
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net (gains) losses on disposal of assets restaurant closures and
refranchisings
|
|
$
|
(2.4
|
)
|
|
$
|
(8.5
|
)
|
Litigation settlements and reserves, net
|
|
|
(0.2
|
)
|
|
|
0.2
|
|
Foreign exchange net (gains) losses
|
|
|
(3.3
|
)
|
|
|
8.4
|
|
Other, net
|
|
|
5.2
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
Other operating (income) expense, net
|
|
$
|
(0.7
|
)
|
|
$
|
1.9
|
|
|
|
|
|
|
|
|
|
|
The $5.2 million of other, net within other operating
(income) expense, net for fiscal year ended June 30, 2010
includes a $2.4 million charge related to consumption tax
in EMEA, $1.5 million of severance costs related to
refranchisings in Germany, $1.0 million of franchise
workout costs and a $0.7 million contract termination fee,
partially offset by $1.1 million of income recorded in
connection with the expiration of gift cards in the U.S.
The $1.8 million of other, net within other operating
(income) expense, net for the fiscal year ended June 30,
2009 consists primarily of $1.7 million of franchise
workout costs.
Income
from Operations
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years
|
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Income from Operations:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
346.7
|
|
|
$
|
345.7
|
|
EMEA/APAC
|
|
|
84.6
|
|
|
|
83.6
|
|
Latin America
|
|
|
38.2
|
|
|
|
37.8
|
|
Unallocated
|
|
|
(136.6
|
)
|
|
|
(127.7
|
)
|
|
|
|
|
|
|
|
|
|
Total income from operations
|
|
$
|
332.9
|
|
|
$
|
339.4
|
|
|
|
|
|
|
|
|
|
|
Income from operations decreased by $6.5 million, or 2%, to
$332.9 million during the fiscal year ended June 30,
2010, compared to the prior fiscal year, primarily as a result
of a decrease in Company restaurant margin of
$12.3 million, a $1.5 million increase in selling,
general and administrative expenses and a reduction in net
property revenue of $1.1 million, partially offset by a
$5.8 million increase in franchise revenues and a
$2.6 million decrease in other operating expense, net. (See
Note 23 to our audited consolidated financial statements
for segment information disclosures).
For the fiscal year ended June 30, 2010, the favorable
impact on revenues from the movement of currency exchange rates
was partially offset by the unfavorable impact of currency
exchange rates on Company restaurant expenses and selling,
general and administrative expenses, resulting in a net
favorable impact on income from operations of $1.4 million.
In the U.S. and Canada, income from operations increased by
$1.0 million, or 0.3%, to $346.7 million during the
fiscal year ended June 30, 2010, compared to the prior
fiscal year, primarily as a result of a decrease in selling,
general and administrative expenses of $5.8 million, a
decrease in other operating expense, net of $4.9 million
and an increase in Company restaurant margin of
$0.4 million. These factors were partially offset by a
53
decrease in franchise revenues of $8.5 million and a
reduction in net property income of $1.6 million. The
increase also reflects a $0.3 million favorable impact from
the movement of currency exchange rates in Canada.
In EMEA/APAC, income from operations increased by
$1.0 million, or 1%, to $84.6 million during the
fiscal year ended June 30, 2010, compared to the prior
fiscal year, primarily as a result of, a $12.8 million
increase in franchise revenues, a $2.3 million decrease in
selling, general and administrative expenses and an increase in
net property income of $0.5 million, partially offset by a
$12.7 million decrease in Company restaurant margin and a
$1.9 million decrease in other operating income, net. The
decrease also reflects a $0.8 million of favorable impact
from the movement of currency exchange rates.
In Latin America, income from operations increased by
$0.4 million, or 1%, to $38.2 million during the
fiscal year ended June 30, 2010, compared to the prior
fiscal year, primarily as a result of an increase in franchise
revenues of $1.5 million partially offset by a
$0.7 million increase in selling, general and
administrative expenses and $0.4 million increase in other
operating expense, net due to the reversal of a litigation
reserve in fiscal 2009. The increase also reflects a
$0.3 million favorable impact from the movement of currency
exchange rates.
Our unallocated corporate expenses increased by
$8.9 million for the fiscal year ended June 30, 2010,
compared to the prior fiscal year, primarily as a result of a
$6.6 million increase in unallocated payroll and other
expenses that benefit the entire system, a $2.4 million
increase in depreciation expense for corporate assets, a
$1.9 million increase in employee benefits and severance
expense and a $0.8 million increase in share-based
compensation expense, partially offset by a $2.4 million
reduction in incentive compensation and a $0.4 million
decrease in professional fees, primarily related to information
technology initiatives.
Interest
Expense, net
Interest expense, net decreased by $6.0 million for the
fiscal year ended June 30, 2010, compared to the prior
fiscal year, reflecting a decrease in borrowings and rates paid
on borrowings during the period. The weighted average interest
rates for the fiscal years ended June 30, 2010 and 2009
were 4.7% and 5.1% respectively, which included the effect of
interest rate swaps on an average of 73% and 71% of our term
debt, respectively.
Income
Tax Expense
Income tax expense was $97.5 million for the fiscal year
ended June 30, 2010, resulting in an effective tax rate of
34.3%, primarily as a result of the current mix of income from
multiple tax jurisdictions and currency fluctuations.
Net
Income
Our net income decreased by $13.3 million, or 7%, to
$186.8 million for the fiscal year ended June 30,
2010, compared to the prior fiscal year, primarily as a result
of a $12.8 million increase in income tax expense, a
decrease in Company restaurant margin of $12.3 million, a
$1.5 million increase in selling, general and
administrative expenses and a reduction in net property revenue
of $1.1 million. These factors were partially offset by a
$6.0 million decrease in interest expense, net, an increase
in franchise revenues of $5.8 million and a
$2.6 million improvement in other operating (income)
expense, net.
Fiscal
Year Ended June 30, 2009 compared to Fiscal Year Ended
June 30, 2008
Revenues
Company
Restaurant Revenues
Company restaurant revenues increased by $84.6 million, or
5%, to $1,880.5 million for the fiscal year ended
June 30, 2009, compared to the prior fiscal year. This
increase was primarily due to a net increase of 69 Company
restaurants (net of closures and sales of Company restaurants to
franchisees, or refranchisings), including the net
acquisition of 36 franchise restaurants during fiscal 2009,
partially offset by $80.5 million of unfavorable impact
from the significant movement of currency exchange rates.
54
In the United States and Canada, Company restaurant revenues
increased by $159.9 million, or 14%, to
$1,331.8 million for the fiscal year ended June 30,
2009, compared to the prior fiscal year. This increase was
primarily a result of a net increase of 59 Company restaurants
during fiscal 2009, including the net acquisition of 42
franchise restaurants, partially offset by $20.6 million of
unfavorable impact from the movement of currency exchange rates
in Canada.
In EMEA/APAC, Company restaurant revenues decreased by
$66.3 million, or 12%, to $488.6 million for the
fiscal year ended June 30, 2009, compared to the prior
fiscal year. This decrease was primarily due to a
$50.0 million unfavorable impact from the movement of
currency exchange rates and lost Company restaurant revenues due
to the refranchising of restaurants in the prior year, primarily
in Germany and the U.K. as part of our ongoing portfolio
management initiative.
In Latin America, Company restaurant revenues decreased by
$9.0 million, or 13%, to $60.1 million for the fiscal
year ended June 30, 2009, compared to the prior fiscal
year, primarily due to $10.0 million of unfavorable impact
from the movement of currency exchange rates and negative
Company comparable sales growth of 3.2% (in constant
currencies). However, this decrease was largely offset by a net
increase of eight Company restaurants during fiscal 2009.
Franchise
Revenues
Total franchise revenues increased by $6.2 million, or 1%,
to $543.4 million for the fiscal year ended June 30,
2009, compared to the prior fiscal year, primarily due to the
net increase of 291 franchise restaurants during fiscal 2009,
worldwide franchise comparable sales growth of 1.4% (in constant
currencies) and a higher effective royalty rate in the
U.S. These factors were partially offset by a
$24.2 million unfavorable impact from the movement of
currency exchange rates.
In the United States and Canada, franchise revenues increased by
$5.2 million, or 2%, to $323.1 million for the fiscal
year ended June 30, 2009, compared to the prior fiscal
year. This increase was the result of a higher effective royalty
rate in the U.S., partially offset by the loss of royalties from
37 fewer franchise restaurants compared to the same period in
the prior year, primarily due to the net acquisition of 42
franchise restaurants by the Company, and a $1.0 million
unfavorable impact from the movement of currency exchange rates
in Canada.
In EMEA/APAC, franchise revenues increased by $0.4 million,
or 0.2%, to $173.4 million for the fiscal year ended
June 30, 2009, compared the prior fiscal year. This
increase was primarily driven by a net increase of 260 franchise
restaurants during fiscal 2009 and franchise comparable sales
growth of 3.3% (in constant currencies). These factors were
largely offset by a $20.4 million unfavorable impact from
the movement of currency exchange rates.
Latin America franchise revenues increased by $0.6 million,
or 1%, to $46.9 million for the fiscal year ended
June 30, 2009, compared to the prior fiscal year. This
increase was primarily a result of the net addition of 68
franchise restaurants during fiscal 2009 and franchise
comparable sales growth of 2.3% (in constant currencies).
However, these factors were largely offset by a
$2.8 million unfavorable impact from the movement of
currency exchange rates.
Property
Revenues
Total property revenues decreased by $8.1 million, or 7%,
to $113.5 million for the fiscal year ended June 30,
2009, compared to the prior fiscal year, primarily due to a
$5.9 million unfavorable impact from the movement of
currency exchange rates and the reduction in the number of
properties in our portfolio, which includes the impact of the
closure or acquisition of restaurants leased to franchisees.
These factors were partially offset by positive worldwide
franchise comparable sales growth, which resulted in increased
revenues from percentage rents.
In the United States and Canada, property revenues decreased by
$0.6 million, or 1%, to $88.1 million for the fiscal
year ended June 30, 2009, compared to the prior fiscal
year, primarily as a result of the reduction in the number of
properties in our portfolio and a $0.7 million unfavorable
impact from the movement of currency exchange rates. This
decrease was partially offset by increased revenues from
percentage rents as a result of positive franchise comparable
sales growth.
55
In EMEA/APAC, property revenues decreased by $7.5 million,
or 23%, to $25.4 million for the fiscal year ended
June 30, 2009, compared to the prior year, primarily due to
a $5.2 million unfavorable impact from the movement of
currency exchange rates and the reduction in the number of
properties in our portfolio. These factors were partially offset
by increased revenues from percentage rents as a result of
positive franchise comparable sales growth.
Operating
Costs and Expenses
Food,
Paper and Product Costs
Total food, paper and product costs increased by
$39.4 million, or 7%, to $603.7 million for the fiscal
year ended June 30, 2009, primarily as a result of the net
addition of 69 Company restaurants during the twelve months
ended June 30, 2009, and significant increases in commodity
costs, including the negative currency exchange impact of cross
border purchases which occurs in Canada, Mexico and the U.K.
when our suppliers purchase goods in currency other than the
local currency in which they operate and pass on all, or a
portion of the currency exchange impact to us. These factors
were partially offset by a $26.1 million favorable impact
from the movement of currency exchange rates. As a percentage of
Company restaurant revenues, food, paper and product costs
increased by 0.7% to 32.1%, primarily due to the increase in
commodity costs noted above, partially offset by the impact of
strategic pricing initiatives.
In the United States and Canada, food, paper and product costs
increased by $58.8 million, or 15%, to $440.0 million
for the fiscal year ended June 30, 2009, primarily as a
result of the net addition of 59 Company restaurants during
fiscal 2009, as well as significant increases in commodity
costs, including the negative currency exchange impact of cross
border purchases in Canada, partially offset by a
$7.4 million favorable impact from the movement of currency
exchange rates. Food, paper and product costs as a percentage of
Company restaurant revenues increased 0.5% to 33.0%, primarily
due to an increase in the cost of beef, cheese, chicken and
other food costs, including the currency exchange impact of
cross border purchases in Canada, partially offset by the impact
of strategic pricing initiatives.
The cost of many of our core commodities reached historical
highs in the United States and Canada during the first quarter
of fiscal 2009; however, commodity and other food costs
moderated throughout the remainder of fiscal 2009.
In EMEA/APAC, food, paper and product costs decreased by
$17.6 million, or 11%, to $140.6 million for the
fiscal year ended June 30, 2009, primarily as a result of
the favorable impact from the movement of currency exchange
rates of $14.7 million and the refranchising of Company
restaurants in the prior year, primarily in Germany and the
U.K., partially offset by an increase in commodity costs,
including the negative currency exchange impact of cross border
purchases. Food, paper and product costs as a percentage of
Company restaurant revenues increased 0.3% to 28.8%, primarily
due to a significant increase in commodity costs, partially
offset by the impact of strategic pricing initiatives.
In Latin America, food, paper and product costs decreased by
$1.8 million, or 7%, to $23.1 million for the fiscal
year ended June 30, 2009, compared to the same period in
the prior year, as a result of the benefits derived from the
favorable impact from the movement of currency exchange rates of
$4.0 million, offset by the net addition of eight Company
restaurants during fiscal 2009 and an increase in commodity
costs, including the negative currency exchange impact of cross
border purchases in Mexico and the indexing of local purchases
to the U.S. dollar. Food, paper and product costs as a
percentage of Company restaurant revenues increased by 1.7% to
38.4% primarily due to the increase in commodity costs as noted
above, partially offset by the impact of strategic pricing
initiatives.
Payroll
and Employee Benefits Costs
Total payroll and employee benefits costs increased by
$47.5 million, or 9%, to $582.2 million for the fiscal
year ended June 30, 2009, primarily due to the net addition
of 69 Company restaurants during fiscal 2009, as well as
increased labor costs in the United States and Canada and EMEA,
partially offset by a $24.0 million favorable impact from
the movement of currency exchange rates. As a percentage of
Company restaurant revenues, payroll
56
and employee benefits costs increased by 1.2% to 31.0%,
primarily as a result of increased labor costs in EMEA and the
United States and Canada, partially offset by positive worldwide
Company comparable sales growth of 0.3% (in constant currencies).
In the United States and Canada, payroll and employee benefits
costs increased by $58.2 million, or 16%, to
$414.9 million for the fiscal year ended June 30,
2009, primarily as a result of the net addition of 59 Company
restaurants during fiscal 2009 and increased labor costs
resulting from the negative impact from decreased traffic and
increased staffing and training on acquired restaurants,
partially offset by a $6.8 million favorable impact from
the movement of currency exchange rates in Canada. As a
percentage of Company restaurant revenues, payroll and employee
benefits costs increased by 0.6% to 31.1%, primarily due to
labor inefficiencies noted above, partially offset by benefits
derived from positive Company comparable sales growth of 0.5%
(in constant currencies).
In EMEA/APAC, payroll and employee benefits costs decreased by
$9.8 million, or 6% to $159.9 million for the fiscal
year ended June 30, 2009, primarily as a result of a
$16.0 million favorable impact from the movement of
currency exchange rates and the refranchising of Company
restaurants in the prior year, primarily in Germany and the
U.K., partially offset by government mandated and contractual
wage and benefits increases in Germany. As a percentage of
Company restaurant revenues, payroll and employee benefits costs
increased by 2.2% to 32.7%, primarily as a result of increases
in labor costs in Germany.
In Latin America, payroll and employee benefits costs decreased
by $0.9 million, or 11% to $7.4 million for the fiscal
year ended June 30, 2009, compared to the same period in
the prior fiscal year as a result of a $1.2 million
favorable impact from the movement of currency exchange rates,
partially offset by the net addition of eight Company
restaurants during fiscal 2009. Payroll and employee benefits
costs as a percentage of Company restaurant revenues increased
by 0.5% to 12.3%, primarily as a result of negative Company
comparable sales growth of 3.2% (in constant currencies).
Occupancy
and Other Operating Costs
Occupancy and other operating costs increased by
$18.8 million, or 4%, to $457.8 million for the fiscal
year ended June 30, 2009, primarily as a result of the net
addition of 69 Company restaurants during fiscal 2009, increased
rents and utility costs,
start-up
costs related to new and acquired Company restaurants in the
U.S. and the write-off of unfavorable leases in the prior
year, primarily in Mexico, partially offset by a reduction in
the amount of accelerated depreciation related to the reimaging
of Company restaurants in the United States and Canada and a
$22.4 million favorable impact from the movement of
currency exchange rates. As a percentage of Company restaurant
revenues, occupancy and other operating costs remained
relatively unchanged at 24.3%, primarily as a result of the
benefits derived from positive worldwide Company comparable
sales growth of 0.3% (in constant currencies) and the prior year
accelerated depreciation expense noted above, offset by
increased rents and the write-off of unfavorable leases in the
prior year, as noted above.
In the United States and Canada, occupancy and other operating
costs increased by $35.7 million, or 13%, to
$306.8 million for the fiscal year ended June 30,
2009, primarily as a result of the net addition of 59 Company
restaurants during fiscal 2009, which represents a 6% increase
in the number of Company restaurants in this segment year over
year, increased rents and utility costs, increased repairs and
maintenance costs, increased casualty insurance and
start-up
costs related to new and acquired Company restaurants, partially
offset by a reduction in the amount of accelerated depreciation
as noted above and a $5.2 million favorable impact from the
movement of currency exchange rates in Canada. As a percentage
of Company restaurant revenues, occupancy and other operating
costs remained unchanged at 23.1% with the benefits derived from
positive Company comparable sales growth of 0.5% (in constant
currencies) and the prior year accelerated depreciation expense
noted above, offset by increased rents and
start-up
costs related to new and acquired Company restaurants.
In EMEA/APAC, occupancy and other operating costs decreased by
$16.7 million, or 11%, to $133.2 million for the
fiscal year ended June 30, 2009, primarily due to a
$14.4 million favorable impact from the movement in
currency exchange rates, a reduction in payments made to third
parties for services currently performed by our employees,
decreased repairs and maintenance costs and the refranchising of
Company restaurants in the prior year, primarily in Germany and
the U.K., partially offset by increased rents. As a percentage
of Company restaurant revenues, occupancy and other operating
costs remained relatively unchanged at 27.3%, with the benefits
from
57
reduced payments for services performed by third parties in the
prior year as noted above, decreased repairs and maintenance
costs and the closure of under-performing restaurants and
refranchising of Company restaurants in the U.K. (including
benefits from the release of unfavorable lease obligations),
offset by increased rents.
In Latin America, occupancy and other operating costs decreased
by $0.2 million, or 1%, to $17.8 million for the
fiscal year ended June 30, 2009, primarily as a result of a
$2.8 million favorable impact from the movement in currency
exchange rates, partially offset by the net addition of eight
Company restaurants during fiscal 2009, increased rents and
utility costs and the write-off of unfavorable leases in the
prior year. As a percentage of Company restaurant revenues,
occupancy and other operating costs increased by 3.6% to 29.7%
as a result of increased utility costs, the write-off of
unfavorable leases as noted above, and negative Company
comparable sales growth of 3.2% (in constant currencies).
Selling,
General and Administrative Expenses
Selling expenses increased by $1.8 million, or 2%, to
$93.3 million for the fiscal year ended June 30, 2009,
compared to the prior fiscal year. The increase, which was
primarily driven by an increase in sales and promotional
expenses of $8.2 million as a result of increased sales at
our Company restaurants, was partially offset by a
$4.0 million favorable impact from the movement of currency
exchange rates and $2.5 million due to lower local
marketing expenditures primarily in EMEA.
General and administrative expenses decreased by
$8.5 million, or 2%, to $401.0 million for the fiscal
year ended June 30, 2009, compared to the prior fiscal
year. The decrease was primarily a result of a
$14.9 million favorable impact from the movement of
currency exchange rates, a $1.8 million decrease in travel
and meeting expenses and $2.5 million of other
miscellaneous benefits. These factors were partially offset by
an increase in stock compensation of $5.0 million, an
incremental increase of $3.1 million in amortization of
intangible assets associated with the acquisition of
restaurants, and a decrease in the amount of bad debt
recoveries, net of $2.6 million.
Property
Expenses
Total property expenses decreased by $4.0 million, or 6.4%,
to $58.1 million for the fiscal year ended June 30,
2009, compared to the same period in the prior fiscal year,
primarily as a result of a $5.2 million favorable impact
from the movement of currency exchange rates and the net effect
of changes to our property portfolio, which includes the impact
of the closure or acquisition of restaurants leased to
franchisees, partially offset by an increase in percentage rent
expense generated by worldwide comparable franchise sales growth
of 1.4% (in constant currencies).
Other
Operating (Income) Expense, Net
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net (gains) losses on disposal of assets restaurant closures and
refranchisings
|
|
$
|
(8.5
|
)
|
|
$
|
(9.8
|
)
|
Litigation settlements and reserves, net
|
|
|
0.2
|
|
|
|
1.1
|
|
Foreign exchange net (gains) losses
|
|
|
8.4
|
|
|
|
2.3
|
|
Other, net
|
|
|
1.8
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
Other operating (income) expense, net
|
|
$
|
1.9
|
|
|
$
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
The $1.8 million of other, net within other operating
(income) expense, net for the fiscal year ended June 30,
2009 consists primarily of $1.7 million of franchise
workout costs.
The $5.8 million of other, net within other operating
(income) expenses, net for the year ended June 30, 2008
includes $3.1 million of franchise workout costs and
$1.9 million of settlement losses associated with the
acquisition of franchise restaurants.
58
Income
from Operations
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Fiscal Years
|
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Income from Operations:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
345.7
|
|
|
$
|
349.7
|
|
EMEA/APAC
|
|
|
83.6
|
|
|
|
91.8
|
|
Latin America
|
|
|
37.8
|
|
|
|
41.4
|
|
Unallocated
|
|
|
(127.7
|
)
|
|
|
(128.7
|
)
|
|
|
|
|
|
|
|
|
|
Total Income from Operations
|
|
$
|
339.4
|
|
|
$
|
354.2
|
|
|
|
|
|
|
|
|
|
|
Income from operations decreased by $14.8 million, or 4%,
to $339.4 million for the fiscal year ended June 30,
2009, primarily as a result of an increase in other operating
expense, net of $2.5 million, a decrease in Company
restaurant margin of $21.1 million and a decrease in net
property income of $4.1 million. The decrease in income
from operations was partially offset by a $6.2 million
increase in franchise revenues, reflecting franchise comparable
sales growth of 1.4% (in constant currencies) and an increase in
the effective royalty rate in the U.S and a $6.7 million
decrease in selling, general and administrative expenses. (See
Note 23 to our audited consolidated financial statements
for segment information disclosures).
For fiscal 2009, the unfavorable impact on revenues from the
movement of currency exchange rates was offset by the favorable
impact of currency exchange rates on Company restaurant expenses
and selling, general and administrative expenses, resulting in a
net unfavorable impact on income from operations of
$14.9 million.
In the United States and Canada, income from operations
decreased by $4.0 million, or 1%, to $345.7 million
for the fiscal year ended June 30, 2009, compared to the
same period in the prior fiscal year, primarily as a result of
an increase in other operating expense, net of
$6.9 million, an increase in selling, general and
administrative expenses of $9.7 million and a decrease in
net property income of $0.4 million, partially offset by an
increase in Company restaurant margin of $7.2 million and
$5.2 million increase in franchise revenues, reflecting
franchise comparable sales growth of 0.4% (in constant
currencies) and an increase in the effective royalty rate in the
U.S.
In EMEA/APAC, income from operations decreased by
$8.2 million, or 9%, to $83.6 million for the fiscal
year ended June 30, 2009, primarily as a result of a
decrease in Company restaurant margin of $22.2 million, and
a decrease in net property income of $2.0 million,
partially offset by an increase in other operating income, net
of $3.5 million, a $12.2 million decrease in selling,
general and administrative expenses and a $0.4 million
increase in franchise revenues, reflecting franchise comparable
sales growth of 3.3% (in constant currencies). These factors
reflect an $11.9 million unfavorable impact from the
movement of currency exchange rates.
In Latin America, income from operations decreased by
$3.6 million, or 9%, to $37.8 million for the fiscal
year ended June 30, 2009, primarily as a result of a
decrease in Company restaurant margin of $6.1 million,
partially offset by a $0.9 million decrease in selling,
general and administrative expenses, a decrease in other
operating expense, net of $0.9 million and a
$0.6 million increase in franchise revenues, which reflects
franchise comparable sales growth of 2.3% (in constant
currencies). These factors reflect a $2.9 million
unfavorable impact from the movement of currency exchange rates.
Our unallocated corporate expenses decreased by
$1.0 million for the fiscal year ended June 30, 2009,
compared to the same period in the prior fiscal year, primarily
as a result of a decrease in general and administrative expenses
attributable to savings from cost containment initiatives.
Interest
Expense, Net
Interest expense, net decreased by $6.6 million for the
fiscal year ended June 30, 2009, compared to the prior
fiscal year, primarily reflecting a decrease in rates paid on
borrowings during the period. The weighted average
59
interest rates for the fiscal years ended June 30, 2009 and
2008 were 5.1% and 6.0%, respectively, which included the effect
of interest rate swaps on 71% and 56% of our term debt,
respectively.
Income
Tax Expense
Income tax expense was $84.7 million for the fiscal year
ended June 30, 2009, resulting in an effective tax rate of
29.7% primarily due to the resolution of federal and state
audits and tax benefits realized from the dissolution of dormant
foreign entities.
See Note 16 to our consolidated financial statements for
further information regarding our effective tax rate. See
Item 1A Risk Factors in Part I of this
report for a discussion regarding our ability to utilize foreign
tax credits and estimate deferred tax assets.
Net
Income
Our net income increased by $10.5 million, or 6%, to
$200.1 million in fiscal 2009, compared to the same period
in the prior fiscal year, primarily as a result of an
$18.7 million decrease in income tax expense, increased
franchise revenues of $6.2 million, driven by a net
increase in restaurants and positive franchise comparable sales
growth, a $6.7 million decrease in selling, general and
administrative expenses and the benefit from a $6.6 million
decrease in interest expense, net. These factors were partially
offset by a net change of $2.5 million in other operating
expense, net, a decrease in Company restaurant margin of
$21.1 million and a decrease in net property income of
$4.1 million.
Liquidity
and Capital Resources
Overview
We had cash and cash equivalents of $187.6 million and
$121.7 million as of June 30, 2010 and 2009,
respectively. In addition, as of June 30, 2010, we had a
borrowing capacity of $115.8 million under our
$150.0 million revolving credit facility. Cash provided by
operations was $310.4 million in fiscal 2010, compared to
$310.8 million in fiscal 2009.
In each of the years ended June 30, 2010 and 2009, we paid
four quarterly dividends of $0.0625 per share of common stock,
resulting in $34.2 million and $34.1 million,
respectively, of cash payments to shareholders of record. During
the first quarter of fiscal 2011, we declared a quarterly
dividend of $0.0625 per share of common stock that is payable on
September 30, 2010 to shareholders of record on
September 14, 2010.
During the third quarter of fiscal 2009, our board of directors
approved and the Company announced a share repurchase program to
repurchase up to $200 million of our common stock in the
open market from time to time prior to December 31, 2010.
We may use a portion of our excess cash to repurchase shares
under our share repurchase program depending on market
conditions. No shares have been purchased under the new share
repurchase program to date.
Long-Term
Debt
Our long-term debt is comprised of a senior secured credit
facility, which consists of Term Loan A, Term Loan B-1 and a
$150.0 million revolving credit facility (the Credit
Facility). The maturity date of Term Loan A and the
revolving credit facility is June 30, 2011, and the
maturity date of Term Loan B-1 is June 30, 2012.
The Credit Facility contains certain customary financial and
non-financial covenants. These covenants impose restrictions on
additional indebtedness, liens, investments, advances,
guarantees and mergers and acquisitions. These covenants also
place restrictions on asset sales, sale and leaseback
transactions, dividends, payments between us and our
subsidiaries and certain transactions with affiliates.
The financial covenants limit the maximum amount of capital
expenditures to approximately $200 million per fiscal year
over the term of the facility, subject to certain financial
ratios. Our leverage ratio, as defined by the Credit Facility,
was 1.5x and 1.8x as of June 30, 2010 and 2009,
respectively. Following the end of each fiscal year, if our
leverage ratio exceeds 3.0x, we are required to prepay the term
debt in an amount equal to 50% of excess cash flow
60
(as defined in the Credit Facility) for such fiscal year. To
date, we have not been required to make any prepayments in
connection with these covenants as a result of our leverage
ratio. 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
may trigger additional mandatory prepayment.
The Credit Facility also allows us to make dividend payments,
subject to certain covenant restrictions. As of June 30,
2010, we were in compliance with the financial covenants of the
Credit Facility.
As of June 30, 2010, we held interest rate swaps with an
aggregate notional value of $575.0 million, which are
linked to the maturities of Term Loan A and Term Loan B-1 and
swap the LIBOR-based floating rate interest payments due under
this indebtedness for fixed interest rates. The weighted average
interest rate on our term debt for fiscal 2010 was 4.7%, which
included on average the impact of interest rate swaps on 73% of
our debt.
Expected
Refinancing
As of June 30, 2010, we had total indebtedness under the
Credit Facility of $753.7 million, of which
$87.5 million is under Term Loan A and $666.2 million
is under Term Loan B-1. As discussed above, the maturity date of
Term Loan A and any future amounts borrowed under our revolving
credit facility is June 30, 2011, and the maturity date of
Term Loan B-1 is June 30, 2012. Since the collateral for
the indebtedness under our Credit Facility is the same for Term
Loan A and Term Loan B-1, we expect to refinance Term Loan B-1
at the same time as Term Loan A. Accordingly, we anticipate
refinancing all the indebtedness under our Credit Facility
before June 30, 2011.
In the event we refinance this indebtedness before its maturity,
we may not be able to re-designate the current interest rate
swaps, which are linked to the maturities of our senior debt, as
accounting hedges for new floating rate obligations, or the swap
instruments may be contractually terminated by our
counterparties. At June 30, 2010, our aggregate obligation
resulting from the interest rate swaps was $26.1 million.
In the event we are unable to re-designate our existing interest
rate swap instruments as accounting hedges for new floating rate
obligations, or in the event that the instruments
counterparties exercise their right to terminate the swap
instruments, we could be required to accelerate the income
statement recognition of this obligation at that time,
accelerate cash payments to counterparties, or both.
Our revolving credit facility provides for the issuance of
letters of credit and at June 30, 2010, we had
$34.2 million of irrevocable standby letters of credit
outstanding under the revolving credit facility. The
beneficiaries under these letters of credit generally require
expiration dates of one year. Since our revolving credit
facility is scheduled to mature within one year, letter of
credit beneficiaries could require us to provide cash deposits
to replace the standby letters of credit we issued under our
revolving credit facility. In such a case we would need to
dedicate a significant amount of cash to satisfy these
obligations, which would reduce the capital available for our
strategic initiatives and other purposes.
Current economic conditions have adversely affected the
availability, cost and terms of debt financing. We anticipate
refinancing our Credit Facility before the maturity date in June
2011. There can be no assurance that we will be able to
refinance the facility on terms as favorable as our current
facility on commercially acceptable terms, or at all.
Accordingly, while we expect cash on hand, cash flow from
operations and our borrowing capacity under current and expected
credit facilities will allow us to meet cash requirements,
including capital expenditures, tax payments, dividends, debt
service payments and share repurchases, if any, over the next
twelve months and for the foreseeable future, until we complete
a refinancing of this facility, it will be difficult to predict
our borrowing capacity and interest costs for future periods. In
the event that we require additional funds for strategic
initiatives or other corporate purposes, we could incur
additional debt or raise funds through the issuance of our
equity securities.
Comparative
Cash Flows
Operating
Activities
Cash provided by operating activities was $310.4 million in
fiscal 2010, compared to $310.8 million in fiscal 2009. The
$310.4 million provided in fiscal 2010 includes net income
of $186.8 million, including non-cash items such as
depreciation and amortization of $111.7 million, a
$40.9 million loss on the remeasurement of foreign
denominated assets and stock based compensation of
$17.0 million, partially offset by $9.5 million gains
on
61
refranchising and asset dispositions. In addition, cash provided
by operating activities was offset by a usage of cash from a
change in working capital of $54.0 million and
$1.5 million change in other long term assets and
liabilities.
The $310.8 million provided in fiscal 2009 includes net
income of $200.1 million, including non-cash items such as
depreciation and amortization of $98.1 million and a
$50.1 million loss on the remeasurement of foreign
denominated assets and stock based compensation of
$16.2 million, as well as a $3.8 million change in
other long term assets and liabilities. In addition, cash
provided by operating activities was offset by a usage of cash
from a change in working capital of $58.5 million. The
$58.5 million of cash used from the change in working
capital is primarily due to the timing of tax payments,
including benefits derived from the dissolution of dormant
foreign entities.
Investing
Activities
Cash used for investing activities was $134.9 million in
fiscal 2010, compared to $242.0 million in fiscal 2009. The
$134.9 million of cash used in fiscal 2010 includes
$150.3 million of payments for property and equipment and
$14.0 million used for the acquisition of franchised
restaurants, partially offset by proceeds received from
refranchisings, dispositions of assets and restaurant closures
of $21.5 million and $8.2 million of principal
payments received on direct financing leases.
The $242.0 million of cash used in fiscal 2009 includes
$204.0 million of payments for property and equipment,
$67.9 million used for the acquisition of franchised
restaurants and $4.4 million used for other investing
activities, partially offset by proceeds received from
refranchisings, dispositions of assets and restaurant closures
of $26.4 million and $7.9 million of principal
payments received on direct financing leases.
Capital expenditures for new restaurants include the costs to
build new Company restaurants as well as properties for new
restaurants that we lease to franchisees. Capital expenditures
for existing restaurants consist of the purchase of real estate
related to existing restaurants, as well as renovations to
Company restaurants, including restaurants acquired from
franchisees, investments in new equipment and normal annual
capital investments for each Company restaurant to maintain its
appearance in accordance with our standards. Capital
expenditures for existing restaurants also include investments
in improvements to properties we lease and sublease to
franchisees, including contributions we make toward leasehold
improvements completed by franchisees on properties we own.
Other capital expenditures include investments in information
technology systems and corporate furniture and fixtures. The
following table presents capital expenditures by type of
expenditure:
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For the
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Fiscal Years Ended
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June 30,
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2010
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2009
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2008
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(In millions)
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New restaurants
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$
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41.1
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$
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65.4
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|
|
$
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55.4
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Existing restaurants
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91.7
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110.1
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|
|
|
102.0
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Other, including corporate
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|
17.5
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|
28.5
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20.8
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|
|
|
|
|
|
|
|
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Total
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$
|
150.3
|
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|
$
|
204.0
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|
|
$
|
178.2
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For fiscal 2011, we expect capital expenditures of approximately
$175 million to $200 million to develop new
restaurants and properties, to fund our restaurant reimaging
program and to make improvements to restaurants we acquire, for
operational initiatives in our restaurants and for other
corporate expenditures.
Financing
Activities
Cash used by financing activities was $96.9 million in
fiscal 2010, compared to $105.5 million in fiscal 2009. The
$96.9 million of cash used includes $67.7 million of
payments on capital leases, term debt and other debt,
$38.5 million of payments on our revolving credit facility,
payment of four quarterly cash dividends totaling
$34.2 million and stock repurchases of $2.7 million.
These cash uses were partially offset by $38.5 million of
proceeds received from our revolving credit facility,
$3.5 million in tax benefits from stock-based compensation
and $4.2 million of proceeds from stock option exercises.
The $105.5 million of cash used in fiscal 2009 includes
$144.3 million of payments on our revolving credit
facility, payment of four quarterly cash dividends totaling
$34.1 million, stock repurchases of $20.3 million and
62
$7.4 million of payments on capital leases, term debt and
other debt. These cash uses were partially offset by
$94.3 million of proceeds received from our revolving
credit facility, $3.3 million in tax benefits from
stock-based compensation and $3.0 million of proceeds from
stock option exercises.
Contractual
Obligations and Commitments
The following table presents information relating to our
contractual obligations as of June 30, 2010:
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Payment Due by Period
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Less Than
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More Than
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Contractual Obligations
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Total
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1 Year
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1-3 Years
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3-5 Years
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5 Years
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(In millions)
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Capital lease obligations
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$
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134.1
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$
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15.2
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$
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29.7
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$
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27.6
|
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$
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61.6
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Operating lease obligations(1)
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1,455.0
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|
|
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161.7
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|
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301.6
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|
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262.1
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|
|
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729.6
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Unrecognized tax benefits(2)
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17.5
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Long-term debt, including current portion and interest(3)
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811.2
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|
|
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125.0
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685.1
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|
|
0.4
|
|
|
|
0.7
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Purchase commitments(4)
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|
95.8
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|
|
|
86.7
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|
|
7.3
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
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$
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2,513.6
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|
$
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388.6
|
|
|
$
|
1,023.7
|
|
|
$
|
291.9
|
|
|
$
|
791.9
|
|
|
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|
|
|
|
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(1)
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Operating lease obligations have
not been reduced by minimum sublease rentals of
$343.1 million due in the future under noncancelable
subleases.
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(2)
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We have provided only a total in
the table above since the timing of the unrecognized tax benefit
payments is unknown.
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(3)
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We have estimated our interest
payments through the maturity of our current long-term debt
facilities based on (i) current LIBOR rates, (ii) the
portion of our debt we converted to fixed rates through interest
rate swaps and (iii) the amortization schedule in our
credit agreement.
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(4)
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Includes open purchase orders, as
well as commitments to purchase advertising and other marketing
services from third parties in advance on behalf of the
Burger King system and obligations related to information
technology and service agreements.
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See Notes 16 and 18 to our audited consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for information about unrecognized tax benefits and our leasing
arrangements, respectively.
As of June 30, 2010, the projected benefit obligation of
our U.S. and international defined benefit pension plans
and U.S. medical plan exceeded pension assets by
$106.6 million. The discount rate used in the calculation
of the benefit obligation at June 30, 2010 for the
U.S. Plans is derived from a yield curve comprised of the
yields of an index of 250 equally-weighted corporate bonds,
rated AA or better by Moodys, which approximates the
duration of the U.S. Plans. We made contributions totaling
$3.5 million into our pension plans and benefit payments of
$5.6 million out of these plans during fiscal 2010.
Estimated net contributions to our pension plans in 2011 are
$6.7 million and estimated benefit payments out of theses
plans in 2011 are $6.6 million. Estimates of reasonably
likely future pension contributions are dependent on pension
asset performance, future interest rates, future tax law
changes, and future changes in regulatory funding requirements.
Other
Commercial Commitments and Off-Balance Sheet
Arrangements
We have guarantees and letters of credit issued in our normal
course of business, vendor relationships, litigation and our
insurance programs. For information on these commitments and
contingent obligations, see Note 22 to the Consolidated
Financial Statements in Part II, Item 8 of this
Form 10-K.
Impact of
Inflation
We believe that our results of operations are not materially
impacted by moderate changes in the inflation rate. Inflation
did not have a material impact on our operations in fiscal 2010,
fiscal 2009 or fiscal 2008. Severe increases in inflation,
however, could affect the global and U.S. economies and
could have an adverse impact on our business, financial
condition and results of operations.
63
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. Volatile credit, equity, foreign currency and energy
markets, and declines in consumer spending have increased and
may continue to create uncertainty inherent in such estimates
and assumptions. As future events and their effects cannot be
determined with precision, actual results could differ
significantly from these estimates. Changes in our estimates
could materially impact our results of operations and financial
condition in any particular period.
We consider our critical accounting policies and estimates to be
as follows based on the high degree of judgment or complexity in
their application:
Long-lived
Assets
Long-lived assets (including definite-lived intangible assets)
are tested for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. We review our long-lived assets for
indications of impairment on a quarterly basis. Some of the
events or changes in circumstances that would trigger an
impairment test include, but are not limited to:
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significant under-performance relative to expected
and/or
historical results (negative comparable sales growth or
operating cash flows for two consecutive years);
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significant negative industry or economic trends;
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knowledge of transactions involving the sale of similar property
at amounts below our carrying value; or
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our expectation to dispose of long-lived assets before the end
of their estimated useful lives, even though the assets do not
meet the criteria to be classified as held for sale.
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The impairment test for long-lived assets requires us to assess
the recoverability of our long-lived assets by comparing their
net carrying value to the sum of undiscounted estimated future
cash flows directly associated with and arising from our use and
eventual disposition of the assets. If the net carrying value of
a group of long-lived assets exceeds the sum of related
undiscounted estimated future cash flows, we would be required
to record an impairment charge equal to the excess, if any, of
net carrying value over fair value.
When assessing the recoverability of our long-lived assets, we
make assumptions regarding estimated future cash flows and other
factors. Some of these assumptions involve a high degree of
judgment and also bear a significant impact on the assessment
conclusions. Included among these assumptions are estimating
undiscounted future cash flows, including the projection of
comparable sales, restaurant operating expenses, capital
requirements for maintaining property and equipment and residual
value of asset groups. 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.
See Note 2 to our audited Consolidated Financial
Statements included in Part II, Item 8 of this
Form 10-K
for additional information about accounting for long-lived
assets.
Goodwill
and Indefinite-lived Intangible Assets
Goodwill represents the excess of the purchase price over the
fair value of assets acquired and liabilities assumed in our
acquisitions of franchise restaurants, predominately in the
United States, which are accounted for as business combinations.
Our indefinite-lived intangible asset consists of the Burger
King brand (the Brand).
We test goodwill and the Brand for impairment on an annual basis
and more often if an event occurs or circumstances change that
indicates impairment might exist.
64
Our impairment test for goodwill requires us to compare the
carrying value of reporting units with assigned goodwill to fair
value. Our reporting units with assigned goodwill are the
U.S. & Canada and APAC. If the carrying value of a
reporting unit exceeds its fair value, we may be required to
record an impairment charge to goodwill. Our impairment test for
the Brand consists of a comparison of the carrying value of the
Brand to its fair value on a consolidated basis, with impairment
equal to the amount by which the carrying value of the Brand
exceeds its fair value. We determined the fair value of our
U.S. & Canada reporting unit and the fair value of our
Brand were substantially in excess of their respective carrying
values when we performed our annual goodwill and Brand
impairment tests as of April 1, 2010.
When testing goodwill and the Brand for impairment, we make
assumptions regarding the amount and the timing of estimated
future cash flows similar to those when testing long-lived
assets for impairment, as described above. In the event that our
estimates or related assumptions change in the future, we may be
required to record an impairment charge.
See Note 2 to our audited Consolidated Financial
Statements included in Part II, Item 8 of this
Form 10-K
for additional information about accounting for long-lived
assets.
Accounting
for Income Taxes
We record income tax liabilities utilizing known obligations and
estimates of potential obligations. A deferred tax asset or
liability is recognized whenever there are future tax effects
from existing temporary differences and operating loss and tax
credit carry-forwards. When considered necessary, we record a
valuation allowance to reduce deferred tax assets to the balance
that is more likely than not to be realized. We must make
estimates and judgments on future taxable income, considering
feasible tax planning strategies and taking into account
existing facts and circumstances, to determine the proper
valuation allowance. When we determine that deferred tax assets
could be realized in greater or lesser amounts than recorded,
the asset balance and income statement reflect the change in the
period such determination is made. Due to changes in facts and
circumstances and the estimates and judgments that are involved
in determining the proper valuation allowance, differences
between actual future events and prior estimates and judgments
could result in adjustments to this valuation allowance.
We file income tax returns, including returns for our
subsidiaries, with federal, state, local and foreign
jurisdictions. We are subject to routine examination by taxing
authorities in these jurisdictions. We apply a two-step approach
to recognizing and measuring uncertain tax positions. The first
step is to evaluate available evidence to determine if it
appears more likely than not that an uncertain tax position will
be sustained on an audit by a taxing authority, based solely on
the technical merits of the tax position. The second step is to
measure the tax benefit as the largest amount that is more than
50% likely of being realized upon settling the uncertain tax
position.
Although we believe we have adequately accounted for our
uncertain tax positions, from time to time, audits result in
proposed assessments where the ultimate resolution may result in
us owing additional taxes. We adjust our uncertain tax positions
in light of changing facts and circumstances, such as the
completion of a tax audit, expiration of a statute of
limitations, the refinement of an estimate, and interest
accruals associated with uncertain tax positions until they are
resolved. We believe that our tax positions comply with
applicable tax law and that we have adequately provided for
these matters. However, to the extent that the final tax outcome
of these matters is different than the amounts recorded, such
differences will impact the provision for income taxes in the
period in which such determination is made.
We use an estimate of the annual effective tax rate at each
interim period based on the facts and circumstances available at
that time, while the actual effective tax rate is calculated at
fiscal year-end.
See Note 16 to our audited Consolidated Financial
Statements included in Part II, Item 8 of this
Form 10-K for additional information about accounting for
income taxes.
Insurance
Reserves
We carry insurance to cover claims such as workers
compensation, general liability, automotive liability, executive
risk and property, and we are self-insured for healthcare claims
for eligible participating employees. Through the use of
insurance program deductibles (ranging from $0.1 million to
$2.5 million) and self insurance, we retain a significant
65
portion of the expected losses under these programs. Insurance
reserves have been recorded based on our estimates of the
anticipated ultimate costs to settle all claims, both reported
and incurred-but-not-reported (IBNR).
Our accounting policies regarding these insurance programs
include judgments and independent actuarial assumptions about
economic conditions, the frequency or severity of claims and
claim development patterns and claim reserve, management and
settlement practices. Since there are many estimates and
assumptions involved in recording insurance reserves,
differences between actual future events and prior estimates and
assumptions could result in adjustments to these reserves.
See Note 22 to our audited Consolidated Financial
Statements included in Part II, Item 8 of this
Form 10-K for additional information about accounting for
our insurance reserves.
New
Accounting Pronouncements Issued But Not Yet
Adopted
In June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 166, Accounting
for Transfers of Financial Assets an Amendment of
FASB Statement No. 140 (now included in FASB
Accounting Standards Codification (ASC) Subtopic
860-20).
This standard amends ASC Topic 860 by removing the concept of a
qualifying special-purpose entity (QSPE) and
eliminates the exception from applying FASB ASC Subtopic
810-10,
Consolidation of Variable Interest Entities,
to qualifying special-purpose entities. Furthermore, it
establishes specific conditions to account for a transfer of
financial assets as a sale, changes the requirements for
derecognizing financial assets and requires additional
disclosure. This standard will be effective as of the beginning
of the first annual reporting period that begins after
November 15, 2009, which for us will be our fiscal year
beginning on July 1, 2010. We do not anticipate that the
adoption of this standard will have a significant impact on the
Company.
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation
No. 46(R) (now included in FASB ASC Topic 810).
This standard is a revision to pre-existing guidance that
requires an enterprise to perform an analysis to identify the
primary beneficiary of a Variable Interest Entity
(VIE), a qualitatively on-going re-assessment on
whether the enterprise is the primary beneficiary of the VIE and
additional disclosures that will provide users of financial
statements with more transparent information about an
enterprises involvement in a VIE. In addition, this
statement revises the methods utilized for determining whether
an entity is a VIE and the events that trigger a reassessment of
whether an entity is a VIE. This standard will be effective as
of the beginning of the first annual reporting period that
begins after November 15, 2009, which for us will be our
fiscal year beginning on July 1, 2010. We do not anticipate
that the adoption of this accounting standard will have a
significant impact on the Company.
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|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Market
Risk
We are exposed to financial market risks associated with
currency exchange rates, interest rates and commodity prices. In
the normal course of business and in accordance with our
policies, we manage these risks through a variety of strategies,
which may include the use of derivative financial instruments to
hedge our underlying exposures. Our policies prohibit the use of
derivative instruments for speculative purposes, and we have
procedures in place to monitor and control their use.
Currency
Exchange Risk
Movements in currency exchange rates may affect the translated
value of our earnings and cash flow associated with our foreign
operations, as well as the translation of net asset or liability
positions that are denominated in foreign currencies. In
countries outside of the United States where we operate Company
restaurants, we generally generate revenues and incur operating
expenses and selling, general and administrative expenses
denominated in local currencies. These revenues and expenses are
translated using the average rates during the period in which
they are recognized and are impacted by changes in currency
exchange rates. In many countries where we do not have Company
restaurants our franchisees pay royalties to us in currencies
other than the local currency in which they operate. However, as
the royalties are calculated based on local currency sales, our
revenues are still impacted by fluctuations in exchange rates.
In fiscal 2010, income from operations would have decreased or
increased $12.5 million if all foreign currencies uniformly
weakened or strengthened 10% relative to the U.S. dollar.
The effect of a uniform movement of all currencies by 10% is
66
provided to illustrate a hypothetical scenario and related
effect on operating income. Actual results will differ as
foreign currencies may move in uniform or different directions
and in different magnitudes.
From time to time we have entered into foreign currency forward
contracts to hedge our exposure to fluctuations in exchange
rates associated with the receipt of forecasted
foreign-denominated royalty cash flows. These forward contracts
are denominated in Canadian dollars and Australian dollars. We
have designated these forward contracts as cash flow hedges; as
a result, the change in fair value of these forward contracts
are recognized in stockholders equity until the forecasted
foreign-denominated royalties are recognized as income in our
consolidated statements of income, and the related
foreign-denominated royalty receivable is settled in the
following month, at which time the applicable portion of the
fair value of the forward contract is reclassified from
stockholders equity to our consolidated statements of
income. At June 30, 2010, we had no foreign currency
forward contracts to hedge the U.S. dollar equivalent in
Australian dollars and in Canadian dollars of forecasted
foreign-denominated royalty cash flows.
We have entered into foreign currency forward contracts intended
to economically hedge our income statement exposure to
fluctuations in exchange rates associated with our intercompany
loans denominated in foreign currencies and certain foreign
currency-denominated assets. These forward contracts are
primarily denominated in euros but are also denominated in
British pounds, Canadian dollars and Singapore dollars.
Fluctuations in the value of these forward contracts are
recognized in our consolidated statements of income as incurred.
However, the fluctuations in the value of these forward
contracts largely offset the impact of changes in the value of
the underlying risk that they are intended to hedge, which is
also reflected in our consolidated statements of income. As of
June 30, 2010, we had foreign currency forward contracts to
hedge the net U.S. dollar equivalent of $391.2 million
of intercompany loans and foreign currency-denominated assets.
This U.S. dollar equivalent by currency is as follows:
$293.6 million in euros; $59.3 million in British
pounds; $24.3 million in Canadian dollars; and
$14.0 million in Singapore dollars.
We are exposed to losses in the event of nonperformance by
counterparties on these forward contracts. We attempt to
minimize this risk by selecting counterparties with investment
grade credit ratings, limiting our exposure to any single
counterparty and regularly monitoring our market position with
each counterparty.
Interest
Rate Risk
We have a market risk exposure to changes in interest rates,
principally in the United States. We attempt to minimize this
risk through the utilization of interest rate swaps. These swaps
are entered into with financial institutions and have reset
dates and key terms that match those of the underlying debt.
Accordingly, any change in market value associated with interest
rate swaps is offset by the opposite market impact on the
related debt.
As of June 30, 2010, we had interest rate swaps with a
notional value of $575.0 million that qualify as cash flow
hedges. These interest rate swaps help us manage exposure to
changes in forecasted LIBOR-based interest payments made on
variable-rate debt. A 1% change in interest rates on our
existing senior term debt of $753.7 million would have
resulted in an increase or decrease in interest expense of
approximately $2.0 million for fiscal year 2010.
Commodity
Price Risk
We purchase certain products, including beef, chicken, cheese,
french fries, tomatoes and other commodities which are subject
to price volatility that is caused by weather, market conditions
and other factors that are not considered predictable or within
our control. Additionally, our ability to recover increased
costs is typically limited by the competitive environment in
which we operate. We do not utilize commodity option or future
contracts to hedge commodity prices and do not have long-term
pricing arrangements other than for chicken, which expires in
December 2010. As a result, we purchase beef and other
commodities at market prices, which fluctuate on a daily basis
and may differ between different geographic regions, where local
regulations may affect the volatility of commodity prices.
The estimated change in Company restaurant food, paper and
product costs from a hypothetical 10% change in average prices
of our commodities would have been approximately
$58.5 million for fiscal 2010. The hypothetical change in
food, paper and product costs could be positively or negatively
affected by changes in prices or product sales mix.
67
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Item 8.
|
Financial
Statements and Supplementary Data
|
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
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Page
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69
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70
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72
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73
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74
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75
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68
Managements
Report on Internal Control Over Financial
Reporting
Management is responsible for the preparation, integrity and
fair presentation of the consolidated financial statements,
related notes and other information included in this annual
report. The financial statements were prepared in accordance
with accounting principles generally accepted in the United
States of America and include certain amounts based on
managements estimates and assumptions. Other financial
information presented is consistent with the financial
statements.
Management is also responsible for establishing and maintaining
adequate internal control over financial reporting, and for
performing an assessment of the effectiveness of internal
control over financial reporting as of June 30, 2010.
Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. The Companys system of internal
control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
Management performed an assessment of the effectiveness of the
Companys internal control over financial reporting as of
June 30, 2010 based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on our assessment and those criteria, management
determined that the Companys internal control over
financial reporting was effective as of June 30, 2010.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
The effectiveness of the Companys internal control over
financial reporting as of June 30, 2010 has been audited by
KPMG LLP, the Companys independent registered public
accounting firm, as stated in its attestation report which is
included herein.
69
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 (Burger King
Holdings) as of June 30, 2010 and 2009, and the related
consolidated statements of income, stockholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended June 30, 2010. These
consolidated financial statements are the responsibility of
Burger King Holdings 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 as of June 30, 2010 and
2009, and the results of its operations and its cash flows for
each of the years in the three-year period ended June 30,
2010, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Burger King Holdings internal control over financial
reporting as of June 30, 2010, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated August 26, 2010 expressed an unqualified opinion on
the effectiveness of Burger King Holdings internal control
over financial reporting.
/s/ KPMG LLP
Miami, Florida
August 26, 2010
Certified Public Accountants
70
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Burger King Holdings, Inc.:
We have audited the internal control over financial reporting of
Burger King Holdings, Inc. and subsidiaries (Burger King
Holdings) as of June 30, 2010, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Burger King
Holdings management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on Burger King
Holdings internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Burger King Holdings maintained, in all material
respects, effective internal control over financial reporting as
of June 30, 2010, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Burger King Holdings as of
June 30, 2010 and 2009, and the related consolidated
statements of income, stockholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended June 30, 2010, and our report
dated August 26, 2010, expressed an unqualified opinion on
those consolidated financial statements.
/s/ KPMG LLP
Miami, Florida
August 26, 2010
Certified Public Accountants
71
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
(In millions, except
share data)
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
187.6
|
|
|
$
|
121.7
|
|
Trade and notes receivable, net
|
|
|
142.9
|
|
|
|
130.0
|
|
Prepaids and other current assets, net
|
|
|
88.4
|
|
|
|
86.4
|
|
Deferred income taxes, net
|
|
|
15.1
|
|
|
|
32.5
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
434.0
|
|
|
|
370.6
|
|
Property and equipment, net
|
|
|
1,014.1
|
|
|
|
1,013.2
|
|
Intangible assets, net
|
|
|
1,025.4
|
|
|
|
1,062.7
|
|
Goodwill
|
|
|
31.0
|
|
|
|
26.4
|
|
Net investment in property leased to franchisees
|
|
|
138.5
|
|
|
|
135.3
|
|
Other assets, net
|
|
|
104.2
|
|
|
|
98.9
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,747.2
|
|
|
$
|
2,707.1
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts and drafts payable
|
|
$
|
106.9
|
|
|
$
|
127.0
|
|
Accrued advertising
|
|
|
71.9
|
|
|
|
67.8
|
|
Other accrued liabilities
|
|
|
200.9
|
|
|
|
220.0
|
|
Current portion of long term debt and capital leases
|
|
|
93.3
|
|
|
|
67.5
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
473.0
|
|
|
|
482.3
|
|
Term debt, net of current portion
|
|
|
667.7
|
|
|
|
755.6
|
|
Capital leases, net of current portion
|
|
|
65.3
|
|
|
|
65.8
|
|
Other liabilities, net
|
|
|
344.6
|
|
|
|
354.5
|
|
Deferred income taxes, net
|
|
|
68.2
|
|
|
|
74.1
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,618.8
|
|
|
|
1,732.3
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 22)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 300,000,000 shares
authorized; 135,814,644 and 134,792,121 shares issued and
outstanding at June 30, 2010 and 2009, respectively
|
|
|
1.4
|
|
|
|
1.4
|
|
Restricted stock units
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
647.2
|
|
|
|
623.4
|
|
Retained earnings
|
|
|
608.0
|
|
|
|
455.4
|
|
Accumulated other comprehensive loss
|
|
|
(66.9
|
)
|
|
|
(45.9
|
)
|
Treasury stock, at cost; 2,972,738 and 2,884,223 shares at
June 30, 2010 and 2009, respectively
|
|
|
(61.3
|
)
|
|
|
(59.5
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,128.4
|
|
|
|
974.8
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,747.2
|
|
|
$
|
2,707.1
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
72
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
(In millions, except
per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$
|
1,839.3
|
|
|
$
|
1,880.5
|
|
|
$
|
1,795.9
|
|
Franchise revenues
|
|
|
549.2
|
|
|
|
543.4
|
|
|
|
537.2
|
|
Property revenues
|
|
|
113.7
|
|
|
|
113.5
|
|
|
|
121.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,502.2
|
|
|
|
2,537.4
|
|
|
|
2,454.7
|
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
585.0
|
|
|
|
603.7
|
|
|
|
564.3
|
|
Payroll and employee benefits
|
|
|
568.7
|
|
|
|
582.2
|
|
|
|
534.7
|
|
Occupancy and other operating costs
|
|
|
461.1
|
|
|
|
457.8
|
|
|
|
439.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company restaurant expenses
|
|
|
1,614.8
|
|
|
|
1,643.7
|
|
|
|
1,538.0
|
|
Selling, general and administrative expenses (See Note 2)
|
|
|
495.8
|
|
|
|
494.3
|
|
|
|
501.0
|
|
Property expenses
|
|
|
59.4
|
|
|
|
58.1
|
|
|
|
62.1
|
|
Other operating (income) expenses, net (See Note 2)
|
|
|
(0.7
|
)
|
|
|
1.9
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
2,169.3
|
|
|
|
2,198.0
|
|
|
|
2,100.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
332.9
|
|
|
|
339.4
|
|
|
|
354.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
49.6
|
|
|
|
57.3
|
|
|
|
67.1
|
|
Interest income
|
|
|
(1.0
|
)
|
|
|
(2.7
|
)
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense, net
|
|
|
48.6
|
|
|
|
54.6
|
|
|
|
61.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
284.3
|
|
|
|
284.8
|
|
|
|
293.0
|
|
Income tax expense
|
|
|
97.5
|
|
|
|
84.7
|
|
|
|
103.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
186.8
|
|
|
$
|
200.1
|
|
|
$
|
189.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.38
|
|
|
$
|
1.48
|
|
|
$
|
1.40
|
|
Diluted
|
|
$
|
1.36
|
|
|
$
|
1.46
|
|
|
$
|
1.38
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
135.4
|
|
|
|
134.8
|
|
|
|
135.1
|
|
Diluted
|
|
|
137.2
|
|
|
|
136.8
|
|
|
|
137.6
|
|
Dividends per common share
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
See accompanying notes to consolidated financial statements.
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
Common
|
|
|
Restricted
|
|
|
Additional
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Stock
|
|
|
Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Stock Shares
|
|
|
Amount
|
|
|
Units
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Total
|
|
|
|
(In millions, except per share information)
|
|
|
Balances at June 30, 2007
|
|
|
135.2
|
|
|
$
|
1.4
|
|
|
$
|
2.8
|
|
|
$
|
573.6
|
|
|
$
|
134.4
|
|
|
$
|
7.5
|
|
|
$
|
(3.8
|
)
|
|
$
|
715.9
|
|
Stock option exercises
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.8
|
|
Stock option tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.3
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.4
|
|
Treasury stock purchases
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35.4
|
)
|
|
|
(35.4
|
)
|
Issuance of shares upon settlement of restricted stock units
|
|
|
|
|
|
|
|
|
|
|
(2.8
|
)
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid on common shares ($0.25 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(34.2
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189.6
|
|
|
|
|
|
|
|
|
|
|
|
189.6
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
(1.7
|
)
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of derivatives, net of tax of
$3.9 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
(6.4
|
)
|
Amounts reclassified to earnings during the period from
terminated swaps, net of tax $1.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
(1.3
|
)
|
Pension and post-retirement benefit plans, net of tax of
$4.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2008
|
|
|
135.0
|
|
|
$
|
1.4
|
|
|
$
|
|
|
|
$
|
600.9
|
|
|
$
|
289.8
|
|
|
$
|
(8.4
|
)
|
|
$
|
(39.2
|
)
|
|
$
|
844.5
|
|
Stock option exercises
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
|
Stock option tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.2
|
|
Treasury stock purchases
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20.3
|
)
|
|
|
(20.3
|
)
|
Dividend paid on common shares ($0.25 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(34.1
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200.1
|
|
|
|
|
|
|
|
|
|
|
|
200.1
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.0
|
)
|
|
|
|
|
|
|
(6.0
|
)
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of derivatives, net of tax of
$10.6 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16.8
|
)
|
|
|
|
|
|
|
(16.8
|
)
|
Amounts reclassified to earnings during the period from
terminated swaps, net of tax $0.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
(0.9
|
)
|
Pension and post-retirement benefit plans, net of tax of
$9.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13.8
|
)
|
|
|
|
|
|
|
(13.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162.6
|
|
Adjustment to adopt re-measurement provision under SFAS No
158, net of tax of $0.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2009
|
|
|
134.8
|
|
|
$
|
1.4
|
|
|
$
|
|
|
|
$
|
623.4
|
|
|
$
|
455.4
|
|
|
$
|
(45.9
|
)
|
|
$
|
(59.5
|
)
|
|
$
|
974.8
|
|
Stock option exercises
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Stock option tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.0
|
|
Treasury stock purchases
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.8
|
)
|
|
|
(2.7
|
)
|
Dividend paid on common shares ($0.25 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(34.2
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186.8
|
|
|
|
|
|
|
|
|
|
|
|
186.8
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
(4.4
|
)
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of derivatives, net of tax of
$2.6 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
|
|
|
|
|
|
4.1
|
|
Amounts reclassified to earnings during the period from
terminated swaps, net of tax $0.6 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
(1.0
|
)
|
Pension and post-retirement benefit plans, net of tax of
$11.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.7
|
)
|
|
|
|
|
|
|
(19.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2010
|
|
|
135.8
|
|
|
$
|
1.4
|
|
|
$
|
|
|
|
$
|
647.2
|
|
|
$
|
608.0
|
|
|
$
|
(66.9
|
)
|
|
$
|
(61.3
|
)
|
|
$
|
1,128.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
186.8
|
|
|
$
|
200.1
|
|
|
$
|
189.6
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
111.7
|
|
|
|
98.1
|
|
|
|
95.6
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
Impairment on non-restaurant properties
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
Gain on hedging activities
|
|
|
(1.6
|
)
|
|
|
(1.3
|
)
|
|
|
(2.0
|
)
|
Loss (gain) on remeasurement of foreign denominated transactions
|
|
|
40.9
|
|
|
|
50.1
|
|
|
|
(55.6
|
)
|
Gain on refranchisings and dispositions of assets
|
|
|
(9.5
|
)
|
|
|
(11.0
|
)
|
|
|
(16.8
|
)
|
Bad debt expense (recoveries), net
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
(2.7
|
)
|
Stock-based compensation
|
|
|
17.0
|
|
|
|
16.2
|
|
|
|
11.4
|
|
Deferred income taxes
|
|
|
16.9
|
|
|
|
12.1
|
|
|
|
20.3
|
|
Changes in current assets and liabilities, excluding
acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and notes receivable
|
|
|
(15.9
|
)
|
|
|
2.1
|
|
|
|
(8.6
|
)
|
Prepaids and other current assets
|
|
|
(1.4
|
)
|
|
|
(35.4
|
)
|
|
|
14.9
|
|
Accounts and drafts payable
|
|
|
(20.8
|
)
|
|
|
3.3
|
|
|
|
20.8
|
|
Accrued advertising
|
|
|
6.4
|
|
|
|
(7.7
|
)
|
|
|
11.1
|
|
Other accrued liabilities
|
|
|
(22.3
|
)
|
|
|
(20.8
|
)
|
|
|
(6.2
|
)
|
Other long-term assets and liabilities, net
|
|
|
(1.5
|
)
|
|
|
3.8
|
|
|
|
(28.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
310.4
|
|
|
|
310.8
|
|
|
|
243.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment
|
|
|
(150.3
|
)
|
|
|
(204.0
|
)
|
|
|
(178.2
|
)
|
Proceeds from refranchisings, disposition of asset and
restaurant closures
|
|
|
21.5
|
|
|
|
26.4
|
|
|
|
27.0
|
|
Payments for acquired franchisee operations, net of cash acquired
|
|
|
(14.0
|
)
|
|
|
(67.9
|
)
|
|
|
(54.2
|
)
|
Return of investment on direct financing leases
|
|
|
8.2
|
|
|
|
7.9
|
|
|
|
7.4
|
|
Other investing activities
|
|
|
(0.3
|
)
|
|
|
(4.4
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(134.9
|
)
|
|
|
(242.0
|
)
|
|
|
(199.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of term debt and capital leases
|
|
|
(67.7
|
)
|
|
|
(7.4
|
)
|
|
|
(55.5
|
)
|
Borrowings under revolving credit facility and other
|
|
|
38.5
|
|
|
|
94.3
|
|
|
|
50.0
|
|
Repayments of revolving credit facility
|
|
|
(38.5
|
)
|
|
|
(144.3
|
)
|
|
|
|
|
Proceeds from stock option exercises
|
|
|
4.2
|
|
|
|
3.0
|
|
|
|
3.8
|
|
Dividends paid on common stock
|
|
|
(34.2
|
)
|
|
|
(34.1
|
)
|
|
|
(34.2
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
3.5
|
|
|
|
3.3
|
|
|
|
9.3
|
|
Repurchases of common stock
|
|
|
(2.7
|
)
|
|
|
(20.3
|
)
|
|
|
(35.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(96.9
|
)
|
|
|
(105.5
|
)
|
|
|
(62.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(12.7
|
)
|
|
|
(7.6
|
)
|
|
|
14.4
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
65.9
|
|
|
|
(44.3
|
)
|
|
|
(3.5
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
121.7
|
|
|
|
166.0
|
|
|
|
169.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
187.6
|
|
|
$
|
121.7
|
|
|
$
|
166.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cashflow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
48.7
|
|
|
$
|
56.0
|
|
|
$
|
64.6
|
|
Income taxes paid
|
|
$
|
54.3
|
|
|
$
|
112.3
|
|
|
$
|
73.5
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property with capital lease obligations
|
|
$
|
3.7
|
|
|
$
|
2.2
|
|
|
$
|
9.3
|
|
Net investment in direct financing leases
|
|
$
|
11.0
|
|
|
$
|
12.2
|
|
|
$
|
2.3
|
|
See accompanying notes to consolidated financial statements.
75
|
|
Note 1.
|
Description
of Business and Organization
|
Description
of Business
Burger King Holdings, Inc. (BKH or the
Company) is a Delaware corporation formed on
July 23, 2002. The Company is the parent of Burger King
Corporation (BKC), a Florida corporation that
franchises and operates fast food hamburger restaurants,
principally under the Burger King brand (the
Brand).
The Company generates revenues from three sources:
(i) retail sales at Company restaurants;
(ii) franchise revenues, consisting of royalties based on a
percentage of sales reported by franchise restaurants and
franchise fees paid by franchisees; and (iii) property
income from restaurants that the Company leases or subleases to
franchisees.
Restaurant sales are affected by the timing and effectiveness of
the Companys advertising, new products and promotional
programs. The Companys results of operations also
fluctuate from quarter to quarter as a result of seasonal trends
and other factors, such as the timing of restaurant openings and
closings and the acquisition of franchise restaurants, as well
as variability of the weather. Restaurant sales are typically
higher in the spring and summer months (our fourth and first
fiscal quarters) when the weather is warmer than in the fall and
winter months (our second and third fiscal quarters). Restaurant
sales during the winter are typically highest in December,
during the holiday shopping season. Our restaurant sales and
Company restaurant margin are typically lowest during our third
fiscal quarter, which occurs during the winter months and
includes February, the shortest month of the year. Furthermore,
adverse weather conditions can have material adverse effects on
restaurant sales. The timing of religious holidays may also
impact restaurant sales.
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation and Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation. Investments in affiliates owned 50% or less are
accounted for by the equity method. These investments were not
significant as of June 30, 2010.
Certain prior year amounts in the accompanying Financial
Statements and Notes to the Financial Statements have been
reclassified in order to be comparable with the current year
classifications. These reclassifications had no effect on
previously reported net income. (See significant accounting
policies for Retirement Plans.)
Concentrations
of Risk
The Companys operations include Company and franchise
restaurants located in 76 countries and U.S. territories.
Of the 12,174 restaurants in operation as of June 30, 2010,
1,387 were Company restaurants and 10,787 were franchise
restaurants.
Four distributors service approximately 85% of our
U.S. system restaurants and the loss of any one of these
distributors would likely adversely affect our business. In many
of the Companys international markets, a single
distributor services all the Burger King restaurants in
the market. The loss of any of one of these distributors would
likely have an adverse effect on the market impacted, and
depending on the market, could have an adverse impact on the
Companys financial results.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
(GAAP) requires management to make estimates and
assumptions that affect the amounts reported in the
Companys consolidated financial statements and
accompanying notes. Management adjusts such estimates and
assumptions when facts and circumstances dictate. Volatile
credit, equity, foreign currency, and energy markets
76
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
and declines in consumer spending have increased and may
continue to affect the uncertainty inherent in such estimates
and assumptions. As future events and their effects cannot be
determined with precision, actual results could differ
significantly from these estimates.
Foreign
Currency Translation
The foreign currency of each foreign subsidiary is generally the
local currency. Foreign currency balance sheets are translated
using the end of period exchange rates, and statements of income
are translated at the average exchange rates for each period.
The translation adjustments resulting from the translation of
foreign currency financial statements are recorded in
accumulated other comprehensive income (loss) within
stockholders equity.
Foreign
Currency Transaction Gain or Losses
Foreign currency transaction gains or losses resulting from the
re-measurement of foreign-denominated assets and liabilities of
the Company or its subsidiaries are reflected in earnings in the
period when the exchange rates change and are included within
other operating (income) expenses, net in the consolidated
statements of income.
Cash
and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid
investments with original maturities of three months or less and
credit card receivables.
Allowance
for Doubtful Accounts
The Company evaluates the collectibility of its trade accounts
receivable from franchisees based on a combination of factors,
including the length of time the receivables are past due and
the probability of collection from litigation or default
proceedings, where applicable. The Company records a specific
allowance for doubtful accounts in an amount required to adjust
the carrying values of such balances to the amount that the
Company estimates to be net realizable value. The Company writes
off a specific account when (a) the Company enters into an
agreement with a franchisee that releases the franchisee from
outstanding obligations, (b) franchise agreements are
terminated and the projected costs of collections exceed the
benefits expected to be received from pursuing the balance owed
through legal action, or (c) franchisees do not have the
financial wherewithal or unprotected assets from which
collection is reasonably assured.
Notes receivable represent loans made to franchisees arising
from re-franchisings of Company restaurants, sales of property,
and in certain cases when past due trade receivables from
franchisees are restructured into an interest-bearing note.
Trade receivables which are restructured to interest-bearing
notes are generally already fully reserved, and as a result, are
transferred to notes receivable at a net carrying value of zero.
Notes receivable with a carrying value greater than zero are
written down to net realizable value when it is probable or
likely that the Company is unable to collect all amounts due
under the contractual terms of the loan agreement.
Inventories
Inventories are stated at the lower of cost
(first-in,
first-out) or net realizable value, and consist primarily of
restaurant food items and paper supplies. Inventories are
included in prepaids and other current assets in the
accompanying consolidated balance sheets.
Property
and Equipment, net
Property and equipment, net, owned by the Company are recorded
at historical cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using
the straight-line method based on the estimated useful lives of
the assets. Leasehold improvements to properties where the
Company is the lessee are amortized over the lesser of the
remaining term of the lease or the estimated useful life of the
improvement. When
77
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
we commit to a plan to close a restaurant, we adjust the
depreciable lives of the restaurants long-lived assets based on
the expected date of closure.
Leases
The Company defines lease term as the initial term of the lease,
plus any renewals covered by bargain renewal options or that are
reasonably assured of exercise because non-renewal would create
an economic penalty. Once determined, lease term is used
consistently by the Company for lease classification, rent
expense recognition, amortization of leasehold improvements and
minimum rent commitment purposes.
Assets acquired by the Company as lessee under capital leases
are stated at the lower of the present value of future minimum
lease payments or fair market value at the date of inception of
the lease. Capital lease assets are depreciated using the
straight-line method over the shorter of the useful life of the
asset or the underlying lease term.
The Company also enters into capital leases as lessor. Capital
leases meeting the criteria of direct financing leases are
recorded on a net basis, consisting of the gross investment and
residual value in the lease less the unearned income. Unearned
income is recognized over the lease term yielding a constant
periodic rate of return on the net investment in the lease.
Direct financing leases are reviewed for impairment whenever
events or circumstances indicate that the carrying amount of an
asset may not be recoverable based on the payment history under
the lease.
The Company records rent expense and income from operating
leases that contain rent holidays or scheduled rent increases on
a straight-line basis over the lease term. Contingent rentals
are generally based on sales levels in excess of stipulated
amounts, and thus are not considered minimum lease payments.
Favorable and unfavorable operating leases were recorded in 2002
as part of the acquisition of BKC by private equity funds
controlled by TPG Capital, Bain Capital Partners and the Goldman
Sachs Funds (the Sponsors) and subsequent
acquisitions of franchise restaurants. The Company amortizes
these favorable and unfavorable leases on a straight-line basis
over the remaining term of the leases. Upon early termination of
a lease, the write-off of the favorable or unfavorable lease
carrying value associated with the lease is recognized as a loss
or gain in the consolidated statements of income. (See
Note 18.)
Goodwill
and Intangible Assets Not Subject to Amortization
Goodwill represents the excess of the purchase price over the
fair value of assets acquired and liabilities assumed in the
Companys acquisitions of franchise restaurants, which are
accounted for as business combinations. The Companys
indefinite-lived intangible asset consists of the Brand, which
was recorded as part of the acquisition of BKC by the Sponsors.
Goodwill and the Brand are not amortized, but are tested for
impairment on an annual basis and more often if an event occurs
or circumstances change that indicates impairment might exist.
The impairment test for goodwill requires the Company to compare
the carrying value of reporting units (with assigned goodwill)
to fair value. If the carrying value of a reporting unit with
assigned goodwill exceeds its estimated fair value, the Company
may be required to record an impairment charge to goodwill.
The impairment test for the Brand consists of a comparison of
the carrying value of the Brand to its fair value on a
consolidated basis, with impairment, if any, equal to the amount
by which the carrying value exceeds its fair value.
The Company performs its impairment testing of goodwill and the
Brand as of the beginning of its fourth fiscal quarter. No
impairment charges resulted from these impairment tests for the
years ended June 30, 2010, 2009 and 2008.
78
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
When the Company disposes of a restaurant within six months of
acquisition, the goodwill recorded in connection with the
acquisition is written off. Goodwill is written off based on the
relative fair value of the business sold to the reporting unit
when disposals occur more than six months after acquisition.
Long-Lived
Assets
Long-lived assets, such as property and equipment and acquired
intangibles subject to amortization, are tested for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company
reviews long-lived assets for indications of impairment on a
quarterly basis. Some of the events or changes in circumstances
that would trigger an impairment review include, but are not
limited to, a significant under-performance relative to expected
and/or
historical results (two consecutive years of negative comparable
sales or operating cash flows), significant negative industry or
economic trends; knowledge of transactions involving the sale of
similar property at amounts below the carrying value; or our
expectation to dispose of long-lived assets before the end of
their estimated useful lives. The impairment test for long-lived
assets requires the Company to assess the recoverability of
long-lived assets by comparing their net carrying value to the
sum of undiscounted estimated future cash flows directly
associated with and arising from use and eventual disposition of
the assets. If the net carrying value of a group of long-lived
assets exceeds the sum of related undiscounted estimated future
cash flows, the Company must record an impairment charge equal
to the excess, if any, of net carrying value over fair value.
Long-lived assets are grouped for recognition and measurement of
impairment at the lowest level for which identifiable cash flows
are largely independent of the cash flows of other assets.
Certain definite-lived intangible assets, consisting primarily
of franchise agreements recorded in connection with acquisition
of BKC by the Sponsors, are grouped for impairment reviews at
the country level. Other long-lived assets and related
liabilities are grouped together for impairment testing at the
operating market level (based on geographic areas) in the case
of the United States, Canada, the U.K. and Germany. The
operating market groupings within the United States and Canada
are predominantly based on major metropolitan areas within the
United States and Canada. Similarly, operating markets within
the other foreign countries with large asset concentrations (the
U.K. and Germany) are comprised of geographic regions within
those countries (three in the U.K. and two 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, most operating functions and advertising are
performed at the country level, and shared by all restaurants in
the country. As a result, the Company has defined operating
markets as the entire country in the case of The Netherlands,
Spain, Italy, Mexico, Singapore, and China.
Other
Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenues, expenses,
gains, and losses that are included in comprehensive income
(loss), but are excluded from net income as these amounts are
recorded directly as an adjustment to stockholders equity,
net of tax. The Companys other comprehensive income (loss)
is comprised of unrealized gains and losses on foreign currency
translation adjustments, unrealized gains and losses on hedging
activity, net of tax, and minimum pension liability adjustments,
net of tax.
79
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Derivative
Financial Instruments
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 statements of
income when the hedged item affects earnings, depending on the
purpose of the derivatives and whether they qualify for, and the
Company has applied hedge accounting treatment.
When applying hedge accounting, the Companys policy is to
designate, at a derivatives inception, the specific
assets, liabilities or future commitments being hedged, and to
assess the hedges effectiveness at inception and on an
ongoing basis. The Company may elect not to designate the
derivative as a hedging instrument where the same financial
impact is achieved in the financial statements. The Company does
not enter into or hold derivatives for speculative purposes.
Disclosures
About Fair Value of Financial Instruments
The Company adopted the required fair value measurements and
disclosure provisions of Financial Accounting Standard Board
(FASB) Accounting Standard Codification
(ASC) Topic 820 related to non-financial assets and
liabilities as of July 1, 2009. These assets and
liabilities are not measured at fair value on an ongoing basis
but are subject to fair value adjustment in certain
circumstances. For the Company these items primarily include
long-lived assets, goodwill and intangible assets for which fair
value is determined as part of the related impairment tests and
asset retirement obligations initially measured at fair value.
At June 30, 2010, there were no significant adjustments to
fair value or fair value measurements required for non-financial
assets or liabilities.
Fair value is defined by this accounting standard as the price
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
in the principal market, or if none exists, the most
advantageous market, for the specific asset or liability at the
measurement date (the exit price). The fair value should be
based on assumptions that market participants would use when
pricing the asset or liability. This accounting standard
establishes a fair value hierarchy the valuation
hierarchy that prioritizes the information used in
measuring fair value as follows:
|
|
|
|
Level 1
|
Observable inputs that reflect quoted prices (unadjusted) for
identical assets or liabilities in active markets
|
|
|
Level 2
|
Inputs other than quoted prices included in Level 1 that
are observable for the asset or liability either directly or
indirectly
|
|
|
Level 3
|
Unobservable inputs reflecting managements own assumptions
about the inputs used in pricing the asset or liability.
|
Certain of the Companys derivatives are valued using
various pricing models or discounted cash flow analyses that
incorporate observable market parameters, such as interest rate
yield curves and currency rates, classified as Level 2
within the valuation hierarchy. Derivative valuations
incorporate credit risk adjustments that are necessary to
reflect the probability of default by the counterparty or the
Company.
The carrying amounts for cash and equivalents, trade accounts
and notes receivable and accounts and drafts receivable
approximate fair value based on the short-term nature of these
accounts.
Restricted investments, consisting of investment securities held
in a rabbi trust to invest compensation deferred under the
Companys Executive Retirement Plan and fund future
deferred compensation obligations, are carried at fair value,
with net unrealized gains and losses recorded in the
Companys consolidated statements of income. The fair value
of these investment securities are determined using quoted
market prices in active markets classified as Level 1
within the fair value hierarchy.
Fair value of variable rate term debt was estimated using inputs
based on bid and offer prices and are Level 2 inputs within
the fair value hierarchy.
80
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Revenue
Recognition
Revenues include retail sales at Company restaurants and
franchise and property revenues. Franchise revenues include
royalties and initial and renewal franchise fees. Property
revenues include rental income from operating lease rentals and
earned income on direct financing leases on property leased or
subleased to franchisees. Retail sales at Company restaurants
are recognized at the point of sale and royalties from
franchisees are based on a percentage of retail sales reported
by franchisees. The Company presents sales net of sales tax and
other sales-related taxes. Royalties are recognized when
collectibility is reasonably assured. Initial franchise fees are
recognized as revenue when the related restaurant begins
operations. A franchisee may pay a renewal franchise fee and
renew its franchise for an additional term. Renewal franchise
fees are recognized as revenue upon receipt of the
non-refundable fee and execution of a new franchise agreement.
The cost recovery accounting method is used to recognize
revenues for franchisees for whom collectibility is not
reasonably assured. Rental income on operating lease rentals and
earned income on direct financing leases are recognized when
collectibility is reasonably assured.
Advertising
and Promotional Costs
The Company expenses the production costs of advertising when
the advertisements are first aired or displayed. All other
advertising and promotional costs are expensed in the period
incurred.
Franchise restaurants and Company restaurants contribute to
advertising funds managed by the Company in the United States
and certain international markets where Company restaurants
operate. Under the Companys franchise agreements,
contributions received from franchisees must be spent on
advertising, marketing and related activities, and result in no
gross profit recognized by the Company. Advertising expense, net
of franchisee contributions, totaled $91.3 million for the
year ended June 30, 2010, $93.3 million for the year
ended June 30, 2009, and $91.5 million for the year
ended June 30, 2008, and is included in selling, general
and administrative expenses in the accompanying consolidated
statements of income.
To the extent that contributions received exceed advertising and
promotional expenditures, the excess contributions are accounted
for as a deferred liability and are recorded in accrued
advertising in the accompanying consolidated balance sheets.
Franchisees in markets where no Company restaurants operate
contribute to advertising funds not managed by the Company. Such
contributions and related fund expenditures are not reflected in
the Companys results of operations or financial position.
Income
Taxes
Amounts in the financial statements related to income taxes are
calculated using the principles of FASB ASC Topic 740,
Income Taxes. Under these principles,
deferred tax assets and liabilities reflect the impact of
temporary differences between the amounts of assets and
liabilities recognized for financial reporting purposes and the
amounts recognized for tax purposes, as well as tax credit
carryforwards and loss carryforwards. These deferred taxes are
measured by applying currently enacted tax rates. A deferred tax
asset is recognized when it is considered more likely than not
to be realized. The effects of changes in tax rates on deferred
tax assets and liabilities are recognized in income in the year
in which the law is enacted. A valuation allowance reduces
deferred tax assets when it is more likely than not that some
portion or all of the deferred tax assets will not be recognized.
Income tax benefits credited to stockholders equity relate
to tax benefits associated with amounts that are deductible for
income tax purposes but do not affect earnings. These benefits
are principally generated from employee exercises of
nonqualified stock options and settlement of restricted stock
awards.
The Company recognizes positions taken or expected to be taken
in a tax return, in the financial statements when it is more
likely than not (i.e., a likelihood of more than fifty percent)
that the position would be sustained
81
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
upon examination by tax authorities. A recognized tax position
is then measured at the largest amount of benefit that is
greater than fifty percent likely of being realized upon
ultimate settlement.
Transaction gains and losses resulting from the remeasurement of
foreign deferred tax assets or liabilities are classified as
other operating (income) expense, net in the consolidated
statements of income.
Earnings
per Share
Basic earnings per share is computed by dividing net income by
the weighted average number of common shares outstanding for the
period. The computation of diluted earnings per share is
consistent with that of basic earnings per share, while giving
effect to all dilutive potential common shares that were
outstanding during the period.
Stock-based
Compensation
The Company recognizes share-based compensation cost based on
the grant date estimated fair value of each award, net of
estimated forfeitures, over the employees requisite
service period, which is generally the vesting period of the
equity grant.
Stock options and restricted stock and restricted stock units
(RSU) granted by the Company typically contain only
a service condition for vesting. For performance-based
restricted stock and restricted stock units (PBRS)
vesting is based both on a performance condition and a service
condition. For awards that have a cliff-vesting schedule,
stock-based compensation cost is recognized ratably over the
requisite service period. For awards with a graded vesting
schedule, where the award vests in increments during the
requisite service period, the Company has elected to record
stock-based compensation cost over the requisite service period
for the entire award.
Retirement
Plans
Gains or losses and prior service costs or credits related to
the Companys pension plans are being recognized as they
arise as a component of other comprehensive income (loss) to the
extent they have not been recognized as a component of net
periodic benefit cost. In the fourth quarter of fiscal year
2009, the Company adopted the measurement date provisions of
FASB ASC Topic 715 Compensation Retirement
Benefits and recorded a decrease to retained earnings
of $0.4 million after tax related to its pension plans and
postretirement medical plan.
The Company sponsors the Burger King Savings Plan (the
Savings Plan), a defined contribution plan under the
provisions of section 401(k) of the Internal Revenue Code.
The Savings Plan is voluntary and is provided to all employees
who meet the eligibility requirements. A participant can elect
to contribute up to 50% of their compensation subject to IRS
limits and the Company matches 100% of the first 6% of employee
compensation. Effective July 1, 2007, the Company added the
Burger King Holdings, Inc. Stock Fund (the BK Stock
Fund) to the Savings Plan as an investment option.
Participants in the Savings Plan may direct no more than 10% of
their investment elections to the BK Stock Fund and no more than
10% of their total account balance.
The Company also maintains an Executive Retirement Plan
(ERP) for all officers and senior management.
Officers and senior management may elect to defer up to 75% of
base pay once 401(k) limits are reached and up to 100% of
incentive pay on a before-tax basis under the ERP. BKC provides
a
dollar-for-dollar
match up to the first 6% of base pay.
The Company established a rabbi trust to invest compensation
deferred under the ERP and fund future deferred compensation
obligations. The rabbi trust is subject to creditor claims in
the event of insolvency, but the assets held in the rabbi trust
are not available for general corporate purposes and are
classified as restricted investments within other assets, net in
the Companys consolidated balance sheets. The rabbi trust
is required to be consolidated into the Companys
consolidated financial statements. Participants receive returns
on amounts they deferred under the deferred compensation plan
based on investment elections they make.
82
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
In the quarter ended September 30, 2009, the Company
elected to cease future participant deferrals and Company
contributions into the rabbi trust; however, participant
deferrals and Company contributions will be credited with a
hypothetical rate of return based on the investment options and
allocations in various mutual funds selected by each participant
(the unfunded portion of the ERP liability). The
deferred compensation expense related to the unfunded portion of
the ERP liability is included as a component of selling, general
and administrative expenses and was not significant. The total
deferred compensation liability related to the ERP was
$22.6 million and $17.9 million at June 30, 2010
and 2009, respectively.
The investment securities in the rabbi trust have been
designated by the Company as trading securities and are carried
at fair value as restricted investments within other assets, net
in the Companys consolidated balance sheets, with
unrealized trading gains and losses recorded in earnings. The
fair value of the investment securities held in the rabbi trust
was $19.9 million and $17.9 million as of
June 30, 2010 and 2009, respectively. During the current
fiscal year, the Company began recording the net (gains) losses
related to the change in value of these investments in selling,
general and administrative expenses, along with an offsetting
amount related to the increase (decrease) in deferred
compensation, in selling, general and administrative expenses in
the accompanying consolidated statements of income to reflect
its exposure to the funded portion of the ERP liability. As
such, the Company reclassified $3.9 million and
$1.5 million of loss previously recorded in other operating
(income) expenses, net to selling, general and administrative
expenses for the fiscal years ended June 30, 2009 and 2008,
respectively.
The following table presents net (gains) and losses related to
the investments held in the rabbi trust and the offsetting
increase (decrease) in deferred compensation expense related to
the ERP liability as a component of selling, general and
administrative expenses (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net (gains) losses on investments held in the rabbi trust
|
|
$
|
(3.7
|
)
|
|
$
|
3.9
|
|
|
$
|
1.5
|
|
Increase (decrease) in deferred compensation funded
portion
|
|
|
3.7
|
|
|
|
(3.9
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recorded in the consolidated statements of income
representing the Companys contributions to the Savings
Plan and the ERP on behalf of restaurant and corporate employees
for the years ended June 30, 2010, 2009 and 2008 totaled
$6.7 million, $6.4 million and $6.9 million,
respectively. Company contributions made on behalf of restaurant
employees are classified as payroll and employee benefit
expenses in our consolidated statements of income, while Company
contributions made on behalf of corporate employees are
classified as selling, general and administrative expenses in
our consolidated statements of income.
|
|
Note 3.
|
Stock-based
Compensation
|
Non-qualified stock option awards (stock options)
granted by the Company expire 10 years from the grant date
and generally vest ratably over a four to five-year service
period commencing on the grant date. In August 2009, the Company
granted stock options covering approximately 1.8 million
shares to eligible employees. Nonvested shares granted by the
Company consist of RSU awards, PBRS awards and deferred shares
issued to non-employee members of the Companys Board of
Directors. RSUs generally vest ratably over a two to five
year service period commencing on the grant date. In August
2009, the Company granted PBRS awards covering approximately
0.7 million shares of common stock to eligible employees.
The PBRS awards typically have a three year vesting period,
which includes the one-year performance period. The number of
PBRS awards that actually vest are determined based on
achievement of a Company performance target during the one-year
performance period.
The Company recorded $17.0 million, $16.2 million and
$11.4 million of stock-based compensation expense in the
years ended June 30, 2010, 2009 and 2008, respectively, in
selling, general and administrative expenses.
83
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Equity
Incentive Plan and 2006 Omnibus Incentive Plan
The Companys Equity Incentive Plan and 2006 Omnibus
Incentive Plan (collectively, the Plans) permit the
grant of stock-based compensation awards including stock
options, RSUs, deferred shares and PBRS to participants
for up to 20.8 million shares of the Companys common
stock. Awards are granted with an exercise price or market value
equal to the closing price of the Companys common stock on
the date of grant. The number of shares available to be granted
under the Plans totaled approximately 3.6 million as of
June 30, 2010. The Company satisfies share-based exercises
and vesting through the issuance of authorized but previously
unissued shares of the Companys stock or treasury shares.
Nonvested shares are generally net-settled with new Company
shares withheld, and not issued, to meet the employees
minimum statutory withholding tax requirements.
Under the Companys compensation program for the Board of
Directors, non-employee directors receive an annual grant of
deferred shares of the Companys common stock and may also
elect to receive their quarterly retainer and Committee fees in
deferred shares in lieu of cash. The annual grant vests in
quarterly installments over a one-year period on the first day
of each calendar quarter following the grant date, and the
deferred shares granted in lieu of cash are fully vested on the
grant date. The deferred shares will settle and shares of common
stock will be issued at the time the non-employee director no
longer serves on the Board of Directors.
Stock-based compensation expense for stock options is estimated
on the grant date using a Black-Scholes option pricing model.
The Companys specific weighted-average assumptions for the
risk-free interest rate, expected term, expected volatility and
expected dividend yield are discussed below. Additionally, the
Company is required to estimate pre-vesting forfeitures for
purposes of determining compensation expense to be recognized.
Future expense amounts for any quarterly or annual period could
be affected by changes in the Companys assumptions or
changes in market conditions.
The Company has determined the expected term of stock options
granted using the simplified method. Based on the results of
applying the simplified method, the Company has determined that
6.25 years is an appropriate expected term for awards with
four-year graded vesting.
As a newly public company, the Company previously elected to
base the estimate of expected volatility of its common stock for
the Black-Scholes option pricing model solely on the historical
volatility of a group of its peers. Beginning in 2008, the
Company determined it had sufficient information regarding the
historical volatility of its common stock price and implied
volatility of its exchange-traded options to incorporate a
portion of these volatilities into the calculation of expected
volatility used in the Black-Scholes model, in addition to the
historical volatility of a group of its peers.
The fair value of each stock option granted under the Plans
during the years ended June 30, 2010, 2009, and 2008 was
estimated on the date of grant using the Black-Scholes option
pricing model based on the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Risk-free interest rate
|
|
2.92%
|
|
3.33%
|
|
4.40%
|
Expected term (in years)
|
|
6.25
|
|
6.25
|
|
6.25
|
Expected volatility
|
|
37.15%
|
|
31.80%
|
|
29.35%
|
Expected dividend yield
|
|
1.37%
|
|
0.96%
|
|
1.07%
|
84
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
A summary of stock option activity under the Plans as of and for
the year ended June 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Total
|
|
|
Weighted
|
|
|
Total
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Contractual Term
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Value
|
|
|
(Yrs)
|
|
|
|
(In 000s)
|
|
|
|
|
|
(In 000s)
|
|
|
|
|
|
Options outstanding as of July 1, 2009
|
|
|
5,926.0
|
|
|
$
|
16.10
|
|
|
$
|
26,861.4
|
|
|
|
6.83
|
|
Granted
|
|
|
1,829.1
|
|
|
$
|
18.37
|
|
|
|
|
|
|
|
|
|
Pre-vest cancels
|
|
|
(687.2
|
)
|
|
$
|
20.05
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(627.8
|
)
|
|
$
|
6.69
|
|
|
|
|
|
|
|
|
|
Post-vest cancels
|
|
|
(81.5
|
)
|
|
$
|
24.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of June 30, 2010
|
|
|
6,358.6
|
|
|
$
|
17.16
|
|
|
$
|
18,954.0
|
|
|
|
6.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of June 30, 2010
|
|
|
3,240.4
|
|
|
$
|
13.49
|
|
|
$
|
18,284.0
|
|
|
|
5.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of stock options
granted was $6.56, $8.54, and $7.99 during the years ended
June 30, 2010, 2009 and 2008, respectively. For the years
ended June 30, 2010, 2009 and 2008, the total intrinsic
value of stock options exercised was $8.1 million,
$11.4 million, and $14.4 million, respectively, and
the related excess tax benefits from stock options exercised
were $3.5 million, $3.3 million, and
$9.3 million, respectively.
For the years ended June 30, 2010, 2009 and 2008, proceeds
from stock options exercised were $4.2 million,
$3.0 million, and $3.8 million, respectively,
A summary of nonvested share activity under the Plans, which
includes RSUs, deferred shares, and PBRS awards, as of and
for the year ended June 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Total
|
|
|
Grant
|
|
|
|
Number of
|
|
|
Date Fair
|
|
|
|
Nonvested Shares
|
|
|
Value
|
|
|
|
(In 000s)
|
|
|
|
|
|
Nonvested shares outstanding as of July 1, 2009
|
|
|
1,768.4
|
|
|
$
|
20.69
|
|
Granted
|
|
|
692.5
|
|
|
$
|
18.35
|
|
Vested & settled
|
|
|
(545.7
|
)
|
|
$
|
14.57
|
|
Pre-vest cancels
|
|
|
(271.3
|
)
|
|
$
|
21.20
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares outstanding as of June 30, 2010
|
|
|
1,643.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares unvested as of June 30, 2010
|
|
|
1,472.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of nonvested shares
granted during the years ended June 30, 2010, 2009 and 2008
were $18.35, $25.10, and $23.95, respectively. The total
intrinsic value of grants which vested and settled was
$9.6 million, $1.1 million, and $14.3 million in
the years ended June 30, 2010, 2009 and 2008, respectively.
As of June 30, 2010, there was $29.5 million of total
unrecognized compensation cost related to stock options and
nonvested shares granted under the Plans. The cost is expected
to be recognized in the Companys financial statements over
a weighted-average period of 1.69 years.
85
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
For the years ended June 30, 2010, 2009 and 2008, the fair
value of shares withheld by the Company to meet employees
minimum statutory withholding tax requirements on the settlement
of RSUs was $2.7 million, $0.3 million, and
$4.1 million, respectively.
|
|
Note 4.
|
Acquisitions,
Closures and Dispositions
|
Acquisitions
Acquisitions are summarized as follows (in millions, except for
number of restaurants):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Number of restaurants acquired
|
|
|
39
|
|
|
|
87
|
|
|
|
83
|
|
Prepaids and other current assets
|
|
$
|
1.8
|
|
|
$
|
1.0
|
|
|
$
|
1.0
|
|
Property and equipment, net
|
|
|
4.9
|
|
|
|
14.6
|
|
|
|
13.3
|
|
Goodwill and other intangible assets
|
|
|
7.6
|
|
|
|
55.7
|
|
|
|
47.5
|
|
Other assets, net
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
Assumed liabilities
|
|
|
(2.4
|
)
|
|
|
(3.4
|
)
|
|
|
(7.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
14.0
|
|
|
$
|
67.9
|
|
|
$
|
54.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closures
and Dispositions
Gains and losses on closures and dispositions represent sales of
Company properties and other costs related to restaurant
closures and sales of Company restaurants to franchisees,
referred to as refranchisings, and are recorded in
other operating (income) expenses, net in the accompanying
consolidated statements of income. Gains and losses recognized
in the current period may reflect closures and refranchisings
that occurred in previous periods.
Closures and dispositions are summarized as follows (in
millions, except for number of restaurants):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Number of restaurant closures
|
|
|
34
|
|
|
|
19
|
|
|
|
29
|
|
Number of refranchisings
|
|
|
91
|
|
|
|
51
|
|
|
|
38
|
|
Net gain on restaurant closures, refranchisings and dispositions
of assets
|
|
$
|
(2.4
|
)
|
|
$
|
(8.5
|
)
|
|
$
|
(9.8
|
)
|
Included in the net gain on restaurant closures, refranchisings
and dispositions of assets for the years ended June 30,
2010 and 2009 is a $2.3 million and $5.4 million gain,
respectively, from the refranchising of Company restaurants in
the U.S. and Germany. Included in the net gain on
restaurant closures, refranchisings and dispositions of assets
for the year ended June 30, 2008 is a $9.0 million
gain from the refranchising of Company restaurants, primarily in
Germany.
86
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 5.
|
Franchise
Revenues
|
Franchise revenues consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Franchise royalties
|
|
$
|
529.5
|
|
|
$
|
518.2
|
|
|
$
|
512.6
|
|
Initial franchise fees
|
|
|
10.9
|
|
|
|
13.8
|
|
|
|
13.2
|
|
Renewal franchise fees and other related fees
|
|
|
8.8
|
|
|
|
11.4
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
549.2
|
|
|
$
|
543.4
|
|
|
$
|
537.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6.
|
Trade and
Notes Receivable, net
|
Trade and notes receivable, net, consists of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Trade accounts receivable
|
|
$
|
158.7
|
|
|
$
|
146.3
|
|
Notes receivable, current portion
|
|
|
4.8
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163.5
|
|
|
|
151.8
|
|
Allowance for doubtful accounts
|
|
|
(20.6
|
)
|
|
|
(21.8
|
)
|
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
142.9
|
|
|
$
|
130.0
|
|
|
|
|
|
|
|
|
|
|
The change in allowances for doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Beginning balance
|
|
$
|
21.8
|
|
|
$
|
23.0
|
|
|
$
|
28.6
|
|
Provision (recoveries) for doubtful accounts, net
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
(2.7
|
)
|
Write-offs
|
|
|
(2.0
|
)
|
|
|
(1.9
|
)
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
20.6
|
|
|
$
|
21.8
|
|
|
$
|
23.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7.
|
Prepaids
and Other Current Assets, net
|
Included in prepaids and other current assets, net were
inventories totaling $15.4 million and $15.8 million,
prepaid expenses of $33.1 million and $31.0 million,
foreign currency forward contracts of $25.9 million and
$0.3 million, and refundable income taxes of
$14.0 million and $39.3 million as of June 30,
2010 and 2009, respectively.
87
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 8.
|
Property
and Equipment, net
|
Property and equipment, net, along with their estimated useful
lives, consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
|
|
$
|
386.0
|
|
|
$
|
390.3
|
|
Buildings and improvements(1)
|
|
(up to 40 years)
|
|
|
723.2
|
|
|
|
697.1
|
|
Machinery and equipment(2)
|
|
(up to 18 years)
|
|
|
317.3
|
|
|
|
293.8
|
|
Furniture, fixtures, and other
|
|
(up to 10 years)
|
|
|
149.0
|
|
|
|
132.8
|
|
Construction in progress
|
|
|
|
|
105.5
|
|
|
|
106.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,681.0
|
|
|
$
|
1,620.6
|
|
Accumulated depreciation and amortization(3)
|
|
|
|
|
(666.9
|
)
|
|
|
(607.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
$
|
1,014.1
|
|
|
$
|
1,013.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Buildings and improvements include assets under capital leases
of $76.6 million and $75.6 million as of June 30,
2010 and 2009, respectively. |
|
(2) |
|
Machinery and equipment include assets under capital leases of
$1.9 million and $1.8 million as of June 30, 2010
and 2009, respectively. |
|
(3) |
|
Accumulated depreciation related to capital leases totaled
$38.6 million and $34.1 million as of June 30,
2010 and 2009, respectively. |
Depreciation and amortization expense on property and equipment
totaled $120.6 million, $110.1 million and
$116.6 million for the years ended June 30, 2010, 2009
and 2008, respectively.
Construction in progress represents new restaurant construction,
reimaging (demolish and rebuild) and remodeling of existing and
acquired restaurants.
|
|
Note 9.
|
Intangible
Assets, net and Goodwill
|
The Burger King Brand, which had a carrying value of
$874.0 million and $905.1 million as of June 30,
2010 and 2009, respectively, is the Companys only
intangible asset with an indefinite life. The decrease in the
net carrying value of the Brand is primarily attributable to a
$31.0 million impact from foreign currency translation on
the value of the Brand recorded in the Companys EMEA/APAC
reporting segment. Goodwill had a carrying value of
$31.0 million and $26.4 million as of June 30,
2010 and 2009, respectively. The increase in goodwill during
2010 resulted from the acquisition of 35 restaurants in
Singapore.
The tables below present intangible assets subject to
amortization, along with their useful lives (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Franchise agreements including reacquired franchise rights
|
|
(up to 26 years)
|
|
$
|
142.2
|
|
|
$
|
140.6
|
|
Accumulated amortization
|
|
|
|
|
(25.3
|
)
|
|
|
(19.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Franchise agreements, net
|
|
|
|
|
116.9
|
|
|
|
121.1
|
|
|
|
|
|
|
|
|
|
|
|
|
88
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Favorable leases
|
|
up to 20 years
|
|
|
49.1
|
|
|
|
48.8
|
|
Accumulated amortization
|
|
|
|
|
(14.6
|
)
|
|
|
(12.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Favorable leases, net
|
|
|
|
|
34.5
|
|
|
|
36.5
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded amortization expense on intangible assets
of $8.7 million, $8.8 million, and $5.0 million
in the fiscal years ended June 30, 2010, 2009, and 2008,
respectively.
As of June 30, 2010, estimated future amortization expense
on intangible assets for each of the years ended June 30,
is $8.9 million in 2011, $8.8 million in 2012 and
2013, $8.6 million in 2014, $8.2 million in 2015 and
$107.2 million thereafter.
|
|
Note 10.
|
Earnings
Per Share
|
Basic and diluted earnings per share were calculated as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
186.8
|
|
|
$
|
200.1
|
|
|
$
|
189.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic
|
|
|
135.4
|
|
|
|
134.8
|
|
|
|
135.1
|
|
Effect of dilutive securities
|
|
|
1.8
|
|
|
|
2.0
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted
|
|
|
137.2
|
|
|
|
136.8
|
|
|
|
137.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.38
|
|
|
$
|
1.48
|
|
|
$
|
1.40
|
|
Diluted earnings per share
|
|
$
|
1.36
|
|
|
$
|
1.46
|
|
|
$
|
1.38
|
|
Antidilutive shares(1)
|
|
|
4.3
|
|
|
|
2.4
|
|
|
|
0.8
|
|
|
|
|
(1) |
|
These shares were not included in the computation of weighted
average shares-diluted because they would have been
anti-dilutive for the periods presented. |
|
|
Note 11.
|
Other
Accrued Liabilities and Other Liabilities
|
Included in other accrued liabilities (current) as of
June 30, 2010 and 2009, were accrued payroll and
employee-related benefit costs totaling $58.5 million and
$69.4 million, respectively. The decrease in payroll and
employee-related benefit costs of $10.9 million is
primarily due to a decrease in annual incentive bonus accrual
and timing of payroll periods during fiscal 2010, as compared to
prior fiscal year.
Included in other liabilities (non-current) as of June 30,
2010 and 2009, were accrued pension liabilities of
$79.4 million and $54.0 million, respectively;
interest rate swap liabilities of $26.1 million and
$32.4 million, respectively; casualty insurance reserves of
$25.5 million and $27.7 million, respectively; retiree
health benefits of $25.0 million and $21.1 million,
respectively; and liabilities for unfavorable leases of
$127.3 million and $155.5 million, respectively. The
$28.2 million decrease in liabilities for unfavorable
leases is primarily attributable to amortization taken during
the fiscal year, termination of leases as a result of
refranchising of Company restaurants and a $4.1 million
impact from foreign currency translation.
89
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Long-term debt is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Term Loan A
|
|
$
|
87.5
|
|
|
$
|
150.0
|
|
Term Loan B-1
|
|
|
666.2
|
|
|
|
666.2
|
|
Revolving Credit Facility
|
|
|
|
|
|
|
|
|
Other
|
|
|
1.7
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
755.4
|
|
|
|
818.3
|
|
Less: current maturities of debt
|
|
|
(87.7
|
)
|
|
|
(62.7
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
667.7
|
|
|
$
|
755.6
|
|
|
|
|
|
|
|
|
|
|
The Companys credit facility consists of term loans A and
B-1 and a $150.0 million revolving credit facility
(credit facility).
The interest rate under Term Loan A and the revolving credit
facility is, at the Companys option, either (a) the
greater of the federal funds effective rate plus 0.50% or the
prime rate (ABR), plus a rate not to exceed 0.75%,
which varies according to the Companys leverage ratio or
(b) LIBOR plus a rate not to exceed 1.75%, which varies
according to Companys leverage ratio. The interest rate
for Term Loan B-1 is, at the Companys option, either
(a) ABR, plus a rate of 0.50% or (b) LIBOR plus 1.50%,
in each case so long as the Companys leverage ratio
remains at or below certain levels (but in any event not to
exceed 0.75% in the case of ABR loans and 1.75% in the case of
LIBOR loans). The weighted average interest rates related to the
Companys term debt was 4.7% and 5.1% for the years ended
June 30, 2010 and June 30, 2009, respectively, which
included the impact of interest rate swaps on 73% and 71% of the
Companys term debt, respectively.
The credit facility contains certain customary financial and
non-financial covenants. These covenants impose restrictions on
additional indebtedness, liens, investments, advances,
guarantees and mergers and acquisitions. These covenants also
place restrictions on asset sales, sale and leaseback
transactions, dividends, payments between the Company and its
subsidiaries and certain transactions with affiliates.
The financial covenants limit the maximum amount of capital
expenditures to approximately $200.0 million per fiscal
year over the term of the facility, subject to certain financial
ratios. Following the end of each fiscal year, if the
Companys leverage ratio exceeds 3.0x, the Company is
required to prepay the term debt in an amount equal to 50% of
excess cash flow (as defined in the credit facility agreement)
for such fiscal year. The Company has not been required to make
any prepayments in connection with these covenants. 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 may trigger
additional mandatory prepayment.
The facility also allows the Company to make dividend payments,
subject to certain covenant restrictions. As of June 30,
2010, the Company believes it was in compliance with the
financial covenants of the credit facility.
Provided that the Company is in compliance with certain
financial covenants, the facility allows the Company to request
one or more tranches of incremental term loans up to a maximum
amount of $150.0 million, although no lender is obligated
to provide any incremental term loans unless it so agrees. As of
June 30, 2010, the amount available under the revolving
credit facility was $115.8 million, net of
$34.2 million of irrevocable standby letters of credit
outstanding. BKC incurs a commitment fee on the unused revolving
credit facility at the rate of 0.50% multiplied by the unused
portion.
90
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
BKC is the borrower under the facility and the Company and
certain subsidiaries have jointly and severally unconditionally
guaranteed the payment of the amounts under the facility. The
Company, BKC and certain subsidiaries have pledged, as
collateral, a 100% equity interest in the domestic subsidiaries
of the Company and BKC with certain exceptions. Furthermore, BKC
has pledged as collateral a 65% equity interest in certain
foreign subsidiaries.
During the year ended June 30, 2010, the Company paid
$101.2 million of long-term debt, of which
$62.5 million related to the Term Loan A and
$38.5 million related to the revolving credit facility and
borrowed $38.5 million under the revolving credit facility.
As of June 30, 2010, the next scheduled principal payment
on term debt is the September 30, 2010 principal payment of
$21.9 million on Term Loan A. The level of required
principal repayments increases over time thereafter. The
maturity dates of Term Loan A, Term Loan B-1, and any amounts
drawn under the revolving credit facility are June 2011, June
2012 and June 2011, respectively.
The aggregate maturities of long-term debt, including the Term
Loan A, Term Loan B-1 and other debt as of June 30, 2010,
are as follows (in millions):
|
|
|
|
|
|
|
Principal
|
|
Year Ended June 30,
|
|
Amount
|
|
|
2011
|
|
$
|
87.7
|
|
2012
|
|
|
666.4
|
|
2013
|
|
|
0.2
|
|
2014
|
|
|
0.2
|
|
2015
|
|
|
0.2
|
|
Thereafter
|
|
|
0.7
|
|
|
|
|
|
|
Total
|
|
$
|
755.4
|
|
|
|
|
|
|
The Company also has lines of credit with foreign banks, which
can also be used to provide guarantees, in the amounts of
$3.1 million and $3.5 million as of June 30, 2010
and 2009, respectively. There are no guarantees issued against
these lines of credit as of June 30, 2010 and 2009,
respectively.
91
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 13.
|
Fair
Value Measurements
|
Fair
Value Measurements
The following table presents (in millions) financial assets and
liabilities measured at fair value on a recurring basis, which
include derivatives designated as cash flow hedging instruments,
derivatives not designated as hedging instruments, and other
investments, which consists of money market accounts and mutual
funds held in a rabbi trust established by the Company to fund a
portion of the Companys current and future obligations
under its Executive Retirement Plan, as well as their location
on the Companys consolidated balance sheets as of
June 30, 2010 and 2009 respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010
|
|
|
Fair Value Measurements at June 30, 2010
|
|
|
|
Carrying Value and Balance Sheet Location
|
|
|
Assets (Liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
Prepaid and
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Current
|
|
|
Other
|
|
|
Accrued
|
|
|
Other
|
|
|
Instruments
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
Assets
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Liabilities
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(26.1
|
)
|
|
$
|
|
|
|
$
|
(26.1
|
)
|
|
$
|
|
|
Foreign currency forward contracts (asset)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
Foreign currency forward contracts (liability)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(26.1
|
)
|
|
$
|
|
|
|
$
|
(26.0
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (asset)
|
|
$
|
25.8
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25.8
|
|
|
$
|
|
|
Foreign currency forward contracts (liability)
|
|
|
|
|
|
|
|
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25.8
|
|
|
$
|
|
|
|
$
|
(2.6
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23.2
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments held in a rabbi trust
|
|
$
|
|
|
|
$
|
19.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19.9
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
19.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19.9
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
Fair Value Measurements at June 30, 2009
|
|
|
|
Carrying Value and Balance Sheet Location
|
|
|
Assets (Liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
Prepaid and
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Current
|
|
|
Other
|
|
|
Accrued
|
|
|
Other
|
|
|
Instruments
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
Assets
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Liabilities
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(32.4
|
)
|
|
$
|
|
|
|
$
|
(32.4
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(32.4
|
)
|
|
$
|
|
|
|
$
|
(32.4
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts (asset)
|
|
$
|
0.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.3
|
|
|
$
|
|
|
Foreign currency forward contracts (liability)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(20.3
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(20.3
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.3
|
|
|
$
|
|
|
|
$
|
(20.3
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(20.0
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments held in a rabbi trust
|
|
$
|
|
|
|
$
|
17.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17.9
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
17.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17.9
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys derivatives are valued using a discounted
cash flow analysis that incorporates observable market
parameters, such as interest rate yield curves and currency
rates, classified as Level 2 within the valuation
hierarchy. Derivative valuations incorporate credit risk
adjustments that are necessary to reflect the probability of
default by the counterparty or the Company.
At June 30, 2010, the fair value of the Companys
variable rate term debt was estimated at $744.4 million,
compared to a carrying amount of $753.7 million. At
June 30, 2009, the fair value of the Companys
variable rate term debt was estimated at $791.9 million,
compared to a carrying amount of $816.2 million. Refer to
Note 2 for inputs used to estimate fair value.
Certain nonfinancial assets and liabilities are measured at fair
value on a nonrecurring basis, that is these assets and
liabilities are not measured at fair value on an ongoing basis
but are subject to periodic impairment tests. For the Company,
these items primarily include long- lived assets, goodwill and
other intangible assets. Refer to Note 2 for inputs and
valuation techniques used to measure fair value of these
nonfinancial assets. There was no impairment charge recorded for
fiscal year ended June 30, 2010.
|
|
Note 14.
|
Derivative
Instruments
|
Disclosures
about Derivative Instruments and Hedging
Activities
The Company enters into derivative instruments for risk
management purposes, including derivatives designated as hedging
instruments and those utilized as economic hedges. The Company
uses derivatives to manage exposure to fluctuations in interest
rates and currency exchange rates.
93
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Interest
Rate Swaps
The Company enters into receive-variable, pay-fixed interest
rate swap contracts to hedge a portion of the Companys
forecasted variable-rate interest payments on its underlying
Term Loan A and Term Loan B-1 debt (the Term Debt).
Interest payments on the Term Debt are made quarterly and the
variable rate on the Term Debt is reset at the end of each
fiscal quarter. The interest rate swap contracts are designated
as cash flow hedges and to the extent they are effective in
offsetting the variability of the variable-rate interest
payments, changes in the derivatives fair value are not
included in current earnings but are included in accumulated
other comprehensive income (AOCI) in the accompanying
consolidated balance sheets. These changes in fair value are
subsequently reclassified into earnings as a component of
interest expense each quarter as interest payments are made on
the Term Debt. At June 30, 2010, interest rate swap
contracts with a notional amount of $575.0 million were
outstanding.
In September 2006, the Company settled interest rate swaps
designated as cash flow hedges, which had a fair value of
$11.5 million, and terminated the hedge relationship. The
fair value of the settled swaps is recorded in AOCI and is being
recognized as a reduction to interest expense each quarter over
the remaining term of the Term Debt. At June 30, 2010,
$0.4 million remained in AOCI related to settled interest
rate swaps.
Foreign
Currency Forward Contracts
The Company enters into foreign currency forward contracts,
which typically have maturities between one and fifteen months,
to economically hedge the remeasurement of certain foreign
currency-denominated intercompany loans receivable and other
foreign-currency denominated assets recorded in the
Companys consolidated balance sheets. Remeasurement
represents changes in the expected amount of cash flows to be
received or paid upon settlement of the intercompany loan
receivables and other foreign-currency denominated assets and
liabilities resulting from a change in currency exchange rates.
The Company also enters into foreign currency forward contracts
in order to manage the foreign exchange variability in
forecasted royalty cash flows due to fluctuations in exchange
rates. At June 30, 2010, foreign currency forward contracts
with a notional amount of $391.2 million were outstanding.
Credit
Risk
By entering into derivative instrument contracts, the Company
exposes itself, from time to time, to counterparty credit risk.
Counterparty credit risk is the failure of the counterparty to
perform under the terms of the derivative contract. When the
fair value of a derivative contract is in an asset position, the
counterparty has a liability to the Company, which creates
credit risk for the Company. The Company attempts to minimize
this risk by selecting counterparties with investment grade
credit ratings, limiting its exposure to any single counterparty
and regularly monitoring its market position with each
counterparty.
Credit-Risk
Related Contingent Features
The Companys derivative instruments do not contain any
credit-risk related contingent features.
94
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The following table presents the required quantitative
disclosures for the Companys derivative instruments (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Currency
|
|
|
|
|
|
Interest
|
|
|
Currency
|
|
|
|
|
|
|
|
|
|
Rate
|
|
|
Forward
|
|
|
|
|
|
Rate
|
|
|
Forward
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
Contracts
|
|
|
Total
|
|
|
Swaps
|
|
|
Contracts
|
|
|
Total
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income (effective
portion)
|
|
$
|
(16.4
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(17.0
|
)
|
|
$
|
(39.2
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(39.3
|
)
|
|
|
|
|
Gain (loss) reclassified from AOCI into interest expense, net(1)
|
|
$
|
(21.1
|
)
|
|
$
|
|
|
|
$
|
(21.1
|
)
|
|
$
|
(10.5
|
)
|
|
$
|
|
|
|
$
|
(10.5
|
)
|
|
|
|
|
Gain (loss) reclassified from AOCI into royalty income
|
|
$
|
|
|
|
$
|
(0.8
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Gain (loss) recognized in interest expense, net (ineffective
portion)(2)
|
|
$
|
(0.2
|
)
|
|
$
|
|
|
|
$
|
(0.2
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Gain (loss) recognized in royalty income, net (ineffective
portion)(2)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other operating expense, net
|
|
$
|
|
|
|
$
|
44.6
|
|
|
$
|
44.6
|
|
|
$
|
|
|
|
$
|
43.2
|
|
|
$
|
43.2
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $1.6 million and $1.3 million of gain for the
fiscal year ended June 30, 2010 and 2009, respectively,
related to the terminated hedges. |
|
(2) |
|
The amount of ineffectiveness recorded in earnings during the
fiscal year ended June 30 2009 was not significant. |
|
|
Note 15.
|
Interest
Expense
|
Interest expense consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Term loans, interest rate swaps and other
|
|
$
|
39.4
|
|
|
$
|
47.2
|
|
|
$
|
56.4
|
|
Capital lease obligations
|
|
|
10.2
|
|
|
|
10.1
|
|
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49.6
|
|
|
$
|
57.3
|
|
|
$
|
67.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had $2.9 million and $4.9 million of
unamortized deferred financing costs at June 30, 2010 and
2009, respectively. These fees are classified in other assets,
net and are amortized over the term of the debt into interest
expense on term debt using the effective interest method.
95
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Income before income taxes, classified by source of income, is
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Domestic
|
|
$
|
228.4
|
|
|
$
|
241.4
|
|
|
$
|
245.1
|
|
Foreign
|
|
|
55.9
|
|
|
|
43.4
|
|
|
|
47.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
284.3
|
|
|
$
|
284.8
|
|
|
$
|
293.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) attributable to income from
continuing operations consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
64.7
|
|
|
$
|
57.0
|
|
|
$
|
64.5
|
|
State, net of federal income tax benefit
|
|
|
4.6
|
|
|
|
6.1
|
|
|
|
8.3
|
|
Foreign
|
|
|
11.3
|
|
|
|
9.5
|
|
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
80.6
|
|
|
$
|
72.6
|
|
|
$
|
83.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
14.4
|
|
|
$
|
9.1
|
|
|
$
|
9.8
|
|
State, net of federal income tax benefit
|
|
|
3.1
|
|
|
|
6.2
|
|
|
|
1.3
|
|
Foreign
|
|
|
(0.6
|
)
|
|
|
(3.2
|
)
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16.9
|
|
|
$
|
12.1
|
|
|
$
|
20.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
97.5
|
|
|
$
|
84.7
|
|
|
$
|
103.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The U.S. Federal tax statutory rate reconciles to the
effective tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
U.S. Federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal income tax benefit
|
|
|
3.4
|
|
|
|
2.8
|
|
|
|
2.6
|
|
Costs/(Benefits) and taxes related to foreign operations
|
|
|
1.7
|
|
|
|
(4.7
|
)
|
|
|
7.4
|
|
Foreign tax rate differential
|
|
|
(5.6
|
)
|
|
|
(4.9
|
)
|
|
|
(5.3
|
)
|
Foreign exchange differential on tax benefits
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
(0.6
|
)
|
Change in valuation allowance
|
|
|
(0.6
|
)
|
|
|
1.1
|
|
|
|
(3.1
|
)
|
Change in accrual for tax uncertainties
|
|
|
0.2
|
|
|
|
(1.3
|
)
|
|
|
(0.1
|
)
|
Other
|
|
|
(0.1
|
)
|
|
|
1.0
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
34.3
|
%
|
|
|
29.7
|
%
|
|
|
35.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective tax rate was 34.3% for the fiscal
year ended June 30, 2010, primarily as a result of the
current mix of income from multiple tax jurisdictions and
currency fluctuations. The Companys effective tax rate was
29.7% for the fiscal year ended June 30, 2009, primarily as
a result of the resolution of federal and state audits
96
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
and tax benefits realized from the dissolution of dormant
entities. The Companys effective tax rate was 35.3% for
the fiscal year ended June 30, 2008, primarily as a result
of the resolution of federal, state and international audits,
dissolution of a foreign partnership, and changes in state and
foreign tax law.
Income tax expense includes an decrease in valuation allowance
related to deferred tax assets in foreign countries of
$1.7 million for the year ended June 30, 2010, an
increase of $3.0 million for the year ended June 30,
2009 and a decrease of $7.1 million for the year ended
June 30, 2008. The decrease in valuation allowance for the
year ended June 30, 2010 is a result of changes in the
projected utilization of deferred tax assets in foreign
jurisdictions.
The following table provides the amount of income tax expense
(benefit) allocated to continuing operations and amounts
separately allocated to other items (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Income tax expense from continuing operations
|
|
$
|
97.5
|
|
|
$
|
84.7
|
|
|
$
|
103.4
|
|
Interest rate swaps in accumulated
other comprehensive income (loss)
|
|
|
2.0
|
|
|
|
(11.0
|
)
|
|
|
(5.0
|
)
|
Pension liability in accumulated other comprehensive income
(loss)
|
|
|
(11.3
|
)
|
|
|
(9.4
|
)
|
|
|
(4.5
|
)
|
Adjustments to deferred income taxes related to Brand
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(2.4
|
)
|
Adjustments to the valuation allowance
related to Brand
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(6.5
|
)
|
Stock option tax benefit in additional paid-in capital
|
|
|
(3.5
|
)
|
|
|
(3.3
|
)
|
|
|
(9.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
84.7
|
|
|
$
|
60.5
|
|
|
$
|
75.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred income tax expense
(benefit) attributable to income from continuing operations are
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Deferred income tax expense (exclusive of the effects of
components listed below)
|
|
$
|
15.7
|
|
|
$
|
3.2
|
|
|
$
|
20.3
|
|
Change in valuation allowance (net of amounts allocated as
adjustments to purchase accounting in 2009 and 2008)
|
|
|
(1.7
|
)
|
|
|
3.0
|
|
|
|
(7.1
|
)
|
Change in effective state income tax rate
|
|
|
0.8
|
|
|
|
4.5
|
|
|
|
|
|
Change in effective foreign income tax rate
|
|
|
2.1
|
|
|
|
1.4
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16.9
|
|
|
$
|
12.1
|
|
|
$
|
20.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Trade and notes receivable, principally due to allowance for
doubtful accounts
|
|
$
|
14.6
|
|
|
$
|
12.7
|
|
Accrued employee benefits
|
|
|
63.8
|
|
|
|
49.6
|
|
Unfavorable leases
|
|
|
53.9
|
|
|
|
71.9
|
|
Liabilities not currently deductible for tax
|
|
|
42.2
|
|
|
|
52.7
|
|
Tax loss and credit carryforwards
|
|
|
138.5
|
|
|
|
111.3
|
|
Property and equipment, principally due to differences in
depreciation
|
|
|
53.0
|
|
|
|
61.6
|
|
Other
|
|
|
3.4
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
369.4
|
|
|
|
363.2
|
|
Valuation allowance
|
|
|
(74.6
|
)
|
|
|
(78.7
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
294.8
|
|
|
|
284.5
|
|
Less deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
249.7
|
|
|
|
237.3
|
|
Leases
|
|
|
53.1
|
|
|
|
55.1
|
|
Statutory impairment
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
315.0
|
|
|
|
292.4
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
20.2
|
|
|
$
|
7.9
|
|
|
|
|
|
|
|
|
|
|
For the year ended June 30, 2010, the valuation allowance
decreased by $4.1 million. The decrease in valuation
allowance for the year ended June 30, 2010 is primarily the
result of changes in the projected utilization of deferred tax
assets in foreign jurisdictions and changes in currency exchange
rates.
Changes in valuation allowance are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Beginning balance
|
|
$
|
78.7
|
|
|
$
|
87.9
|
|
|
$
|
97.8
|
|
Change in estimates recorded to deferred income tax expense
|
|
|
(1.7
|
)
|
|
|
3.0
|
|
|
|
(7.1
|
)
|
Change in estimates in valuation allowance recorded to
intangible assets
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(6.5
|
)
|
Changes from foreign currency exchange rates
|
|
|
(3.1
|
)
|
|
|
(11.9
|
)
|
|
|
4.6
|
|
Other
|
|
|
0.7
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
74.6
|
|
|
$
|
78.7
|
|
|
$
|
87.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has no Federal loss carryforwards in the United
States and has State loss carryforwards of $0.2 million,
expiring between 2022 and 2026. In addition, the Company has
foreign loss carryforwards of $298.0 million expiring
between 2011 and 2030, and foreign loss carryforwards of
$229.8 million that do not expire. As of June 30,
2010, the Company has a foreign tax credit carryforward balance
of $50.8 million.
Deferred taxes have not been provided on basis differences
related to investments in foreign subsidiaries. These
differences consist primarily of $147.3 million of
undistributed earnings, which are considered to be permanently
reinvested in the operations of such subsidiaries outside the
United States. Determination of the
98
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
deferred income tax liability on these unremitted earnings is
not practicable. Such liability, if any, depends on
circumstances existing if and when remittance occurs.
The Company had $14.2 million and $15.5 million of
unrecognized tax benefits at June 30, 2010 and 2009,
respectively, which if recognized, would affect the effective
income tax rate. A reconciliation of the beginning and ending
amounts of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Beginning balance
|
|
$
|
15.5
|
|
|
|
18.3
|
|
|
|
18.9
|
|
Additions on tax position related to the current year
|
|
|
1.2
|
|
|
|
4.5
|
|
|
|
3.7
|
|
Additions for tax positions of prior years
|
|
|
2.7
|
|
|
|
1.9
|
|
|
|
0.6
|
|
Reductions for tax positions of prior years
|
|
|
(2.0
|
)
|
|
|
(7.7
|
)
|
|
|
(3.9
|
)
|
Reductions for settlements
|
|
|
(2.0
|
)
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
Reductions due to statute expiration
|
|
|
(1.2
|
)
|
|
|
(1.3
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
14.2
|
|
|
$
|
15.5
|
|
|
$
|
18.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the twelve months beginning July 1, 2010, it is
reasonably possible the Company will reduce unrecognized tax
benefits by a range of approximately $2.0 million to
$3.0 million, primarily as a result of the expiration of
certain statutes of limitations and the completion of certain
tax audits.
The Company recognizes interest and penalties related to
unrecognized tax benefits in income tax expense. The total
amount of accrued interest and penalties at June 30, 2010
and 2009 was $2.9 million and $3.7 million,
respectively. Potential interest and penalties associated with
uncertain tax positions recognized during the years ended
June 30, 2010 and 2009 were $0.6 million, each year,
and $1.5 million for the year ended June 30, 2008. To
the extent interest and penalties are not assessed with respect
to uncertain tax positions, amounts accrued will be reduced and
reflected as a reduction of the overall income tax provision.
The Company files income tax returns, including returns for its
subsidiaries, with federal, state, local and foreign
jurisdictions. Generally the Company is subject to routine
examination by taxing authorities in these jurisdictions,
including significant international tax jurisdictions, such as
the United Kingdom, Germany, Spain, Switzerland, Singapore and
Mexico. None of the foreign jurisdictions should be individually
material. The Company is currently under audit by the
U.S. Internal Revenue Service for the years ended
June 30, 2008 and June 30, 2007. The Company also has
various state and foreign income tax returns in the process of
examination. From time to time, these audits result in proposed
assessments where the ultimate resolution may result in the
Company owing additional taxes. The Company believes that its
tax positions comply with applicable tax law and that it has
adequately provided for these matters.
|
|
Note 17.
|
Related
Party Transactions
|
The Company paid $1.1 million in registration expenses
relating to the secondary offerings during the year ended
June 30, 2008. This amount included registration and filing
fees, printing fees, external accounting fees, all reasonable
fees and disbursements of one law firm selected by the Sponsors
and all expenses related to the road show for the secondary
offerings.
As of June 30, 2010, the Company leased or subleased 1,145
restaurant properties to franchisees and non-restaurant
properties to third parties under capital and operating leases.
The building and leasehold improvements of the leases with
franchisees are usually accounted for as direct financing leases
and recorded as a net investment in property leased to
franchisees, while the land is recorded as operating leases.
Most leases to franchisees provide for
99
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
fixed payments with contingent rent when sales exceed certain
levels. Lease terms generally range from 10 to 20 years.
The franchisees bear the cost of maintenance, insurance and
property taxes.
Property and equipment, net leased to franchisees and other
third parties under operating leases was as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
$
|
198.3
|
|
|
$
|
195.8
|
|
Buildings and improvements
|
|
|
79.6
|
|
|
|
114.0
|
|
Restaurant equipment
|
|
|
8.1
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
286.0
|
|
|
$
|
314.9
|
|
Accumulated depreciation
|
|
|
(70.5
|
)
|
|
|
(40.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
215.5
|
|
|
$
|
274.0
|
|
|
|
|
|
|
|
|
|
|
Net investment in property leased to franchisees and other third
parties under direct financing leases was as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Future minimum rents to be received
|
|
$
|
316.6
|
|
|
$
|
306.4
|
|
Estimated unguaranteed residual value
|
|
|
3.7
|
|
|
|
4.0
|
|
Unearned income
|
|
|
(172.3
|
)
|
|
|
(166.2
|
)
|
Allowance on direct financing leases
|
|
|
(0.6
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
147.4
|
|
|
$
|
144.0
|
|
Current portion included within trade receivables
|
|
|
(8.9
|
)
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
|
|
|
Net investment in property leased to franchisees
|
|
$
|
138.5
|
|
|
$
|
135.3
|
|
|
|
|
|
|
|
|
|
|
In addition, the Company is the lessee on land, building,
equipment, office space and warehouse leases, including 259
restaurant buildings under capital leases. Initial lease terms
are generally 10 to 20 years. Most leases provide for fixed
monthly payments. Many of these leases provide for future rent
escalations and renewal options. Certain leases require
contingent rent, determined as a percentage of sales, generally
when annual sales exceed specific levels. Most leases also
obligate the Company to pay the cost of maintenance, insurance
and property taxes.
As of June 30, 2010, future minimum lease receipts and
commitments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Receipts
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
|
|
|
Lease Commitments(a)
|
|
|
|
Financing
|
|
|
Operating
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
2011
|
|
$
|
29.9
|
|
|
$
|
67.8
|
|
|
$
|
(15.2
|
)
|
|
$
|
(161.7
|
)
|
2012
|
|
|
29.3
|
|
|
|
62.9
|
|
|
|
(14.9
|
)
|
|
|
(156.9
|
)
|
2013
|
|
|
28.8
|
|
|
|
60.3
|
|
|
|
(14.8
|
)
|
|
|
(144.7
|
)
|
2014
|
|
|
27.6
|
|
|
|
58.2
|
|
|
|
(14.8
|
)
|
|
|
(136.5
|
)
|
2015
|
|
|
27.0
|
|
|
|
51.3
|
|
|
|
(12.8
|
)
|
|
|
(125.6
|
)
|
Thereafter
|
|
|
174.0
|
|
|
|
335.3
|
|
|
|
(61.6
|
)
|
|
|
(729.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
316.6
|
|
|
$
|
635.8
|
|
|
$
|
(134.1
|
)
|
|
$
|
(1,455.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Lease commitments under operating leases have not been reduced
by minimum sublease rentals of $343.1 due in the future under
noncancelable subleases. |
100
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The Companys total minimum obligations under capital
leases are $134.1 million and $138.1 million as of
June 30, 2010 and 2009, respectively. Of these amounts,
$63.2 million and $67.5 million represents interest as
of June 30, 2010 and 2009, respectively. The remaining
balance of $70.9 million and $70.6 million is
reflected as capital lease obligations recorded in the
Companys consolidated balance sheet, of which
$5.6 million and $4.8 million is classified as current
portion of long-term debt and capital leases as of June 30,
2010 and 2009, respectively.
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Rental income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
$
|
73.1
|
|
|
$
|
69.9
|
|
|
$
|
78.9
|
|
Contingent
|
|
|
17.9
|
|
|
|
20.6
|
|
|
|
20.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rental income
|
|
|
91.0
|
|
|
|
90.5
|
|
|
|
99.6
|
|
Earned income on direct financing leases
|
|
|
22.7
|
|
|
|
23.0
|
|
|
|
22.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property revenues
|
|
$
|
113.7
|
|
|
$
|
113.5
|
|
|
$
|
121.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense associated with the lease commitments is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Rental expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
$
|
168.9
|
|
|
$
|
166.5
|
|
|
$
|
150.2
|
|
Contingent
|
|
|
7.4
|
|
|
|
7.7
|
|
|
|
7.4
|
|
Amortization of favorable and unfavorable leases contracts, net
|
|
|
(15.0
|
)
|
|
|
(18.2
|
)
|
|
|
(24.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rental expense
|
|
$
|
161.3
|
|
|
$
|
156.0
|
|
|
$
|
133.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable leases are amortized on a straight line basis over the
remaining lease term for a period of up to 20 years, with
amortization expense included in occupancy and other operating
costs and property expenses in the consolidated statements of
income. Unfavorable leases are amortized over a period of up to
20 years as a reduction in occupancy and other operating
costs and property expenses in the consolidated statements of
income.
Amortization of favorable leases totaled $2.6 million,
$2.6 million and $1.8 million for the years ended
June 30, 2010, 2009 and 2008, respectively. Amortization of
unfavorable leases totaled $17.6 million,
$20.8 million and $26.0 million for the years ended
June 30, 2010, 2009 and 2008, respectively.
Favorable leases, net of accumulated amortization totaled
$34.4 million and $36.5 million as of June 30,
2010 and June 30, 2009, respectively, and are classified as
intangible assets in the accompanying consolidated balance
sheets. Unfavorable leases, net of accumulated amortization
totaled $127.3 million and $155.5 million as of
June 30, 2010 and June 30, 2009, respectively, and are
classified within other liabilities in the accompanying
consolidated balance sheets.
As of June 30, 2010, estimated future amortization expense
of favorable lease contracts subject to amortization for each of
the years ended June 30 is $2.6 million in 2011,
$2.5 million in 2012, $2.6 million in 2013,
$2.4 million in 2014, $2.3 million in 2015 and
$22.1 million thereafter. As of June 30, 2010,
estimated future amortization expense of unfavorable lease
contracts subject to amortization for each of the years ended
June 30 is $15.1 million in 2011, $14.1 million in
2012, $13.3 million in 2013, $12.4 million in 2014,
$11.2 million in 2015 and $61.3 million thereafter.
101
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 19.
|
Stockholders
Equity
|
Dividends
Paid
During each of the years ended June 30, 2010, 2009, and
2008, the Company declared four quarterly cash dividends of
$0.0625 per share on its common stock. Total dividends paid by
the Company during each of the years ended June 30, 2010,
2009, and 2008 was $34.2 million, $34.1 million, and
$34.2 million, respectively.
Accumulated
Other Comprehensive Income (Loss)
The following table displays the change in the components of
accumulated other comprehensive income (loss) (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
Comprehensive
|
|
|
|
Derivatives
|
|
|
Pensions
|
|
|
Translation
|
|
|
Income (Loss)
|
|
|
Balances at June 30, 2007
|
|
$
|
7.6
|
|
|
$
|
4.5
|
|
|
$
|
(4.6
|
)
|
|
$
|
7.5
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
(1.7
|
)
|
Net change in fair value of derivatives, net of tax of
$3.9 million
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(6.4
|
)
|
Amounts reclassified to earnings during the period from
terminated swaps, net of tax $1.1 million
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.3
|
)
|
Pension and post-retirement benefit plans, net of tax of
$4.5 million
|
|
|
|
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2008
|
|
|
(0.1
|
)
|
|
|
(2.0
|
)
|
|
|
(6.3
|
)
|
|
|
(8.4
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(6.0
|
)
|
|
|
(6.0
|
)
|
Net change in fair value of derivatives, net of tax of
$10.6 million
|
|
|
(16.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(16.8
|
)
|
Amounts reclassified to earnings during the period from
terminated swaps, net of tax $0.4 million
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
Pension and post-retirement benefit plans, net of tax of
$9.2 million
|
|
|
|
|
|
|
(13.8
|
)
|
|
|
|
|
|
|
(13.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2009
|
|
|
(17.8
|
)
|
|
|
(15.8
|
)
|
|
|
(12.3
|
)
|
|
|
(45.9
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(4.4
|
)
|
|
|
(4.4
|
)
|
Net change in fair value of derivatives, net of tax of
$2.6 million
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Amounts reclassified to earnings during the period from
terminated swaps, net of tax $0.6 million
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.0
|
)
|
Pension and post-retirement benefit plans, net of tax of
$11.3 million
|
|
|
|
|
|
|
(19.7
|
)
|
|
|
|
|
|
|
(19.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2010
|
|
$
|
(14.7
|
)
|
|
$
|
(35.5
|
)
|
|
$
|
(16.7
|
)
|
|
$
|
(66.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 20.
|
Pension
and Post Retirement Medical Benefits
|
Pension
Benefits
The Company sponsors noncontributory defined benefit pension
plans for its salaried employees in the United States (the
U.S. Pension Plans) and certain employees in
the United Kingdom, Germany and Switzerland (the
International Pension Plans). Effective
December 31, 2005, all benefits accrued under the
U.S. Pension Plans were frozen at the benefit level
attained as of that date.
102
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Postretirement
Medical Benefits
The Companys postretirement medical plan (the
U.S. Medical Plan) provides medical, dental and
life insurance benefits to U.S. salaried retirees hired
prior to June 30, 2001 and who were age 40 or older as
of June 30, 2001, and their eligible dependents. The amount
of retirement health care coverage an employee will receive
depends upon the length of credited service with the Company,
multiplied by an annual factor to determine the value of the
post-retirement health care coverage.
Obligations
and Funded Status
The following table sets forth the change in benefit
obligations, fair value of plan assets and amounts recognized in
the balance sheets for the U.S. Pension Plans,
International Pension Plans and U.S. Medical Plan (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
International
|
|
|
U.S.
|
|
|
|
Pension Plan
|
|
|
Pension Plans
|
|
|
Medical Plan
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
146.0
|
|
|
$
|
147.8
|
|
|
$
|
23.6
|
|
|
$
|
27.0
|
|
|
$
|
22.1
|
|
|
$
|
22.3
|
|
Service cost
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
|
|
2.1
|
|
|
|
0.4
|
|
|
|
0.6
|
|
Interest cost
|
|
|
9.1
|
|
|
|
11.0
|
|
|
|
1.3
|
|
|
|
1.6
|
|
|
|
1.3
|
|
|
|
1.7
|
|
Actuarial (gains) losses
|
|
|
29.0
|
|
|
|
(6.4
|
)
|
|
|
5.6
|
|
|
|
(3.3
|
)
|
|
|
2.7
|
|
|
|
(1.8
|
)
|
Employee Contributions
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
Part D Rx Subsidy Received
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Foreign currency exchange rate changes
|
|
|
|
|
|
|
|
|
|
|
(2.3
|
)
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(5.1
|
)
|
|
|
(6.4
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
179.0
|
|
|
$
|
146.0
|
|
|
$
|
29.6
|
|
|
$
|
23.6
|
|
|
$
|
26.0
|
|
|
$
|
22.1
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
97.9
|
|
|
$
|
99.0
|
|
|
$
|
16.6
|
|
|
$
|
20.8
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
14.6
|
|
|
|
(19.5
|
)
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
2.3
|
|
|
|
24.8
|
|
|
|
1.2
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
Employee Contributions
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
Actuarial gain/loss
|
|
|
|
|
|
|
|
|
|
|
1.7
|
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(5.1
|
)
|
|
|
(6.4
|
)
|
|
|
(0.5
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange rate changes
|
|
|
|
|
|
|
|
|
|
|
(2.0
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
109.7
|
|
|
$
|
97.9
|
|
|
$
|
18.3
|
|
|
$
|
16.6
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of plan
|
|
$
|
(69.3
|
)
|
|
$
|
(48.1
|
)
|
|
$
|
(11.3
|
)
|
|
$
|
(7.0
|
)
|
|
$
|
(26.0
|
)
|
|
$
|
(22.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
(1.1
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(1.0
|
)
|
Noncurrent liabilities
|
|
|
(68.2
|
)
|
|
|
(47.1
|
)
|
|
|
(11.2
|
)
|
|
|
(6.9
|
)
|
|
|
(25.0
|
)
|
|
|
(21.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension liability, end of fiscal year
|
|
$
|
(69.3
|
)
|
|
$
|
(48.1
|
)
|
|
$
|
(11.3
|
)
|
|
$
|
(7.0
|
)
|
|
$
|
(26.0
|
)
|
|
$
|
(22.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income
(AOCI)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized actuarial loss (gain)
|
|
$
|
55.1
|
|
|
$
|
31.2
|
|
|
$
|
2.7
|
|
|
$
|
(1.3
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AOCI (before tax)
|
|
$
|
55.1
|
|
|
$
|
31.2
|
|
|
$
|
2.7
|
|
|
$
|
(1.3
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Additional
year-end information for the U.S. Pension Plans, International
Pension Plans and U.S. Medical Plan with accumulated benefit
obligations in excess of plan assets
The following sets forth the projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for
the U.S. Pension Plans, International Pension Plans and
U.S. Medical Plan with accumulated benefit obligations in
excess of plan assets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
International
|
|
|
U.S.
|
|
|
|
Pension Plan
|
|
|
Pension Plans
|
|
|
Medical Plan
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Projected benefit obligation
|
|
$
|
179.0
|
|
|
$
|
146.0
|
|
|
$
|
8.8
|
|
|
$
|
7.3
|
|
|
$
|
26.0
|
|
|
$
|
22.1
|
|
Accumulated benefit obligation
|
|
$
|
179.0
|
|
|
$
|
146.0
|
|
|
$
|
1.6
|
|
|
$
|
6.4
|
|
|
$
|
26.0
|
|
|
$
|
22.1
|
|
Fair value of plan assets
|
|
$
|
109.7
|
|
|
$
|
97.9
|
|
|
$
|
1.3
|
|
|
$
|
1.3
|
|
|
$
|
|
|
|
$
|
|
|
As of June 30, 2010, for International Pension Plans,
accumulated benefit obligations in excess of plan assets relates
to the Switzerland pension plan.
Components
of Net Periodic Benefit Cost
A summary of the components of net periodic benefit cost for the
U.S. Pension Plans and International Pension Plans and
U.S. Medical Plan is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
U.S. Medical
|
|
|
|
U.S. Pension Plan
|
|
|
Pension Plans
|
|
|
Plan
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.3
|
|
|
$
|
1.3
|
|
|
$
|
1.6
|
|
|
$
|
0.4
|
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
Interest cost
|
|
|
9.1
|
|
|
|
8.8
|
|
|
|
8.7
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
1.2
|
|
|
|
1.4
|
|
|
|
1.3
|
|
|
|
1.3
|
|
Expected return on plan assets
|
|
|
(9.6
|
)
|
|
|
(8.8
|
)
|
|
|
(8.2
|
)
|
|
|
(0.4
|
)
|
|
|
(0.5
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized net actuarial (gain) loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
Amortization of prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
(0.5
|
)
|
|
$
|
|
|
|
$
|
0.5
|
|
|
$
|
1.7
|
|
|
$
|
1.6
|
|
|
$
|
1.2
|
|
|
$
|
1.4
|
|
|
$
|
1.6
|
|
|
$
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Changes in Plan Assets and Projected Benefit Obligation
Recognized in Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension
|
|
|
|
|
|
U.S. Medical
|
|
|
|
Plans
|
|
|
International Pension Plans
|
|
|
Plans
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Unrecognized actuarial (gain) loss
|
|
$
|
23.9
|
|
|
$
|
24.1
|
|
|
$
|
4.0
|
|
|
$
|
0.4
|
|
|
$
|
2.7
|
|
|
$
|
(1.7
|
)
|
Recognized net actuarial gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in OCI
|
|
$
|
23.9
|
|
|
$
|
24.1
|
|
|
$
|
4.0
|
|
|
$
|
0.4
|
|
|
$
|
3.1
|
|
|
$
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, for the combined U.S. and
international pension plans, the Company expected to amortize
during fiscal 2011 from accumulated other comprehensive income/
(loss) into net periodic pension cost an estimated
$2.5 million of net actuarial loss.
104
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Assumptions
The weighted-average assumptions used in computing the benefit
obligations of the U.S. Pension Plans and U.S. Medical
Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
U.S. Medical
|
|
|
U.S. Pension Plan
|
|
Pension Plans
|
|
Plan
|
|
|
2010
|
|
2009
|
|
2008
|
|
2010
|
|
2009
|
|
2008
|
|
2010
|
|
2009
|
|
2008
|
|
Discount rate as of year-end
|
|
|
5.20
|
%
|
|
|
6.37
|
%
|
|
|
6.10
|
%
|
|
|
5.17
|
%
|
|
|
6.00
|
%
|
|
|
6.10
|
%
|
|
|
5.20
|
%
|
|
|
6.37
|
%
|
|
|
6.10
|
%
|
Range of compensation rate increase
|
|
|
N/A*
|
|
|
|
N/A*
|
|
|
|
N/A*
|
|
|
|
3.71
|
%
|
|
|
3.53
|
%
|
|
|
4.15
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
* |
|
The Company curtailed the U.S Pension Plans during the year
ended June 30, 2006. |
The discount rate used in the calculation of the benefit
obligation at June 30, 2010 for the U.S. Plans is
derived from a yield curve comprised of the yields of an index
of 250 equally-weighted corporate bonds, rated AA or better by
Moodys, which approximates the duration of the
U.S. Plans.
The weighted-average assumptions used in computing the net
periodic benefit cost of the U.S. Pension Plans and the
U.S. Medical Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
U.S. Medical
|
|
|
U.S. Pension Plans
|
|
Pension Plans
|
|
Plan
|
|
|
2010
|
|
2009
|
|
2008
|
|
2010
|
|
2009
|
|
2008
|
|
2010
|
|
2009
|
|
2008
|
|
Discount rate
|
|
|
6.37
|
%
|
|
|
6.10
|
%
|
|
|
6.07
|
%
|
|
|
6.07
|
%
|
|
|
5.89
|
%
|
|
|
5.39
|
%
|
|
|
6.37
|
%
|
|
|
6.10
|
%
|
|
|
6.07
|
%
|
Range of compensation rate increase
|
|
|
N/A
|
*
|
|
|
N/A
|
*
|
|
|
N/A
|
*
|
|
|
3.57
|
%
|
|
|
3.88
|
%
|
|
|
3.61
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected long-term rate of return on plan assets
|
|
|
7.50
|
%
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
6.42
|
%
|
|
|
6.51
|
%
|
|
|
7.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
* |
|
The Company curtailed the U.S Pension Plans during the year
ended June 30, 2006. |
The expected long-term rate of return on plan assets is
determined by expected future returns on the asset categories in
target investment allocation. These expected returns are based
on historical returns for each assets category adjusted
for an assessment of current market conditions.
The assumed healthcare cost trend rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Healthcare cost trend rate assumed for next year
|
|
|
8.00
|
%
|
|
|
8.50
|
%
|
|
|
9.00
|
%
|
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2020
|
|
|
|
2016
|
|
|
|
2016
|
|
Assumed healthcare cost trend rates do not have a significant
effect on the amounts reported for the postretirement healthcare
plans, since a one-percentage point increase or decrease in the
assumed healthcare cost trend rate would have a minimal effect
on service and interest cost and the postretirement obligation.
105
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Plan
Assets
The fair value of major category of pension plan assets for
U.S. and International Pension Plans at June 30, 2010
is presented below:
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
International
|
|
|
|
Pension Plan
|
|
|
Pension Plans
|
|
|
|
2010
|
|
|
2010
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
Cash and Cash equivalents(a)
|
|
$
|
7.7
|
|
|
$
|
0.3
|
|
Equity Securities(b):
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
49.2
|
|
|
|
3.2
|
|
Non U.S.
|
|
|
11.8
|
|
|
|
8.3
|
|
Fixed Income(b) :
|
|
|
|
|
|
|
|
|
Corporate Bonds and Notes
|
|
|
20.6
|
|
|
|
|
|
U.S. Government Treasuries
|
|
|
6.3
|
|
|
|
|
|
International Debt
|
|
|
4.9
|
|
|
|
|
|
Mortgage-Backed Securities
|
|
|
4.5
|
|
|
|
|
|
U.S. Government Agencies
|
|
|
1.9
|
|
|
|
|
|
Asset-Backed Securities
|
|
|
1.0
|
|
|
|
|
|
Municipal Bonds
|
|
|
0.8
|
|
|
|
|
|
Non- U.S. Bonds
|
|
|
0.2
|
|
|
|
6.2
|
|
Other(c )
|
|
|
0.8
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
Total fair value of plan assets
|
|
$
|
109.7
|
|
|
$
|
18.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Short-term investments in money market funds |
|
(b) |
|
Securities held in common commingled trust funds |
|
(c) |
|
Other securities held in common commingled trust funds including
interest rate swaps and foreign currency contracts. |
The Company categorizes plan assets within a three level fair
value hierarchy as described in Note 2. Pooled funds are
primarily classified as Level 2 and are valued using net
asset values of participation units held in common collective
trusts, as reported by the managers of the trusts and as
supported by the unit prices of actual purchase and sale
transactions. The fair value of plan assets for
U.S. Pension Plan and International Pension Plans as of
June 30, 2009 was $97.9 million and
$16.6 million, respectively.
The investment objective for the U.S. Pension Plans and
International Pension Plans is to secure the benefit obligations
to participants while minimizing costs to the Company. The goal
is to optimize the long-term return on plan assets at an average
level of risk. The portfolio of equity securities, currently
targeted at 60% for U.S. Pension Plan and 70% for
International Plan, includes primarily large-capitalization
companies with a mix of small-capitalization U.S. and
foreign companies well diversified by industry. The portfolio of
fixed income asset allocation, currently targeted at 40% for
U.S. Plan and 30% for International Plan, is actively
managed and consists of long duration fixed income securities
primarily in U.S. debt markets and non
U.S. bonds with long-term maturities that help to reduce
exposure to interest variation and to better correlate asset
maturities with obligations.
Estimated
Future Cash Flows
Total contributions to the U.S. Pension Plans and
International Pension Plans were $3.5 million,
$25.7 million and $6.1 million for the years ended
June 30, 2010, 2009 and 2008, respectively.
106
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The U.S. and International Pension Plans and
U.S. Medical Plans expected contributions to be paid
in the next fiscal year, the projected benefit payments for each
of the next five fiscal years and the total aggregate amount for
the subsequent five fiscal years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
International
|
|
U.S.
|
|
|
Pension Plans
|
|
Pension Plans
|
|
Medical Plan*
|
|
Estimated Net Contributions During Fiscal 2011:
|
|
$
|
6.1
|
|
|
$
|
0.6
|
|
|
$
|
1.0
|
|
Estimated Future Year Benefit Payments During Years Ended
June 30,:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
6.4
|
|
|
$
|
0.2
|
|
|
$
|
1.0
|
|
2012
|
|
$
|
6.7
|
|
|
$
|
0.3
|
|
|
$
|
1.3
|
|
2013
|
|
$
|
7.1
|
|
|
$
|
0.3
|
|
|
$
|
1.4
|
|
2014
|
|
$
|
7.6
|
|
|
$
|
0.2
|
|
|
$
|
1.6
|
|
2015
|
|
$
|
8.2
|
|
|
$
|
0.2
|
|
|
$
|
1.7
|
|
2016 - 2020
|
|
$
|
51.9
|
|
|
$
|
2.4
|
|
|
$
|
10.4
|
|
|
|
Note 21.
|
Other
Operating (Income) Expenses, Net
|
Other operating (income) expenses, net, consist of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net (gains) losses on disposal of assets restaurant closures and
refranchisings
|
|
$
|
(2.4
|
)
|
|
$
|
(8.5
|
)
|
|
$
|
(9.8
|
)
|
Litigation settlements and reserves, net
|
|
|
(0.2
|
)
|
|
|
0.2
|
|
|
|
1.1
|
|
Foreign exchange net (gains) losses
|
|
|
(3.3
|
)
|
|
|
8.4
|
|
|
|
2.3
|
|
Other, net
|
|
|
5.2
|
|
|
|
1.8
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating (income) expense, net
|
|
$
|
(0.7
|
)
|
|
$
|
1.9
|
|
|
$
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $5.2 million of other, net within other operating
(income) expense, net for fiscal year ended June 30, 2010
includes a $2.4 million charge related to consumption tax
in EMEA, $1.5 million of severance costs related to
refranchisings in Germany, $1.0 million of franchise
workout costs and a $0.7 million contract termination fee,
partially offset by $1.1 million of income recorded in
connection with the expiration of gift cards in the U.S.
The $1.8 million of other, net within other operating
(income) expense, net for the fiscal year ended June 30,
2009 consists primarily of $1.7 million of franchise
workout costs.
The $5.8 million of other, net within other operating
(income) expenses, net for the year ended June 30, 2008
includes $3.1 million of franchise workout costs and
$1.9 million of settlement losses associated with the
acquisition of franchise restaurants.
|
|
Note 22.
|
Commitments
and Contingencies
|
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
107
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
to acquire possession of the related restaurants, subject to
landlord consent. The aggregate contingent obligation arising
from these assigned lease guarantees, excluding contingent
rents, was $71.5 million as of June 30, 2010, expiring
over an average period of seven years.
Other commitments arising out of normal business operations were
$9.7 million as of June 30, 2010, of which
$8.6 million was guaranteed under bank guarantee
arrangements.
Letters
of Credit
As of June 30, 2010, the Company had $34.2 million in
irrevocable standby letters of credit outstanding, which were
issued primarily to certain insurance carriers to guarantee
payments of deductibles for various insurance programs, such as
health and commercial liability insurance. Such letters of
credit are secured by the collateral under the Companys
revolving credit facility. As of June 30, 2010, no amounts
had been drawn on any of these irrevocable standby letters of
credit.
As of June 30, 2010, the Company had posted bonds totaling
$3.1 million, which related to certain utility deposits and
capital projects.
Vendor
Relationships
During the year ended June 30, 2000, the Company entered
into long-term, exclusive contracts with The
Coca-Cola
Company and with Dr Pepper/Seven Up, Inc. to supply the Company
and its franchise restaurants with their products and obligating
Burger
King®
restaurants in the United States to purchase a specified number
of gallons of soft drink syrup. These volume commitments are not
subject to any time limit. As of June 30, 2010, the Company
estimates that it will take approximately 14 years to
complete the
Coca-Cola
and Dr Pepper/Seven Up, Inc. purchase commitments. In the event
of early termination of these arrangements, the Company may be
required to make termination payments that could be material to
the Companys results of operations and financial position.
Additionally, in connection with these contracts, the Company
received upfront fees, which are being amortized over the term
of the contracts. As of June 30, 2010 and 2009, the
deferred amounts totaled $14.9 million and
$16.1 million, respectively. These deferred amounts are
amortized as a reduction to food, paper and product costs in the
accompanying consolidated statements of income.
As of June 30, 2010, the Company had $9.2 million in
aggregate contractual obligations for the year ended
June 30, 2010 with vendors providing information technology
and telecommunication services under multiple arrangements.
These contracts extend up to five years with a termination fee
ranging from $0.5 million to $1.9 million during those
years. The Company also has separate arrangements for
telecommunication services with an aggregate contractual
obligation of $12.1 million over five years with no early
termination fee.
The Company also enters into commitments to purchase
advertising. As of June 30, 2010, commitments to purchase
advertising totaled $60.7 million and run through December
2012.
Litigation
On July 30, 2008, the Company was sued by four Florida
franchisees over its decision to mandate extended operating
hours in the United States. The plaintiffs seek damages,
declaratory relief and injunctive relief. The court dismissed
the plaintiffs original complaint in November 2008. In
December 2008, the plaintiffs filed an amended complaint. In
August 2010, the court entered an order reaffirming the legal
bases for dismissal of the original complaint, again holding
that BKC had the authority under its franchise agreements to
mandate extended operating hours. However, BKCs motion to
dismiss the plaintiffs amended complaint is still before
the court.
On September 10, 2008, a class action lawsuit was filed
against the Company in the United States District Court for the
Northern District of California. The complaint alleged that all
96 Burger King restaurants in California leased by the Company
and operated by franchisees violate accessibility requirements
under federal and state law.
108
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
In September 2009, the court issued a decision on the
plaintiffs motion for class certification. In its
decision, the court limited the class action to the 10
restaurants visited by the named plaintiffs, with a separate
class of plaintiffs for each of the 10 restaurants and 10
separate trials. In March 2010, the Company agreed to settle the
lawsuit with respect to the 10 restaurants and, in July 2010,
the court gave final approval to the settlement. In April 2010,
the Company received a demand from the law firm representing the
plaintiffs in the class action lawsuit, notifying the Company
that the firm was prepared to bring a class action covering the
other restaurants. If a lawsuit is filed, the Company intends to
vigorously defend against all claims in the lawsuit, but the
Company is unable to predict the ultimate outcome of this
litigation.
The National Franchisee Association, Inc. and several individual
franchisees filed class action lawsuits on November 10,
2009, and June 15, 2010, respectively, claiming to
represent Burger King franchisees. The lawsuits seek a judicial
declaration that the franchise agreements between BKC and its
franchisees do not obligate the franchisees to comply with
maximum price points set by BKC for products on the BK Value
Menu sold by the franchisees, specifically the
1/4
lb. Double Cheeseburger and the Buck Double. The lawsuit filed
by the individual franchisees also seeks monetary damages for
financial loss incurred by franchisees who were required to sell
those products for no more than $1.00. In June 2010, the court
entered an order in the NFA case granting in
part BKCs motion to dismiss. The court held that BKC
had the authority under its franchise agreements to set maximum
prices but that, for purposes of a motion to dismiss, the NFA
had asserted a plausible claim that BKCs
decision may not have been made in good faith. Both cases have
been consolidated in front of the same judge. While the Company
believes its decision to put the
1/4
lb. Double Cheeseburger and the Buck Double on the BK
Value Menu was made in good faith, the Company is unable to
predict the ultimate outcome of these cases.
From time to time, the Company is involved in other legal
proceedings arising in the ordinary course of business relating
to matters including, but not limited to, disputes with
franchisees, suppliers, employees and customers, as well as
disputes over our intellectual property.
Other
The Company carries insurance programs to cover claims such as
workers compensation, general liability, automotive
liability, executive risk and property, and is self-insured for
healthcare claims for eligible participating employees. Through
the use of insurance program deductibles (ranging from
$0.1 million to $2.5 million) and self insurance, the
Company retains a significant portion of the expected losses
under these programs.
Insurance reserves have been recorded based on the
Companys estimate of the anticipated ultimate costs to
settle all claims, both reported and incurred-but-not-reported
(IBNR), and such reserves include judgments and independent
actuarial assumptions about economic conditions, the frequency
or severity of claims and claim
109
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
development patterns, and claim reserve, management and
settlement practices. As of June 30, 2010 and 2009, the
Company had $37.1 million and $39.5 million,
respectively, in accrued liabilities for such claims.
|
|
Note 23.
|
Segment
Reporting
|
The Company operates in the fast food hamburger category of the
quick service segment of the restaurant industry. Revenues
include retail sales at Company restaurants, franchise revenues,
consisting of royalties based on a percentage of sales reported
by franchise restaurants and franchise fees paid by franchisees,
and property revenues. The business is managed in three distinct
geographic segments: (1) United States and Canada;
(2) Europe, the Middle East and Africa and Asia Pacific
(EMEA/APAC); and (3) Latin America.
The unallocated amounts reflected in certain tables below
include corporate support costs in areas such as facilities,
finance, human resources, information technology, legal,
marketing and supply chain management, which benefit all of the
Companys geographic segments and system-wide restaurants
and are not allocated specifically to any of the geographic
segments.
The following tables present revenues, income from operations,
depreciation and amortization, total assets, long-lived assets
and capital expenditures by geographic segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
1,695.2
|
|
|
$
|
1,743.0
|
|
|
$
|
1,578.5
|
|
EMEA/APAC
|
|
|
698.0
|
|
|
|
687.4
|
|
|
|
760.8
|
|
Latin America
|
|
|
109.0
|
|
|
|
107.0
|
|
|
|
115.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,502.2
|
|
|
$
|
2,537.4
|
|
|
$
|
2,454.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other than the United States and Germany, no other individual
country represented 10% or more of the Companys total
revenues. Revenues in the United States totaled
$1.5 billion, $1.6 billion and $1.4 billion for
the years ended June 30, 2010, 2009 and 2008, respectively.
Revenues in Germany totaled $281.9 million,
$307.2 million and $349.5 million for the years ended
June 30, 2010, 2009 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Income from Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
346.7
|
|
|
$
|
345.7
|
|
|
$
|
349.7
|
|
EMEA/APAC
|
|
|
84.6
|
|
|
|
83.6
|
|
|
|
91.8
|
|
Latin America
|
|
|
38.2
|
|
|
|
37.8
|
|
|
|
41.4
|
|
Unallocated
|
|
|
(136.6
|
)
|
|
|
(127.7
|
)
|
|
|
(128.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from operations
|
|
|
332.9
|
|
|
|
339.4
|
|
|
|
354.2
|
|
Interest expense, net
|
|
|
48.6
|
|
|
|
54.6
|
|
|
|
61.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
284.3
|
|
|
|
284.8
|
|
|
|
293.0
|
|
Income tax expense
|
|
|
97.5
|
|
|
|
84.7
|
|
|
|
103.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
186.8
|
|
|
$
|
200.1
|
|
|
$
|
189.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
72.8
|
|
|
$
|
63.4
|
|
|
$
|
64.0
|
|
EMEA/APAC
|
|
|
18.0
|
|
|
|
15.7
|
|
|
|
14.1
|
|
Latin America
|
|
|
4.9
|
|
|
|
5.6
|
|
|
|
4.5
|
|
Unallocated
|
|
|
16.0
|
|
|
|
13.4
|
|
|
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
111.7
|
|
|
$
|
98.1
|
|
|
$
|
95.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
2,047.6
|
|
|
$
|
2,004.3
|
|
EMEA/APAC
|
|
|
592.5
|
|
|
|
598.2
|
|
Latin America
|
|
|
66.8
|
|
|
|
59.5
|
|
Unallocated
|
|
|
40.3
|
|
|
|
45.1
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,747.2
|
|
|
$
|
2,707.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Long-Lived Assets:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
960.7
|
|
|
$
|
945.0
|
|
EMEA/APAC
|
|
|
113.6
|
|
|
|
121.3
|
|
Latin America
|
|
|
38.0
|
|
|
|
37.1
|
|
Unallocated
|
|
|
40.3
|
|
|
|
45.1
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
1,152.6
|
|
|
$
|
1,148.5
|
|
|
|
|
|
|
|
|
|
|
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, 2010 and 2009. Long-lived
assets in the United States, including the unallocated portion,
totaled $923.2 million and $917.1 million as of
June 30, 2010 and 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$
|
99.9
|
|
|
$
|
146.9
|
|
|
$
|
121.9
|
|
EMEA/APAC
|
|
|
30.9
|
|
|
|
30.7
|
|
|
|
28.6
|
|
Latin America
|
|
|
5.4
|
|
|
|
7.6
|
|
|
|
9.4
|
|
Unallocated
|
|
|
14.1
|
|
|
|
18.8
|
|
|
|
18.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
150.3
|
|
|
$
|
204.0
|
|
|
$
|
178.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The goodwill reflected in the Companys consolidated
balance sheets of $31.0 million and $26.4 million as
of June 30, 2010 and 2009, respectively, was primarily
attributable to the Companys United States and Canada
geographic segment.
111
BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 24.
|
Quarterly
Financial Data (Unaudited)
|
Summarized unaudited quarterly financial data (in millions,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
September 30, 2009
|
|
December 31, 2009
|
|
March 31, 2010
|
|
June 30, 2010
|
|
Revenue
|
|
$
|
636.9
|
|
|
$
|
645.4
|
|
|
$
|
596.9
|
|
|
$
|
623.0
|
|
Operating income
|
|
$
|
83.0
|
|
|
$
|
88.2
|
|
|
$
|
78.9
|
|
|
$
|
82.8
|
|
Net income
|
|
$
|
46.6
|
|
|
$
|
50.2
|
|
|
$
|
41.0
|
|
|
$
|
49.0
|
|
Basic earnings per share
|
|
$
|
0.35
|
|
|
$
|
0.37
|
|
|
$
|
0.30
|
|
|
$
|
0.36
|
|
Diluted earnings per share
|
|
$
|
0.34
|
|
|
$
|
0.37
|
|
|
$
|
0.30
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
September 30, 2008
|
|
December 31, 2008
|
|
March 31, 2009
|
|
June 30, 2009
|
|
Revenue
|
|
$
|
673.5
|
|
|
$
|
634.1
|
|
|
$
|
599.9
|
|
|
$
|
629.9
|
|
Operating income
|
|
$
|
89.9
|
|
|
$
|
86.2
|
|
|
$
|
75.6
|
|
|
$
|
87.7
|
|
Net income
|
|
$
|
49.8
|
|
|
$
|
44.3
|
|
|
$
|
47.1
|
|
|
$
|
58.9
|
|
Basic earnings per share
|
|
$
|
0.37
|
|
|
$
|
0.33
|
|
|
$
|
0.35
|
|
|
$
|
0.44
|
|
Diluted earnings per share
|
|
$
|
0.36
|
|
|
$
|
0.33
|
|
|
$
|
0.34
|
|
|
$
|
0.43
|
|
Quarterly results are impacted by the timing of expenses and
charges which affect comparability of results.
|
|
Note 25.
|
Subsequent
Event
|
On August 19, 2010, the Company declared a quarterly
dividend of $0.0625 per share of common stock that is payable on
September 30, 2010 to shareholders of record on
September 14, 2010.
112
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the
participation of the Companys management, including the
Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as of
June 30, 2010. Based on that evaluation, the CEO and CFO
concluded that the Companys disclosure controls and
procedures were effective as of such date to ensure that
information required to be disclosed in the reports that it
files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms.
Internal
Control Over Financial Reporting
The Companys management, including the CEO and CFO,
confirm that there were no changes in the Companys
internal control over financial reporting during the fiscal
quarter ended June 30, 2010 that have materially affected,
or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
Managements
Report on Internal Control Over Financial Reporting
Managements Report on Internal Control Over Financial
Reporting and the report of Independent Registered Public
Accounting Firm on internal control over financial reporting are
set forth in Part II, Item 8 of this
Form 10-K.
|
|
Item 9B.
|
Other
Information
|
On June 2, 2010, the Compensation Committee of the Board
(the Compensation Committee) approved a change to
our long term equity incentive program. For fiscal 2011, the
Compensation Committee decided to bifurcate the annual
performance based restricted stock grant which comprises 50% of
the annual equity award into 25% restricted stock and 25%
performance shares for the Chief Executive Officer and the
executive vice presidents of the Company. The restricted stock
and performance shares will vest 100% on the third anniversary
of the grant date. The performance share awards will have a one
year performance period ending June 30, 2011. The final
performance share awards can increase or decrease by 100% based
upon the financial performance of the Company during fiscal
2011. The measure of the Companys performance for this
purpose for fiscal 2011 is Profit Before Taxes or PBT, and the
grant date is August 25, 2010. The remainder of the equity
award will continue to be a stock option grant.
On July 19, 2010, the Compensation Committee approved base
salary increases for two of our named executive officers to
bring their base salaries into the desired competitive range.
Ben K. Wells, our Chief Financial Officer, received a base
salary increase of $30,000, to $525,000. Charles M.
Fallon, Jr., our President, North America, received a base
salary increase of $62,250, to $500,000. These increases were
effective as of July 2, 2010. In addition, the Compensation
Committee approved a special equity award for Mr. Wells to
reward him for superior performance. The equity award consists
of shares of restricted stock with a value of $360,000 and a
grant date of August 25, 2010. The restricted stock will
vest ratably over three years on the anniversary of the grant
date.
113
Part III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this Item, other than the
information regarding our executive officers which is set forth
in Part I, Item I above under the caption
Executive Officers of the Registrant, is
incorporated herein by reference from the Companys
definitive proxy statement to be filed no later than
120 days after June 30, 2010. We refer to this proxy
statement as the 2010 Proxy Statement.
|
|
Item 11.
|
Executive
Compensation
|
Incorporated herein by reference from the Companys 2010
Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Incorporated herein by reference from the Companys 2010
Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Incorporated herein by reference from the Companys 2010
Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
Incorporated herein by reference from the Companys 2010
Proxy Statement.
Part IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
|
(1)
|
All
Financial Statements
|
Consolidated financial statements filed as part of this report
are listed under Part II, Item 8 of this
Form 10-K.
|
|
(2)
|
Financial
Statement Schedules
|
No schedules are required because either the required
information is not present or is not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial
statements or the notes thereto.
The exhibits listed in the accompanying index are filed as part
of this report.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Where Found
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Burger King
Holdings, Inc.
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Annual Report on Form 10-K dated August 31, 2006
|
|
3
|
.2
|
|
Amended and Restated Bylaws, effective as of the date of the
Companys 2010 Annual Meeting of stockholders
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K dated June 3, 2010.
|
|
4
|
.1
|
|
Form of Common Stock Certificate
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
114
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Where Found
|
|
|
10
|
.1
|
|
Amended and Restated Credit Agreement, dated February 15,
2006, among Burger King Corporation, Burger King Holdings, Inc.,
the lenders party thereto, JPMorgan Chase Bank, N.A., as
administrative agent, Citicorp North America, Inc., as
syndication agent, and Bank of America, N.A., RBC Capital
Markets and Wachovia Bank, National Association, as
documentation agents
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.2
|
|
Form of Amended and Restated Shareholders Agreement by and
among Burger King Holdings, Inc., Burger King Corporation, TPG
BK Holdco LLC, GS Capital Partners 2000, L.P., GS Capital
Partners 2000 Offshore, L.P., GS Capital Partners 2000
GmbH & Co. Beteiligungs KG, GS Capital Partners 2000
Employee Fund, L.P., Bridge Street Special Opportunities
Fund 2000, L.P., Stone Street Fund 2000, L.P., Goldman
Sachs Direct Investment Fund 2000, L.P., GS Private Equity
Partners 2000, L.P., GS Private Equity Partners 2000 Offshore
Holdings, L.P., GS Private Equity Partners
2000-Direct
Investment Fund, L.P., Bain Capital Integral Investors, LLC,
Bain Capital VII Coinvestment Fund, LLC and BCIP TCV, LLC
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.10
|
|
Burger King Holdings, Inc. Equity Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.11
|
|
Burger King Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.12
|
|
Burger King Corporation Fiscal Year 2006 Executive Team
Restaurant Support Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.13
|
|
Form of Management Restricted Unit Agreement
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.14
|
|
Form of Amendment to Management Restricted Unit Agreement
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.15
|
|
Management Restricted Unit Agreement among John W. Chidsey,
Burger King Holdings, Inc. and Burger King Corporation, dated as
of October 8, 2004
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.16
|
|
Special Management Restricted Unit Agreement among Peter C.
Smith, Burger King Holdings, Inc. and Burger King Corporation,
dated as of December 1, 2003
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.17
|
|
Form of 2003 Management Stock Option Agreement
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.18
|
|
Form of 2005 Management Stock Option Agreement
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
115
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Where Found
|
|
|
10
|
.19
|
|
Form of Board Member Stock Option Agreement
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.20
|
|
Form of Special Management Stock Option Agreement among John W.
Chidsey, Burger King Holdings, Inc. and Burger King Corporation
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.30
|
|
Restricted Stock Unit Award Agreement between Burger King
Holdings, Inc. and John W. Chidsey, dated as of May 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.31
|
|
Form of Restricted Stock Unit Award Agreement under the Burger
King Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.32
|
|
Form of Restricted Stock Unit Award Agreement under the Burger
King Holdings, Inc. 2006 Equity Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.33
|
|
Form of Option Award Agreement under the Burger King Holdings,
Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.34
|
|
Form of Option Award Agreement under the Burger King Holdings,
Inc. Equity Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Registration Statement on Form S-1 (File No. 333-131897)
|
|
10
|
.35
|
|
Form of Performance Award Agreement under the Burger King
Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K dated August 14, 2006
|
|
10
|
.36
|
|
Form of Retainer Stock Award Agreement for Directors under the
Burger King Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K dated August 14, 2006
|
|
10
|
.37
|
|
Form of Annual Deferred Stock Award Agreement for Directors
under the Burger King Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K dated August 14, 2006
|
|
10
|
.44
|
|
Form of Performance Award Agreement for Restricted Stock Units
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K filed October 26, 2007
|
|
10
|
.45
|
|
Option Award Agreement between Burger King Holdings, Inc. and
Charles M. Fallon, Jr. dated June 6, 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Quarterly Report on Form 10-Q filed February 5, 2008
|
|
10
|
.46
|
|
Option Award Agreement between Burger King Holdings, Inc. and
Charles M. Fallon, Jr. dated June 6, 2006
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Quarterly Report on Form 10-Q filed February 5, 2008
|
|
10
|
.47
|
|
Form of Restricted Stock Unit Agreement under Burger King
Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Quarterly Report on Form 10-Q filed May 5, 2008
|
|
10
|
.49
|
|
Employment Agreement dated August 22, 2006 between Peter
Robinson and Burger King Corporation
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K filed November 5, 2008
|
|
10
|
.50
|
|
Assignment Letter dated August 22, 2006 among Peter
Robinson, Burger King Corporation and Burger King Europe GmbH
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Current Report on Form 8-K filed November 5, 2008
|
|
10
|
.52
|
|
Amended and Restated Employment Agreement between Charles M.
Fallon and Burger King Corporation dated December 8, 2008
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Annual Report on Form 10-K filed August 27, 2009
|
116
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Where Found
|
|
|
10
|
.53
|
|
Amended and Restated Employment Agreement between Russell B.
Klein and Burger King Corporation dated December 8, 2008
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Annual Report on Form 10-K filed August 27, 2009
|
|
10
|
.54
|
|
Amended and Restated Employment Agreement between Ben K. Wells
and Burger King Corporation dated December 8, 2008
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Annual Report on Form 10-K filed August 27, 2009
|
|
10
|
.55
|
|
Form of Performance Award Agreement for Restricted Stock Units
under the Burger King Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Annual Report on Form 10-K filed August 27, 2009
|
|
10
|
.56
|
|
Form of Performance Award Agreement for Performance Based
Restricted Stock under the Burger King Holdings, Inc. 2006
Omnibus Incentive Plan
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Annual Report on Form 10-K filed August 27, 2009
|
|
10
|
.57
|
|
First Amendment to Employment Agreement dated as of
September 30, 2009 between Burger King Corporation and
Peter Robinson
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Annual Report on Form 10-Q filed November 2, 2009
|
|
10
|
.58
|
|
Separation Agreement and General Release dated November 5,
2009 between Burger King Corporation and Russell B. Klein
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Annual Report on Form 10-Q filed February 5, 2010
|
|
10
|
.59
|
|
Amended and Restated Employment Agreement between John W.
Chidsey and Burger King Corporation dated April 1, 2010
|
|
Incorporated herein by reference to the Burger King Holdings,
Inc. Quarterly Report on
Form 10-Q
filed April 30, 2010
|
|
10
|
.60
|
|
Form of Restricted Stock Award Agreement under the Burger King
Holdings Inc. 2006 Omnibus Incentive Plan
|
|
Attached
|
|
10
|
.61
|
|
Form of Restricted Stock Unit Award Agreement under the Burger
King Holdings, Inc. 2006 Omnibus Incentive Plan
|
|
Attached
|
|
21
|
.1
|
|
List of Subsidiaries of the Registrant
|
|
Attached
|
|
23
|
.1
|
|
Consent of KPMG LLP
|
|
Attached
|
|
31
|
.1
|
|
Certification of Chief Executive Officer of Burger King
Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Attached
|
|
31
|
.2
|
|
Certification of Chief Financial Officer of Burger King
Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Attached
|
|
32
|
.1
|
|
Certification of Chief Executive Officer of Burger King
Holdings, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Attached
|
|
32
|
.2
|
|
Certification of the Chief Financial Officer of Burger King
Holdings, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Attached
|
|
|
|
|
|
Management contract or compensatory plan or arrangement |
117
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BURGER KING HOLDINGS, INC.
Name: John W. Chidsey
Title: Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ John
W. Chidsey
John
W. Chidsey
|
|
Chairman and Chief Executive Officer (principal executive
officer)
|
|
August 26, 2010
|
|
|
|
|
|
/s/ Ben
K. Wells
Ben
K. Wells
|
|
Chief Financial Officer
(principal financial and accounting officer)
|
|
August 26, 2010
|
|
|
|
|
|
/s/ Richard
W. Boyce
Richard
W. Boyce
|
|
Director
|
|
August 26, 2010
|
|
|
|
|
|
/s/
David
A. Brandon
|
|
Director
|
|
August 26, 2010
|
|
|
|
|
|
/s/ Ronald
M. Dykes
Ronald
M. Dykes
|
|
Director
|
|
August 26, 2010
|
|
|
|
|
|
/s/ Peter
R. Formanek
Peter
R. Formanek
|
|
Director
|
|
August 26, 2010
|
|
|
|
|
|
/s/ Manuel
A. Garcia
Manuel
A. Garcia
|
|
Director
|
|
August 26, 2010
|
|
|
|
|
|
/s/ Sanjeev
K. Mehra
Sanjeev
K. Mehra
|
|
Director
|
|
August 26, 2010
|
|
|
|
|
|
/s/
Stephen
G. Pagliuca
|
|
Director
|
|
August 26, 2010
|
|
|
|
|
|
/s/ Brian
T. Swette
Brian
T. Swette
|
|
Director
|
|
August 26, 2010
|
|
|
|
|
|
/s/ Kneeland
C. Youngblood
Kneeland
C. Youngblood
|
|
Director
|
|
August 26, 2010
|
119