This excerpt taken from the BKC 10-K filed Sep 7, 2007.
Our U.K. business has and may continue to experience declining sales and operating profits that may adversely affect the financial health of our franchisees and us.
We face risks and uncertainties in the U.K. that may impact the financial health of our franchisees and us. As of June 30, 2007, we operated 96 restaurants and our franchisees operated 456 restaurants in the U.K. During fiscal 2007, we closed 13 company restaurants in the U.K., 10 of which closed in the fourth quarter. We are continuing to review our company restaurant portfolio in the U.K. and may decide to close additional company restaurants based on location, restaurant profitability, brand presence and lease term.
Certain of our U.K. franchisees continue to face financial difficulties affecting their ability to meet their obligations to us, including the payment of royalties, advertising contributions and rent payments. For the year ended June 30, 2007, we deferred $3 million in royalty and rent revenues owed to us by distressed franchisees in the U.K. and recorded $2 million of bad debt expense in the U.K. marketing fund. In addition, in connection with the sale of company restaurants to certain U.K. franchisees, we have guaranteed certain lease payments arising from leases assigned to these franchisees as part of the sale. The aggregate contingent obligation arising from these assigned lease guarantees in the U.K. was $71 million as of June 30, 2007. If we are unable to strengthen the operating performance of the U.K. restaurants, we could incur additional write-offs, additional expenses under these assigned lease guarantees and a decrease in our revenues and earnings which could negatively impact our financial condition and our future revenue growth.
In addition, continuing or increasing losses from our company restaurants in the U.K., along with other factors, could have a negative effect on our ability to utilize foreign tax credits to offset our U.S. income taxes and could cause us to establish a valuation allowance at a future date against all or a portion of our foreign tax credit carryforwards.
Since the second quarter of fiscal 2007, we have been taking active measures and implementing marketing and operational initiatives to improve the performance of the U.K. market and to work with our distressed U.K. franchisees and their creditors to attempt to strengthen the franchisees financial condition. As part of our marketing
initiatives to improve brand recognition and address changing U.K. consumer preferences, during the year ended June 30, 2007, we made an incremental contribution of $7 million to the marketing fund in the U.K. and may continue to incur incremental advertising contributions in the future. To the extent that these additional expenses are significant, they may negatively impact our future expenses and, consequently, our earnings. Furthermore, these marketing and operational initiatives may not be effective, which would have a negative impact on the financial condition of our U.K. business.