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Burger King Holdings 10-K 2008 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Commission file number:
001-32875
Registrant’s
telephone number, including area code
(305) 378-3000
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject
to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, 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):
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, 2007
was $2.2 billion.
The number of shares outstanding of the Registrant’s Common
Stock as of August 25, 2008 was 135,287,760.
Part III incorporates certain information by reference from
Registrant’s definitive proxy statement for the 2008 annual
meeting of stockholders, which proxy will be filed no later than
120 days after the close of the Registrant’s fiscal
year ended June 30, 2008.
BURGER
KING HOLDINGS, INC.
2008
FORM 10-K
ANNUAL REPORT
Burger
King®,
Whopper®,
Double
Whopper®,
Have It Your
Way®,
Tendercrisp®,
Burger King Bun Halves and Crescent Logo, Spicy Chick’N
Crisp®,
BKtm
Value Menu,
BKtm
Breakfast Value Menu, BK
Wrappertm,
BK
Fusiontm
and
BKtm
Stacker are trademarks of Burger King Brands, Inc., a
wholly-owned subsidiary of Burger King Holdings, Inc. References
to fiscal 2008, fiscal 2007 and fiscal 2006 in this
Form 10-K
are to the fiscal years ended June 30, 2008, 2007 and 2006,
respectively.
In this document, we rely on and refer to information
regarding the restaurant industry, the quick service restaurant
segment and the fast food hamburger restaurant category that has
been prepared by the industry research firm 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 analyses based upon data
available from known sources or other proprietary research and
analysis.
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Part I
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 world’s
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, 2008, we owned or franchised a total
of 11,565 restaurants in 71 countries and U.S. territories,
of which 1,360 restaurants were Company restaurants and 10,205
were owned by our franchisees. Of these restaurants, 7,207 or
62% were located in the United States and 4,358 or 38% were
located in our international markets. Our restaurants feature
flame-broiled hamburgers, chicken and other specialty
sandwiches, french fries, soft drinks and other
reasonably-priced food items. During our more than 50 years
of operating history, we have developed a scalable and
cost-efficient quick service hamburger restaurant model that
offers customers fast food at modest prices.
We generate revenues from three sources: 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. Approximately 90% of our restaurants are franchised
and we have a higher percentage of franchise restaurants to
Company restaurants than our major competitors in the FFHR
category. We believe that this restaurant ownership mix provides
us with a strategic advantage because the capital required to
grow and maintain the Burger
King®
system is funded primarily by franchisees, while still
giving us a sizeable base of Company restaurants to demonstrate
credibility with franchisees in launching new initiatives. As a
result of the high percentage of franchise restaurants in our
system, we have lower capital requirements compared to our major
competitors.
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 and issued and sold
25 million shares of common stock at a price of $17.00 per
share. Upon completion of the offering, our common stock became
listed on the NYSE under the symbol “BKC.” Subsequent
to our initial public offering, the private equity funds
controlled by the Sponsors sold 22 million shares of common
stock at a price of $22.00 per share in February/March 2007;
20.7 million shares of common stock at a price of $25.00
per share in November 2007; and 15 million shares of common
stock at a price of $27.41 per share in May 2008. The
private equity funds currently own approximately 32% of our
outstanding common stock.
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 4% over the past 10 years, totaling approximately
$228 billion for the
12-month
period ended June 30, 2008. According to The NPD Group,
Inc., QSR sales are projected to increase at an annual rate of
4% between 2008 and 2012.
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Furthermore, we believe the QSR segment is generally less
vulnerable to economic downturns and increases in energy prices
than the casual dining segment, due to the value that QSRs
deliver to consumers, as well as some “trading 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.
However, significant economic downturns or sharp increases in
energy prices may adversely impact FFHR chains, including us.
According to The NPD Group, Inc., the FFHR category is the
largest category in the QSR segment, generating sales of over
$61 billion in the United States for the
12-month
period ended June 30, 2008 representing 27% of total QSR
sales. The FFHR category grew 3% in terms of sales during the
same period and, according to The NPD Group, Inc., is expected
to increase at an average rate of 3.5% per year over the next
five years. For the
12-month
period ended June 30, 2008, the top three FFHR chains
(McDonald’s, Burger King and Wendy’s) accounted for
73% of the category’s total sales, with approximately 15%
attributable to Burger King.
We believe that we are well-positioned to capitalize on the
following competitive strengths to achieve future growth:
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We intend to grow and strengthen our competitive position
through the continued focus on our strategic global growth
pillars — marketing, products, operations and
development — and the implementation of the following
key elements of our business strategy:
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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 Management’s
Discussion and Analysis of Financial Condition and Results of
Operations in Part II, Item 7 and Segment
Reporting in Part II, Item 8 in Note 21 of this
Form 10-K.
United
States and Canada
Our restaurants are limited-service restaurants of distinctive
design and are generally located in high-traffic areas
throughout the United States and Canada. As of June 30,
2008, 984 Company restaurants and 6,528 franchise restaurants
were operating in the United States and Canada. We believe our
restaurants appeal to a broad spectrum of consumers, with
multiple day parts appealing to different customer groups.
Operating Procedures and Hours of
Operation. All of our restaurants must adhere to
strict standardized operating procedures and requirements which
we believe are critical to the image and success of the
Burger King brand. Each restaurant is required to follow
the Manual of Operating Data, an extensive operations manual
containing mandatory restaurant operating standards,
specifications and procedures prescribed from time to time to
assure uniformity of operations and consistent high quality of
products at Burger King restaurants. Among the
requirements contained in the Manual of Operating Data are
standard design, equipment system, color scheme and signage,
operating procedures, hours of operation and standards of
quality for products and services.
Commencing in June 2008, we required restaurants in the United
States to be open until at least 2 a.m., Thursday
through Saturday and to be open by at least 6 a.m., Monday
through Saturday. Restaurants in the United States and Canada
are required to be open until at least midnight on the remaining
days of the week. 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.
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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. There is also a field staff consisting
of operations, training, and real estate and marketing personnel
who support Company restaurant and franchise operations in the
United States and Canada. Our franchise operations are organized
into eight divisions, each of which is headed by a division vice
president supported by field personnel who interact directly
with the franchisees. Each Company restaurant is managed by one
restaurant manager and one to three assistant managers,
depending upon the restaurant’s sales volume. Management of
a franchise restaurant is the responsibility of the franchisee,
who is trained in our techniques and is responsible for ensuring
that the day-to-day operations of the restaurant are in
compliance with the Manual of Operating Data.
Restaurant Menu. Our barbell menu strategy of
expanding our high-margin indulgent products and our value
products and our goal of expanding the dayparts that we serve
are the core drivers of our product offerings. The basic menu of
all of our restaurants consists of hamburgers, cheeseburgers,
chicken and fish sandwiches, breakfast items, french fries,
onion rings, salads, desserts, soft drinks, shakes, milk and
coffee. However, as we expand our hours of operation we have,
and expect to continue to, introduce new breakfast, dessert and
snack menu offerings which will complement our core products. We
will also continue to use limited time offers, such as the Indy
Whopper sandwich we offered in fiscal 2008, to provide
guests with innovative taste experiences. Franchisees must offer
all mandatory menu items.
Restaurant Design and Image. Our restaurants
consist of several different building types with various seating
capacities. The traditional Burger King restaurant is
free-standing, ranging in size from approximately 1,900 to
4,300 square feet, with seating capacity of 40 to 120
guests, drive-thru facilities and adjacent parking areas. Some
restaurants are located in airports, shopping malls, toll road
rest areas and educational and sports facilities. In fiscal
2005, we developed new, smaller restaurant designs that reduce
the average building costs by approximately 25%. The seating
capacity for these smaller restaurant designs is between 40 and
80 guests. We believe this seating capacity is adequate since
approximately 62% of our U.S. Company restaurant sales are
made at the drive-thru. We and our franchisees have opened 167
new restaurants in the United States and Canada in this format
through June 30, 2008.
In fiscal 2008, we began our reimaging initiative for our
Company restaurants in the U.S. and Canada. This initiative
includes the remodeling or scraping and rebuilding of Company
restaurants where we believe a new modernized exterior and
interior image can drive additional sales. During fiscal 2008,
we reimaged a total of 32 Company restaurants and, as of
the date of this report, we had 19 additional restaurants in
progress.
New Restaurant Development. We employ a
sophisticated and disciplined market planning and site selection
process through which we identify trade areas and approve
restaurant sites throughout the United States and Canada that
will provide for quality expansion. We have established a
development committee to oversee all new restaurant development
within the United States and Canada. Our development
committee’s objective is to ensure that every proposed new
restaurant location is carefully reviewed and that each location
meets the stringent requirements established by the committee,
which include factors such as site accessibility and visibility,
traffic patterns, signage, parking, site size in relation to
building type and certain demographic factors. Our model for
evaluating sites accounts for potential changes to the site,
such as road reconfiguration and traffic pattern alterations.
Each franchisee wishing to develop a new restaurant is
responsible for selecting a new site location. However, we work
closely with our franchisees to assist them in selecting sites.
They must agree to search for a potential site within an
identified trade area and to have the final site location
approved by the development committee.
We increased our restaurant count in the U.S. and Canada by
24 restaurants during fiscal 2008, the first year of net
restaurant growth in this segment in six years. We have
instituted several initiatives to accelerate restaurant
development in the United States, including reduced upfront
franchise fees, process simplifications and turnkey development
assistance programs, which reduce the time and uncertainty
associated with opening new restaurants.
As of June 30, 2008, we owned and operated 984 restaurants
in the United States and Canada, representing 13% of total
U.S. and Canada system-wide restaurants. Included in this
number are 31 restaurants that were owned by a joint venture
between us and an independent third party. The joint venture was
dissolved on June 30, 2008 and,
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effective July 1, 2008, these restaurants have been
operated as Company restaurants. Out of our 984 Company
restaurants, we own the properties for 348 restaurants and we
lease the remaining 636 properties from third-party landlords.
Our Company restaurants in the United States and Canada
generated $1.2 billion in revenues in fiscal 2008, or 74%
of our total U.S. and Canada revenues and 48% of our total
worldwide revenues. We also use our Company restaurants to test
new products and initiatives before rolling them out to the
wider Burger King system.
The following table details the top ten locations of our Company
restaurants in the United States and Canada as of June 30,
2008:
In addition, in July 2008, we acquired 72 restaurants in Iowa
and Nebraska from one of our franchisees.
General. We grant franchises to operate
restaurants using Burger King trademarks, trade dress and
other intellectual property, uniform operating procedures,
consistent quality of products and services and standard
procedures for inventory control and management.
Our growth and success have been built in significant part upon
our substantial franchise operations. We franchised our first
restaurant in 1961, and as of June 30, 2008, there were
6,528 franchise restaurants, owned by 777 franchise operators,
in the United States and Canada. Franchisees report gross sales
on a monthly basis and pay royalties based on reported sales.
Franchise restaurants in the United States and Canada generated
revenues of $318 million in fiscal 2008, or 59% of our
total worldwide franchise revenues. The five largest franchisees
in the United States and Canada in terms of restaurant count
represented in the aggregate approximately 16% of our franchise
restaurants in this segment as of June 30, 2008.
The following table details the top ten locations of our
franchisees’ restaurants in the United States and Canada as
of June 30, 2008:
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The following is a list of the five largest franchisees in terms
of restaurant count in the United States and Canada as of
June 30, 2008:
Franchise Agreement Terms. For each franchise
restaurant, we enter into a franchise agreement covering a
standard set of terms and conditions. The typical franchise
agreement in the United States and Canada has a
20-year term
(for both initial grants and renewals of franchises) and
contemplates a one-time franchise fee of $50,000, which must be
paid in full before the restaurant opens for business, or in the
case of renewal, before expiration of the current franchise
term. In recent years, however, we have offered franchisees
reduced upfront franchise fees to encourage
U.S. franchisees to open new restaurants.
Recurring fees consist of monthly royalty and advertising
payments. Franchisees in the United States and Canada are
generally required to pay us an advertising contribution equal
to a percentage of gross sales, typically 4%, on a monthly
basis. In addition, most existing franchise restaurants in the
United States and Canada pay a royalty of 3.5% and 4% of gross
sales, respectively, on a monthly basis. As of July 1,
2000, a new royalty rate structure became effective in the
United States for most new franchise agreements, including both
new restaurants and renewals of franchises, but limited
exceptions were made for agreements that were grandfathered
under the old fee structure or entered into pursuant to certain
early renewal incentive programs. In general, new franchise
restaurants opened and franchise agreement renewals in the
United States after June 30, 2003 will generate royalties
at the rate of 4.5% of gross sales for the full franchise term.
As of June 30, 2008, the average royalty rate in the United
States was 3.8%.
Franchise agreements are not assignable without our consent, and
we have a right of first refusal if a franchisee proposes to
sell a restaurant. Defaults (including non-payment of royalties
or advertising contributions, or failure to operate in
compliance with the terms of the Manual of Operating Data) can
lead to termination of the franchise agreement. We can control
the growth of our franchisees because we have the right to veto
any restaurant acquisition 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.
Our property operations consist of restaurants where we lease
the land and often the building to the franchisee. Our real
estate operations in the United States and Canada generated
$89 million of our property revenues in fiscal 2008, or 73%
of our total worldwide property revenues.
For properties that we lease from third-party landlords and
sublease to franchisees, leases generally provide for fixed
rental payments and may provide for contingent rental payments
based on a restaurant’s annual gross sales. 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, 2008, we leased or subleased
to franchisees in the United States and Canada 917 properties,
of which we own 454 properties and lease either the land or the
land and building from third-party landlords on the remaining
463 properties.
Europe,
the Middle East and Africa/Asia Pacific
(EMEA/APAC)
EMEA. EMEA is the second largest geographic
area in the Burger King system behind the United States
as measured by number of restaurants. As of June 30, 2008,
EMEA had 2,379 restaurants in 31 countries and
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territories, including 283 Company restaurants located in the
U.K., Germany, Spain, The Netherlands and Italy. Germany is the
largest market in EMEA with 620 restaurants as of June 30,
2008.
APAC. As of June 30, 2008, APAC had 672
restaurants in 13 countries and territories, including China,
Malaysia, Thailand, Australia, Philippines, Singapore, New
Zealand, South Korea, Indonesia, and Japan. All of the
restaurants in the region other than our nine Company
restaurants in China are franchised. Australia is the largest
market in APAC, with 318 restaurants as of June 30, 2008,
all of which are franchised and operated under
Hungry Jack’s, a brand that we own in Australia
and New Zealand. Australia is the only market in which we
operate under a brand other than Burger King. We believe
there is significant potential for growth in APAC, particularly
in our existing markets of South Korea, Hong Kong, Singapore,
Malaysia, China and the Philippines and in new markets such as
Japan and Indonesia.
Our restaurants located in EMEA/APAC generally adhere to the
standardized operating procedures and requirements followed by
U.S. restaurants. However, regional and country-specific
market conditions often require some variation in our standards
and procedures. Some of the major differences between
U.S. and EMEA/APAC operations are discussed below.
Management Structure. Our EMEA 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, and Munich (for EMEA) and
Shanghai (for APAC). These centers are staffed by teams who
support both franchised operations and Company restaurants.
Menu and Restaurant Design. Restaurants must
offer certain global Burger King menu items. In many
countries, special products developed to satisfy local tastes
and respond to competitive conditions are also offered. Many
restaurants are in-line facilities in smaller, attached
buildings without a drive-thru or in food courts rather than
free-standing buildings. In addition, the design, facility size
and color scheme of the restaurant building may vary from
country to country due to local requirements and preferences. We
and our franchisees have opened 94 new restaurants with the
smaller building designs in EMEA/APAC through June 30, 2008.
New Restaurant Development. Unlike the United
States and Canada, where all new development must be approved by
the development committee, our market planning and site
selection process in EMEA/APAC is managed by our regional teams,
who are knowledgeable about the local market. In several of our
markets, there is typically a single franchisee that owns and
operates all of the restaurants within a country. We have
identified opportunities for extending the reach of the
Burger King brand in most of our existing markets in EMEA
and APAC. Over the past two years our franchisees opened
restaurants in six new markets in EMEA/APAC: Poland, Japan,
Indonesia, Egypt, Bulgaria and Romania. We are also considering
the possibility of entering into other
EMEA/APAC
markets, including countries in Eastern Europe, the
Mediterranean and the Middle East, and we are in the process of
identifying prospective new franchisees for these markets.
As of June 30, 2008, 283 (or 12%) of the restaurants in
EMEA were Company restaurants. There are nine Company
restaurants in APAC, all of which are located in China.
The following table details Company restaurant locations in EMEA
as of June 30, 2008:
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As of June 30, 2008, 2,759 or 90% of our restaurants in
EMEA/APAC were franchised. Some of our international markets,
including Hungary, Portugal, South Korea and the Philippines,
are operated by a single franchisee. Other markets, such as the
U.K., Germany and Spain, have multiple franchisees. In general,
we enter into a franchise agreement for each restaurant.
International franchise agreements generally contemplate a
one-time franchise fee of $50,000, with monthly royalties and
advertising contributions each of up to 5% of gross sales.
We have granted master franchises in Australia and Turkey, where
the franchisees are allowed to sub-franchise restaurants within
their particular territory. Additionally, in New Zealand and
certain Middle East and Persian Gulf countries, we have entered
into arrangements with franchisees under which they have agreed
to nominate third parties to develop and operate restaurants
within their respective territories under franchise agreements
with us. As part of these arrangements, the franchisees have
agreed to provide certain support services to third party
franchisees on our behalf, and we have agreed to share the
franchise fees and royalties paid by such third party
franchisees. Our largest franchisee in the Middle East and
Persian Gulf is also allowed to grant development rights with
respect to each country within its territory. We have also
entered into exclusive development agreements with franchisees
in a number of countries throughout EMEA/APAC, including, most
recently, Japan and Egypt. These exclusive development
agreements generally grant the franchisee exclusive rights to
develop restaurants in a particular geographic area and contain
growth clauses requiring franchisees to open a minimum number of
restaurants within a specified period.
The following is a list of the five largest franchisees in terms
of restaurant count in EMEA/APAC as of June 30, 2008:
Our property operations in EMEA primarily consist of franchise
restaurants located in the U.K., Germany and Spain, which we
lease or sublease to franchisees. We have no franchisee-operated
properties in APAC. Of the 103 properties in EMEA that we lease
or sublease to franchisees, we own four properties and lease the
land and building from third party landlords on the remaining 99
properties. Our EMEA property operations generated
$33 million of our revenues in fiscal 2008, or 27% of our
total worldwide property revenues.
Lease terms on properties that we lease or sublease to our EMEA
franchisees vary from country to country. These leases generally
provide for
25-year
terms, depending on the term of the related franchise agreement.
We lease most of our properties from third party landlords and
sublease them to franchisees. These leases generally provide for
fixed rental payments based on our underlying rent plus a small
markup. In general, franchisees are obligated to pay for all
costs and expenses associated with the restaurant property,
including property taxes, repairs and maintenance and insurance.
In the U.K., many of our leases for our restaurant properties
are subject to rent reviews every five years, which may result
in rent adjustments to reflect current market rents for the next
five years.
As of June 30, 2008, we had 1,002 restaurants in 25
countries and territories in Latin America. There were 84
Company restaurants in Latin America, all located in Mexico, and
918 franchise restaurants in the segment as of June 30,
2008. We are the leader in 16 of the 25 countries and
territories in which the Burger King system operates in
Latin America, including Mexico and Puerto Rico, in terms of
number of restaurants. Mexico is the largest market in this
segment, with a total of 390 restaurants as of June 30,
2008, or 39% of the region. Our restaurants in Mexico have
consistently had the highest Company restaurant margins
worldwide due to a favorable real estate and labor environment.
In fiscal 2008, we opened 41 new restaurants in Mexico, of which
seven were Company restaurants
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and 34 were franchise restaurants. Additionally, we entered the
country of Colombia and re-opened the Island of Curaçao
during the same period.
The following is a list of the five largest franchisees in terms
of restaurant count in Latin America as of June 30, 2008:
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.
Franchisees must make monthly contributions, generally 4% to 5%
of gross sales, to our advertising funds, and we contribute on
the same basis for Company restaurants. Advertising
contributions are used to pay for all expenses relating to
marketing, advertising and promotion, including market research,
production, advertising costs, public relations and sales
promotions. In international markets where there is no Company
restaurant presence, franchisees typically manage their own
advertising expenditures, and these amounts are not included in
the advertising fund. However, as part of our global marketing
strategy, we provide these franchisees with assistance in order
to deliver a consistent global brand message.
In the United States and in those other countries where we have
Company restaurants, we coordinate the development, budgeting
and expenditures for all marketing programs, as well as the
allocation of advertising and media contributions, among
national, regional and local markets, subject in the United
States to minimum expenditure requirements for media costs and
certain restrictions as to new media channels. We are required,
however, under our U.S. franchise agreements to discuss the
types of media in our advertising campaigns and the percentage
of the advertising fund to be spent on media with the recognized
franchisee association, currently the National Franchisee
Association, Inc. In addition, U.S. franchisees may elect
to participate in certain local advertising campaigns at the
Designated Market Area (DMA) level by making contributions
beyond those required for participation in the national
advertising fund. Approximately 76% of DMAs in the United States
participated in local advertising campaigns during fiscal 2008.
This allows local markets to execute customized advertising and
promotions to deliver market specific solutions. We believe that
increasing the level of local advertising makes us more
competitive in the FFHR category.
Our current global marketing strategy is based upon customer
choice. We believe that quality, innovation and differentiation
drive profitable customer traffic and pricing power over the
long term. Our global strategy is focused on our core consumer,
the SuperFan, our Have It Your Way brand promise, our
core menu items, such as flame broiled hamburgers, french fries
and soft drinks, the development of innovative products and the
consistent communication of our brand. We concentrate our
marketing on television advertising, which we believe is the
most effective way to reach our target customer, the SuperFan.
SuperFans are consumers who reported eating at a fast food
hamburger outlet nine or more times in the past month. We also
use radio and Internet advertising and other marketing tools on
a more limited basis.
We establish the standards and specifications for most of the
goods used in the development, improvement and operation of our
restaurants and for the direct and indirect sources of supply of
most of those items. These requirements help us assure the
quality and consistency of the food products sold at our
restaurants and protect and enhance the image of the Burger
King system and the Burger King brand.
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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. RSI is the purchasing agent for the Burger
King system in the United States and negotiates the purchase
terms for most equipment, food, beverages (other than branded
soft drinks) and other products such as promotional toys and
paper products used in our restaurants. RSI is also authorized
to purchase and manage distribution services on behalf of the
Company restaurants and franchisees who appoint RSI as their
agent for these purposes. As of June 30, 2008, RSI was
appointed the distribution manager for approximately 94% of the
restaurants in the United States. A subsidiary of RSI also
purchases food and paper products for our Company and franchise
restaurants in Canada under a contract with us. As of
June 30, 2008, 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 closely with our franchisees to implement programs
that leverage our global purchasing power and to negotiate lower
product costs and savings for our restaurants outside of the
United States and Canada. We approve suppliers and use similar
standards and criteria to evaluate international suppliers that
we use for U.S. suppliers. Franchisees may propose
additional suppliers, subject to our approval and established
business criteria.
In fiscal 2000, we entered into long-term exclusive contracts
with The
Coca-Cola
Company and with Dr Pepper/Seven Up, Inc. to supply Company
and franchise restaurants with their products, which obligate
Burger King restaurants in the United States to purchase
a specified number of gallons of soft drink syrup. These volume
commitments are not subject to any time limit. As of
June 30, 2008, 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 and removing the equipment owned by
Coca-Cola
and installed in Company restaurants in the three years prior to
the termination.
Company restaurants play a key role in the development of new
products and initiatives because we can use them to test and
perfect new products, equipment and programs before introducing
them to franchisees, which we believe gives us credibility with
our franchisees in launching new initiatives. This strategy
allows us to keep research and development costs down and
simultaneously facilitates the ability to sell new products and
to launch initiatives both internally to franchisees and
externally to guests.
We operate a research and development facility or “test
kitchen” at our headquarters in Miami and certain other
regional locations. In addition, certain vendors have granted us
access to their facilities in the U.K. and China to test new
products. While research and development activities are
important to our business, these expenditures are not material.
Independent suppliers also conduct research and development
activities for the benefit of the Burger King system. We
believe new product development is critical to our long-term
success and is a significant factor behind our comparable sales
growth. Product innovation begins with an intensive research and
development process that analyzes each potential new menu item,
including market tests to gauge consumer taste preferences, and
includes an ongoing analysis of the economics of food cost,
margin and final price point.
We have developed two new broilers including a flexible batch
broiler that is significantly smaller, less expensive and easier
to maintain than the current broiler used in our restaurants. We
have installed the flexible batch broiler in most of our Company
restaurants in the United States and Canada. During fiscal 2008,
the decrease in our operating margins in the United States and
Canada was partially offset by the benefits realized from the
flexible
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batch broilers, including lower accelerated depreciation expense
and reduced utility costs. While the depreciation benefits have
been mostly realized, we expect to continue to benefit from
reduced utility costs as a result of these broilers without
sacrificing speed, quality or efficiency. Franchisees in the
United States and Canada are required to install the new
broilers in their restaurants by January 2010. We have filed a
patent application with respect to the flexible batch broiler
technology and design. We have licensed one of our equipment
vendors on an exclusive basis to manufacture and supply the
flexible batch broiler to the Burger King system
throughout the world.
Franchisees typically use a point of sale, or POS, cash register
system to record all sales transactions at the restaurant. We
have not historically required franchisees to use a particular
brand or model of hardware or software components for their
restaurant system. However, we have established specifications
to reduce costs, improve service and allow better data analysis
and starting in January 2006 have approved three global POS
vendors and one regional vendor for each of our three segments
to sell these systems to our franchisees. Currently, franchisees
report sales manually, and we do not have the ability to verify
sales data electronically by accessing their POS cash register
systems. We have the right under our franchise agreement to
audit franchisees to verify sales information provided to us.
The new POS system will make it possible for franchisees to
submit their sales and transaction level details to us in
near-real-time in a common format, allowing us to maintain one
common database of sales information 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.
We are focused on achieving a high level of guest satisfaction
through the close monitoring of restaurants for compliance with
our key operations platforms: Clean & Safe,
Hot & Fresh and Friendly & Fast. We have
uniform operating standards and specifications relating to the
quality, preparation and selection of menu items, maintenance
and cleanliness of the premises and employee conduct.
The Clean & Safe certification is administered by an
independent outside vendor whose purpose it is to bring
heightened awareness of food safety, and includes immediate
follow-up
procedures to take any action needed to protect the safety of
our customers. We measure our Hot & Fresh and
Friendly & Fast operations platforms principally
through Guest TracSM, a rating system based on survey data
submitted by our customers.
We review the overall performance of our operations platforms
through an Operations Excellence Review, or OER, which focuses
on evaluating and improving restaurant operations and guest
satisfaction.
All Burger King restaurants are required to be operated
in accordance with quality assurance and health standards which
we establish, as well as standards set by federal, state and
local governmental laws and regulations. These standards include
food preparation rules regarding, among other things, minimum
cooking times and temperatures, sanitation and cleanliness.
We closely supervise the operation of all of our Company
restaurants to help ensure that standards and policies are
followed and that product quality, guest service and cleanliness
of the restaurants are maintained. Detailed reports from
management information systems are tabulated and distributed to
management on a regular basis to help maintain compliance. In
addition, we conduct scheduled and unscheduled inspections of
Company and franchise restaurants throughout the Burger King
system.
As of June 30, 2008, we and our wholly-owned subsidiaries,
Burger King Corporation and Burger King Brands, Inc., owned
approximately 2,445 trademark and service mark registrations and
applications and approximately 620 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
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development, improvement and operation of Burger King
restaurants. These proprietary standards, specifications and
restaurant operating procedures are trade secrets owned by us.
Additionally, we own certain patents relating to equipment used
in our restaurants and provide proprietary product and labor
management software to our franchisees. Patents are of varying
duration.
We operate in the FFHR category of the QSR segment within the
broader restaurant industry. Our two main domestic competitors
in the FFHR category are McDonald’s Corporation, or
McDonald’s, and Wendy’s International, Inc., or
Wendy’s. To a lesser degree, we compete against national
food service businesses offering alternative menus, such as
Subway, Yum! Brands, Inc.’s Taco Bell, Pizza Hut and
Kentucky Fried Chicken, casual restaurant chains, such as
Applebee’s, Chili’s, Ruby Tuesday’s and
“fast casual” restaurant chains, such as Panera Bread,
as well as convenience stores and grocery stores that offer menu
items comparable to that of Burger King restaurants. We
compete on the basis of price, service and location and by
offering quality food products.
Our largest U.S. competitor, McDonald’s, has
significant international operations. Non-FFHR based chains,
such as KFC and Pizza Hut, have many outlets in international
markets that compete with Burger King and other FFHR
chains. In addition, Burger King restaurants compete
internationally against local FFHR chains, sandwich shops,
bakeries and single-store locations.
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 proscribed 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.
Company restaurant operations are also subject to federal and
state laws governing such matters as consumer protection,
privacy, wages, working conditions, citizenship requirements,
health insurance and overtime. Some states have set minimum wage
requirements higher than the federal level.
In addition, we may become subject to legislation or regulation
seeking to tax
and/or
regulate high-fat and high-sodium foods, particularly in the
United States, the U.K. and Spain. For example, in New York
City, restaurants and other food service establishments were
required to phase out artificial trans fat by July 1, 2008.
In addition, the City of Philadelphia has passed a law that
requires restaurants to phase out artificial trans fat by
September 1, 2008. Other counties and municipalities have
adopted a ban on trans fat in restaurant foods, and more than
12 states are considering adopting such laws. We have begun
the rollout of a trans fat free cooking oil to our Company
restaurants in the United States. Two trans fat free oil blends
have passed our operational, supply and consumer criteria,
allowing us to begin the national rollout. We expect that all
U.S. restaurants will be using trans fat free cooking oil
and serving trans fat free par fried and baked goods by the end
of October 2008.
Certain counties and municipalities, such as New York City,
San Francisco and King County, have approved menu labeling
legislation that requires restaurant chains to provide caloric
information on menu boards. Other
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counties and municipalities have announced they are considering
or proposing menu labeling legislation, including
San Mateo, California and Philadelphia. Additional cities
or states may propose to adopt trans fat restrictions, menu
labeling or similar regulations. Finally, the City of Los
Angeles has adopted a ban on the development of new quick
service restaurants in certain districts of the City in an
attempt to address the high rates of obesity in such districts.
In addition, public interest groups have focused attention on
the marketing of high-fat and high-sodium foods to children in a
stated effort to combat childhood obesity, and legislators in
the United States have proposed legislation to restore the
FTC’s authority to regulate children’s advertising. We
have signed an advertising pledge in the United States, which is
a voluntary commitment to change the way we advertise to
children under the age of 12 in the United States.
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. 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.
Information about the Company’s working capital (changes in
current assets and liabilities) is included in
Management’s Discussion and Analysis of Financial
Condition and Results of Operations in Part II,
Item 7 and in the Consolidated Statements of Cash Flows in
Financial Statements and Supplementary Data in
Part II, Item 8.
We are not aware of any federal, state or local environmental
laws or regulations that will materially affect our earnings or
competitive position or result in material capital expenditures.
However, we cannot predict the effect on our operations of
possible future environmental legislation or regulations.
Our business is not dependent upon a single customer or a small
group of customers, including franchisees. No franchisees or
customers accounted for more than 10% of total consolidated
revenues in fiscal 2008.
No material portion of our business is subject to renegotiation
of profits or termination of contracts or subcontracts at the
election of the U.S. government.
Our business is moderately seasonal. Restaurant sales are
typically higher in the spring and summer months (our fourth and
first fiscal quarters) when weather is warmer than in the fall
and winter months (our second and third fiscal quarters).
Restaurant sales during the winter are typically highest in
December, during the holiday shopping season. Our restaurant
sales and Company restaurant margins are typically lowest during
our third fiscal quarter, which occurs during the winter months
and includes February, the shortest month of the year. Because
our business is moderately seasonal, results for any one quarter
are not necessarily indicative of the results that may be
achieved for any other quarter or for the full fiscal year.
As of June 30, 2008, we had approximately
41,000 employees in our Company restaurants, our field
management offices and our global headquarters. As franchisees
are independent business owners, they and their employees are
not included in our employee count. We consider our relationship
with our employees to be good.
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Financial information about our significant geographic areas
(U.S. & Canada, EMEA/APAC and Latin America) is
incorporated herein by reference from Selected Financial Data
in Part II, Item 6; Management’s
Discussion and Analysis of Financial Condition and Results of
Operations in Part II, Item 7; and in Financial
Statements and Supplementary Data in Part II,
Item 8 of this
Form 10-K.
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 or by
calling the SEC at
1-800-SEC-0330.
The references to our website address and the SEC’s website
address do not constitute incorporation by reference of the
information contained in these websites and should not be
considered part of this document.
Our Corporate Governance Guidelines, our Code of Business Ethics
and Conduct, our Code of Ethics for Executive Officers, our Code
of Conduct for Directors and our Code of Business Ethics and
Conduct for Vendors are also located within the Investor
Relations section of our website. These documents, as well as
our SEC filings and copies of financial and other information,
are available in print free of charge to any shareholder who
requests a copy from our Investor Relations Department. Requests
to Investor Relations may also be made by calling
(305) 378-7696,
or by sending the request to Investor Relations, Burger King
Holdings, Inc., 5505 Blue Lagoon Drive, Miami, FL 33126.
The Company’s Chief Executive Officer, John W. Chidsey,
certified to the New York Stock Exchange (NYSE) on
December 27, 2007, pursuant to section 303A.12 of the
NYSE’s listing standards, that he was not aware of any
violation by the Company of the NYSE’s corporate governance
listing standards as of that date.
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, 2008. 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.
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Russell B. Klein has served as our Executive Vice
President and President, Global Marketing, Strategy and
Innovation since June 2006. Previously, he served as Chief
Marketing Officer from June 2003 to June 2006. From August 2002
to May 2003, Mr. Klein served as Chief Marketing Officer at
7-Eleven Inc. From January 1999 to July 2002, Mr. Klein
served as a Principal at Whisper Capital.
Ben K. Wells has served as our Executive Vice President
and 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 Executive Vice
President, Global Operations since September 2007.
Mr. Ramirez has worked for Burger King Corporation for over
23 years. From January 2002 to September 2007,
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 Executive Vice President
and 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 Executive Vice President,
General Counsel, Chief Ethics and Compliance Officer and
Secretary since September 2004. In June 2007, 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 Executive
Vice President and 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.
Peter Robinson has served as our Executive Vice President
and President, EMEA since October 2006. From 2003 through 2006,
Mr. Robinson served as Senior Vice President and President,
Pillsbury USA Division.
Special
Note Regarding Forward-Looking Statements
Certain statements made in this report that reflect
management’s 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
reducing the hours of operation gap with our competitors; 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 franchise restaurants, including their
growth potential and our expectations regarding franchisee
distress; our expectations regarding opportunities to enhance
restaurant profitability and effectively manage margin
pressures, including escalating commodity prices and fuel costs;
our intention to continue to employ innovative and creative
marketing strategies and expand product offerings, including the
launching of new and limited time offer products; our intention
to focus on our restaurant reimaging program; our ability to use
proactive portfolio management to drive financial performance
and development; 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 beliefs regarding the effects of the
realignment of our European and Asian businesses; our
expectations regarding the impact of accounting
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pronouncements; our intention to renew hedging contracts; our
expectations regarding unrecognized tax benefits; and our
continued efforts to leverage our global purchasing power. These
forward-looking statements are only predictions based on our
current expectations and projections about future events.
Important factors could cause our actual results, level of
activity, performance or achievements to differ materially from
those expressed or implied by these forward-looking statements,
including, but not limited to, the risks and uncertainties
discussed below.
The restaurant industry is intensely competitive and we compete
in the United States and internationally with many
well-established food service companies on the basis of price,
service, location and food quality. Our competitors include a
large and diverse group of restaurant chains and individual
restaurants that range from independent local operators to
well-capitalized national and international restaurant
companies. McDonald’s and Wendy’s are our principal
competitors. As our competitors expand their operations,
including through acquisitions or otherwise, we expect
competition to intensify. We also compete against regional
hamburger restaurant chains, such as Carl’s Jr., Jack in
the Box and Sonic. Some of our competitors have substantially
greater financial and other resources than we do, which may
allow them to react to changes in pricing, marketing and the
quick service restaurant segment in general better than we can.
To a lesser degree, we compete against national food service
businesses offering alternative menus, such as Subway and Yum!
Brands, Inc.’s Taco Bell, Pizza Hut and Kentucky Fried
Chicken, casual restaurant chains, such as Applebee’s,
Chili’s, Ruby Tuesday’s and “fast casual”
restaurant chains, such as Panera Bread, as well as convenience
stores and grocery stores that offer menu items comparable to
that of Burger King restaurants. In one of our major
European markets, the U.K., much of the growth in the quick
service restaurant segment is expected to come from bakeries,
sandwich shops and new entrants that are appealing to changes in
consumer preferences away from the FFHR category.
Finally, the restaurant industry has few barriers to entry, and
therefore new competitors may emerge at any time. To the extent
that one of our existing or future competitors offers items that
are better priced or more appealing to consumer tastes or a
competitor increases the number of restaurants it operates in
one of our key markets or offers financial incentives to
personnel, franchisees or prospective sellers of real estate in
excess of what we offer, or a competitor has more effective
advertising and marketing programs than we do, it could have a
material adverse effect on our financial condition and results
of operations. We also compete with other restaurant chains and
other retail businesses for quality site locations and hourly
employees.
A significant component of our growth strategy involves
increasing our net restaurant count in our international
markets. We can increase our net restaurant count by opening new
international restaurants in both existing and new markets and
by minimizing the number of closures in our existing markets. We
and our franchisees face many challenges in opening new
international restaurants, including, among others:
We expect that most of our international growth will be
accomplished through the opening of additional franchise
restaurants. However, our franchisees may be unwilling or unable
to increase their investment in our
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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.
We and our franchisees purchase large quantities of food and
supplies which may be subject to substantial price fluctuations.
The cost of the food and supplies we use depends on a variety of
factors, many of which are not predictable or within our
control. Fluctuations in weather, global supply and demand and
the value of the U.S. dollar, commodity market conditions,
government tax incentives and other factors could adversely
affect the cost, availability and quality of some of our
critical products and raw ingredients, including beef, chicken,
cheese and cooking oils. 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. Our profitability depends in
part on our ability to anticipate and react to changes in food
and supply costs. Moreover, to the extent that we increase the
prices for our products, our guests may reduce the number of
visits to our restaurants or purchase less expensive menu items,
which would have a material adverse effect on our business,
results of operation and financial condition.
We purchase large quantities of beef and chicken in the United
States, which represent approximately 19% and 13% of our food
costs, respectively. 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 and other factors.
Demand for corn for use in ethanol, the primary alternative fuel
in the United States, has significantly reduced the supply of
corn for cattle and chicken feed and has resulted in higher beef
and chicken prices. The price of beef and chicken increased in
fiscal 2008 and we expect the price of these commodities to
continue to be volatile. We do not utilize commodity option or
future contracts to hedge commodity prices for beef and do not
have long-term pricing arrangements. As a result, we purchase
beef and many other commodities at market prices, which
fluctuate on a daily basis. We are currently under fixed price
contracts with most of our chicken suppliers which expire in
December 2008. If the price of beef, chicken or other food
products that we use in our restaurants increases in the future
and we choose not to pass, or cannot pass, these increases on to
our guests, our operating margins would decrease.
Increases in energy costs for our Company restaurants,
principally electricity for lighting restaurants and natural gas
for our broilers, could adversely affect our operating margins
and our financial results if we choose not to pass, or cannot
pass, these increased costs to our guests. In addition, our
distributors purchase gasoline needed to transport food and
other supplies to us. Any significant increases in energy costs
could result in the imposition of fuel surcharges by our
distributors that could adversely affect our operating margins
and financial results if we chose not to pass, or cannot pass,
these increased costs to our guests.
As of June 30, 2008, our restaurants were operated,
directly by us or by franchisees, in 71 foreign countries and
U.S. territories (Guam and Puerto Rico, which are
considered part of our international business). During fiscal
2007 and 2008, our revenues from international operations were
approximately $930 million and $1.043 billion,
respectively, or 42% of total revenues for both years. Our
results of operations are substantially affected not only by
global economic conditions, but also by local operating and
economic conditions, which can vary substantially by market.
Unfavorable conditions can depress sales in a given market and
may prompt promotional or other actions
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that adversely affect our margins, constrain our operating
flexibility or result in charges, restaurant closures or sales
of Company restaurants. Whether we can manage this risk
effectively depends mainly on the following:
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.
The restaurant industry is affected by consumer preferences and
perceptions. If prevailing health or dietary preferences and
perceptions cause consumers to avoid our products in favor of
alternative food options, our business could suffer. In
addition, negative publicity about our products could materially
harm our business, results of operations and financial
condition. In recent years, numerous companies in the fast food
industry have introduced products positioned to capitalize on
the growing consumer preference for food products that are
and/or are
perceived to be healthful, nutritious, low in calories and low
in fat content. Our success will depend in part on our ability
to anticipate and respond to changing consumer preferences,
tastes and eating and purchasing habits.
Our success depends to a significant extent on discretionary
consumer spending, which is influenced by general economic
conditions, consumer confidence and the availability of
discretionary income. We may experience declines in sales during
economic downturns, periods of prolonged inflation or due to
natural disasters, health epidemics or pandemics, terrorist
attacks or the prospect of such events. Challenging economic
conditions, particularly in the United States, due to
inflationary pressures, higher unemployment rates and
unprecedented increases in gasoline prices could result in a
decline in consumer discretionary income. Any material decline
in the amount of discretionary spending either in the United
States or, as we continue to expand internationally, in other
countries in which we operate, could reduce traffic in some or
all of our restaurants or limit our ability to raise prices,
either of which could have a material adverse effect on our
financial condition and results of operations.
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Moreover, in the event of a natural disaster or act of
terrorism, or the threat of either, we may be required to
suspend operations in some or all of our restaurants, which
could have a material adverse effect on our business, financial
condition and results of operations.
Approximately 90% of our restaurants are franchised and we do
not expect the percentage of franchise restaurants to change
significantly as we implement our growth strategy. Although we
believe that this restaurant ownership mix is beneficial to us
because the capital required to grow and maintain our system is
funded primarily by franchisees, it also presents a number of
drawbacks, such as our limited control over franchisees and
limited ability to facilitate changes in restaurant ownership.
In addition, we are dependent on franchisees to open new
restaurants as part of our growth strategy. Franchisees may not
have access to the financial resources they need in order to
open new restaurants due to the unavailability of credit or
other factors beyond their control. Any significant inability to
obtain necessary financing on acceptable terms, or at all, could
slow our planned growth.
Our principal competitors may have greater control over their
respective restaurant systems than we do. McDonald’s
exercises control through its significantly higher percentage of
company restaurants and ownership of franchisee real estate.
Wendy’s also has a higher percentage of company restaurants
than we do. As a result of the greater number of company
restaurants, McDonald’s and Wendy’s may have a greater
ability to implement operational initiatives and business
strategies, including their marketing and advertising programs.
Franchisees are independent operators and have a significant
amount of flexibility in running their operations, including the
ability to set prices of our products in their restaurants.
Their employees are not our employees. Although we can exercise
control over our franchisees and their restaurant operations to
a limited extent through our ability under the franchise
agreements and our Manual of Operating Data to mandate menu
items, signage, equipment, hours of operation and standardized
operating procedures and approve suppliers, distributors and
products, the quality of franchise restaurant operations may be
diminished by any number of factors beyond our control.
Consequently, franchisees may not successfully operate
restaurants in a manner consistent with our standards and
requirements, such as our cleanliness standards, or may not hire
and train qualified managers and other restaurant personnel.
While we ultimately can take action to terminate franchisees
that do not comply with the standards contained in our franchise
agreements 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
and property revenues could decline.
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.
We have limited control over the ability of franchisees to
invest in other businesses. To the extent that franchisees use
the cash from their Burger King restaurants to subsidize
their other businesses rather than to pay amounts owed to us for
royalties, advertising fund contributions or rents or to expand
their Burger King business, our financial results could
be adversely affected.
Our revenues are heavily influenced by brand marketing and
advertising. Our marketing and advertising programs may not be
successful, which may lead us to fail to attract new guests and
retain existing guests. If our marketing and advertising
programs are unsuccessful, our results of operations could be
materially adversely affected. Moreover, because franchisees and
Company restaurants contribute to our advertising fund based on
a percentage of their gross sales, our advertising fund
expenditures are dependent upon sales volumes at system-wide
restaurants. If system-wide sales decline, there will be a
reduced amount available for our marketing and advertising
programs.
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The support of our franchisees is critical for the success of
our marketing programs and any new strategic initiatives we seek
to undertake. In the United States, we poll our franchisees
before introducing any nationally- or locally-advertised price
or discount promotion to gauge the level of support for the
campaign. In addition, franchisees may elect to participate in
certain local advertising campaigns at the Designated Market
Area level, and their failure to contribute to local advertising
may adversely impact sales in their markets. While we can
mandate certain strategic initiatives through enforcement of our
franchise agreements, we need the active support of our
franchisees if the implementation of these initiatives is to be
successful. Although we believe that our current relationships
with our franchisees are generally good, there can be no
assurance that our franchisees will continue to support our
marketing programs and strategic initiatives. For example, we
were recently 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.
We receive revenues in the form of royalties and fees from our
franchisees. As a result, our operating results substantially
depend upon our franchisees’ sales volumes, restaurant
profitability, and financial viability. However, our franchisees
are independent operators, and their decision to incur
indebtedness is generally outside of our control and could
result in financial distress in the future due to over-leverage.
In 2003, many of our franchisees in the United States and Canada
were in financial distress primarily due to over-leverage. In
response to this situation, we established the Franchisee
Financial Restructuring Program, or FFRP program, in February
2003 to address these financial problems. At its peak in August
2003, over 2,540 restaurants were in the FFRP program. As of
December 31, 2006, the FFRP program in the United States
and Canada was completed. However, there will always be a
percentage of franchisees in our system in financial distress
and we will continue to provide assistance to these franchisees
as needed. As of June 30, 2008, we have an aggregate
remaining potential commitment of up to $17 million to fund
certain loans to renovate franchise restaurants, make
renovations to certain restaurants that we lease or sublease to
franchisees, and to provide rent relief
and/or
contingent cash flow subsidies to certain franchisees.
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.
In connection with sales of Company restaurants to franchisees,
we have guaranteed certain lease payments of franchisees arising
from leases assigned to the franchisees as part of the sale, by
remaining secondarily liable for base and contingent rents under
the assigned leases of varying terms. The aggregate contingent
obligation arising from these assigned lease guarantees,
excluding contingent rent, was $101 million as of
June 30, 2008, including $67 million in the U.K.,
expiring over an average period of six years.
To the extent that our franchisees experience financial
distress, due to over-leverage or otherwise, it could negatively
affect (1) our operating results as a result of delayed or
reduced payments of royalties, advertising fund contributions
and rents for properties we lease to them or claims under our
lease guarantees, (2) our future revenue, earnings and cash
flow growth and (3) our financial condition. In addition,
lenders to our franchisees were adversely affected by
franchisees who defaulted on their indebtedness and there can be
no assurance that current or prospective franchisees can obtain
necessary financing on favorable terms or at all in light of the
history of financial distress among franchisees and prevailing
market conditions.
There
can be no assurance that the franchisees can or will renew their
franchise agreements with us.
Our franchise agreements typically have a
20-year
term, and our franchisees may not be willing or able to renew
their franchise agreements with us. For example, franchisees may
decide not to renew due to low sales volumes, high real estate
costs, or may be unable to renew due to the failure to secure
lease renewals. In order for a franchisee to renew its franchise
agreement with us, it typically must pay a $50,000 franchise
fee, remodel its restaurant to conform to our current standards
and, in many cases, renew its property lease with its landlord.
The average cost to remodel a stand-alone restaurant in the
United States ranges from $200,000 to $250,000 and the
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average cost to replace the existing building with a new
building is approximately $1 million. Franchisees generally
require additional capital to undertake the required remodeling
and pay the franchise fee, which may not be available to the
franchisee on acceptable terms or at all. If a substantial
number of our franchisees cannot or decide not to, renew their
franchise agreements with us, then our results of operations and
financial condition would suffer.
We have embarked on a reimaging program to remodel and rebuild
our Company restaurants in the United States and Canada.
During fiscal 2008, we spent approximately $26 million on
our restaurant reimaging program, and we plan to spend an
additional $30 million to $35 million through the end
of fiscal 2009. As a result of this program, we have had to
temporarily close Company restaurants in the process of being
remodeled or rebuilt, and such restaurant closures will continue
for the duration of the program. During fiscal 2008, we
experienced a net reduction in sales of approximately
$1 million as a result of the reimaging program. Although
we have not yet experienced a significant impact on our Company
restaurant revenues, we expect that, as this program begins to
accelerate, these closures will result in additional lost
revenues. While we believe that these capital investments will
drive increased sales and traffic and ultimately generate
increased profits for the improved facilities, there can be no
assurance that we will experience a return on investment and, if
there is such return, that it will offset the lost revenues
resulting from restaurant closures.
Moreover, when we decide to remodel or rebuild a restaurant, we
are required to depreciate the remaining book value of assets to
be disposed of through their disposal date. This accelerated
depreciation expense will have an immediate adverse impact on
occupancy and other operating costs and, therefore, on our
operating margins. During the three and twelve months ended June
30, 2008, accelerated depreciation expense contributed to the
increase in occupancy and other operating expense and to the
decrease in operating margins.
To the extent that the capital investment in our restaurants
fails to generate adequate returns to offset the adverse impact
on revenues and operating margins of temporary restaurant
closures and accelerated depreciation expense, our restaurant
reimaging program will be unsuccessful and our revenues, profits
and cash position will suffer.
Exchange rate fluctuations may affect the translated value of
our earnings and cash flow associated with our international
operations, as well as the translation of net asset or liability
positions that are denominated in foreign currencies. In
countries outside of the United States where we operate Company
restaurants, we generate revenues and incur operating expenses
and selling, general and administrative expenses denominated in
local currencies. In many countries where we do not have Company
restaurants, our franchisees pay royalties in U.S. dollars.
However, as the royalties are calculated based on local currency
sales, our revenues are still impacted by fluctuations in
exchange rates. In fiscal 2008, income from operations would
have decreased or increased $14 million if all foreign
currencies uniformly weakened or strengthened by 10% relative to
the U.S. dollar.
Fluctuations in interest rates may also affect our business. We
attempt to minimize this risk and lower our overall borrowing
costs through the utilization of derivative financial
instruments, primarily interest rate swaps. These swaps are
entered into with financial institutions and have reset dates
and critical terms that match those of our forecasted interest
payments. Accordingly, any change in market value associated
with interest rate swaps is offset by the opposite market impact
on the related debt. We do not attempt to hedge all of our debt
and, as a result, may incur higher interest costs for portions
of our debt which are not hedged.
Our business is susceptible to the risk of food-borne illnesses
(such as
e-coli,
bovine spongiform encephalopathy or “mad cow’s
disease,” hepatitis A, trichinosis or salmonella). We
cannot guarantee that our internal controls and training will be
fully effective in preventing all food-borne illnesses.
Furthermore, our reliance on third-party food suppliers and
distributors increases the risk that food-borne illness
incidents could be caused by
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third-party food suppliers and distributors outside of our
control
and/or
multiple locations being affected rather than a single
restaurant. New illnesses resistant to any precautions may
develop in the future, or diseases with long incubation periods
could arise, such as bovine spongiform encephalopathy, that
could give rise to claims or allegations on a retroactive basis.
Reports in the media of one or more instances of food-borne
illnesses in one of our restaurants or in one of our
competitor’s restaurants could negatively affect our
restaurant sales, force the closure of some of our restaurants
and conceivably have a national or international impact if
highly publicized. This risk exists even if it were later
determined that the illness had been wrongly attributed to the
restaurant or if our restaurants were not implicated but the
cause of the illness was traced to an ingredient used in our
products.
In addition, other illnesses, such as foot and mouth disease or
avian influenza, could adversely affect the supply of some of
our food products and significantly increase our costs. In 2007,
there was an outbreak of foot and mouth disease in England,
which prompted a European-wide ban on live animals, fresh meat
and milk products from the U.K. Although this disease is
extremely rare in humans, the negative publicity about beef and
beef products could adversely affect our sales.
Our industry has long been subject to the threat of food
tampering by suppliers, employees or guests, such as the
addition of foreign objects in the food that we sell. Reports,
whether or not true, of injuries caused by food tampering have
in the past severely injured the reputations of restaurant
chains in the quick service restaurant segment and could affect
us in the future as well. Instances of food tampering, even
those occurring solely at restaurants of our competitors could,
by resulting in negative publicity about the restaurant
industry, adversely affect our sales on a local, regional,
national or worldwide basis. A decrease in guest traffic as a
result of these health concerns or negative publicity could
materially harm our business, results of operations and
financial condition.
We
rely on distributors of food, beverages and other products that
are necessary for our and our franchisees’ operations. If
these distributors fail to provide the necessary products in a
timely fashion, our business would face supply shortages and our
results of operations might be adversely affected.
We and our franchisees are dependent on frequent deliveries of
perishable food products that meet our specifications. Four
distributors service approximately 85% of our U.S. system
restaurants and the loss of any one of these distributors would
likely adversely affect our business. Moreover, in many of our
international markets, including the U.K., we have a sole
distributor that delivers products to all of our restaurants.
Our distributors operate in a competitive and low-margin
business environment and, as a result, they often extend
favorable credit terms to our franchisees. If certain of our
franchisees experience financial distress and do not pay
distributors for products bought from them, those
distributors’ operations would likely be adversely affected
which could jeopardize their ability to continue to supply us
and our other franchisees with needed products. Finally,
unanticipated demand, problems in production or distribution,
disease or food-borne illnesses, inclement weather, terrorist
attacks or other conditions could result in shortages or
interruptions in the supply of perishable food products. As a
result of the financial distress of our franchisees or
otherwise, we may need to take steps to ensure the continued
supply of products to restaurants in the affected markets, which
could result in increased costs to distribute needed products. A
disruption in our supply and distribution network could have a
severe impact on our and our franchisees’ ability to
continue to offer menu items to our guests and could adversely
affect our and our franchisees’ business, results of
operations and financial condition.
Our success depends in part upon our ability to continue to
attract, motivate and retain regional operational and restaurant
general managers with the qualifications to succeed in our
industry and the motivation to apply our core service
philosophy. If we are unable to continue to recruit and retain
sufficiently qualified managers or to motivate our employees to
sustain high service levels, our business and our growth could
be adversely affected. Competition for these employees could
require us to pay higher wages which could result in higher
labor costs. In addition, increases in the minimum wage or labor
regulations could increase our labor costs. For example, the
European markets have seen increased minimum wages due to a
higher level of regulation and the U.S. Congress increased
the national minimum wage to $6.55, with a further increase to
$7.25 effective July 24, 2009. In addition, many states
have adopted, and others are considering adopting, minimum wage
statutes that exceed the federal minimum wage.
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We may be unable to increase our prices in order to pass these
increased labor costs on to our guests, in which case our and
our franchisees’ margins would be negatively affected.
The 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; Russell Klein, our
President, Global Marketing, Strategy and Innovation; Ben Wells,
our Chief Financial Officer; Julio Ramirez, our Executive Vice
President, Global Operations; 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.
We face risks and uncertainties in the U.K. that have resulted
and may continue to result in operating losses in the U.K. This
underperforming market continues to experience challenges such
as difficulties in staffing, negative consumer perceptions about
our food and a highly competitive operating environment.
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.
During 2007, the Mexican Government instituted a tax structure
which will result in companies paying the higher of an
income-based tax or an alternative flat tax commencing in fiscal
2008. The alternative flat tax does not currently have a
material effect on our Mexico tax positions. Should the facts
and circumstances change, we would be required to reevaluate
deferred tax assets related to our Mexican operations, which may
result in a change to our overall tax rate.
Effective July 1, 2006, we realigned the activities
associated with managing our European and Asian businesses,
including the transfer of rights of existing franchise
agreements, the ability to grant future franchise agreements and
utilization of our intellectual property assets, in new European
and Asian holding companies. Previously, all cash flows relating
to intellectual property and franchise rights in those regions
returned to the United States and were subsequently transferred
back to those regions to fund their growing capital
requirements. We believe this realignment more closely aligns
the intellectual property with the respective regions, provides
funding in the proper region and lowers our effective tax rate.
However, if certain of our European and Asian businesses are
less profitable than expected, there could be an adverse impact
on our overall effective tax rate, which would result in
increased income tax expense to us. In connection with this
realignment and the transfer of certain intellectual property to
our new European and Asian holding companies, we received from a
third-party qualified appraiser valuations of the intellectual
property assets. If the IRS were to materially disagree with the
valuations or certain other assumptions made in connection with
this realignment, it could result in additional income tax
liability which could negatively affect our results of
operations.
We are subject to income taxes in both the United States and
numerous foreign jurisdictions. In these foreign jurisdictions,
changes in statutory tax rates may adversely impact our deferred
taxes and effective tax rate. Significant judgment is required
in determining our worldwide provision for income taxes. In the
ordinary course of our business, there are many transactions and
calculations where the ultimate tax determination is uncertain.
Tax authorities regularly audit us as part of their routine
practice. Although we believe our tax estimates are reasonable,
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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 potential losses and liabilities and
we or our franchisees may not be able to renew leases, control
rent increases and control real estate expenses at existing
restaurant locations or obtain leases or purchase real estate
for new restaurants.
Many of our Company restaurants are presently located on leased
premises. In addition, our franchisees generally lease their
restaurant locations. At the end of the term of the lease, we or
our franchisees might be forced to find a new location to lease
or close the restaurant. If we are able to negotiate a new lease
at the existing location or an extension of the existing lease,
the rent may increase significantly. With respect to the land
and buildings that are owned by us or our franchisees, the value
of these assets could decrease or costs could increase because
of changes in the investment climate for real estate,
demographic trends, increases in insurance and taxes and
liability for environmental conditions. Any of these events
could adversely affect our profitability or our
franchisees’ profitability. Some leases are subject to
renewal at fair market value, which could involve substantial
rent increases, or are subject to renewal with scheduled rent
increases, which could result in rents being above fair market
value. We compete with numerous other retailers and restaurants
for sites in the highly competitive market for retail real
estate and some landlords and developers may exclusively grant
locations to our competitors. As a result, we may not be able to
obtain new leases or renew existing ones on acceptable terms,
which could adversely affect our sales and brand-building
initiatives. In the U.K., we have approximately 40 leases for
properties that we sublease to franchisees in which the lease
term with our landlords is longer than the sublease. As a
result, we may be liable for lease obligations if such
franchisees do not renew their subleases or if we cannot find
substitute tenants.
The success of any restaurant depends in substantial part on its
location. There can be no assurance that current locations will
continue to be attractive as demographic patterns change.
Neighborhood or economic conditions where restaurants are
located could decline in the future, thus resulting in
potentially reduced sales in these locations. If we or our
franchisees cannot obtain desirable locations at reasonable
prices, our ability to implement our growth strategy will be
adversely affected.
We depend in large part on our brand, which represents 35% of
the total assets on our balance sheet as of June 30, 2008,
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.
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We may experience significant fluctuations in our operating
results due to a variety of factors, many of which are outside
of our control. Our operating results for any one quarter are
not necessarily indicative of results to be expected for any
other quarter or for any year and sales, comparable sales, and
average restaurant sales for any future period may decrease. Our
results of operations may fluctuate significantly because of a
number of factors, including but not limited to, our ability to
retain existing guests, attract new guests at a steady rate and
maintain guest satisfaction; the announcement or introduction of
new or enhanced products by us or our competitors; significant
marketing promotions that increase traffic to our stores; the
amount and timing of operating costs and capital expenditures
relating to expansion of our business; operations and
infrastructure; governmental regulation; and the risk factors
discussed in this section. Moreover, we may not be able to
successfully implement the business strategy described in this
Form 10-K
and implementing our business strategy may not sustain or
improve our results of operations or increase our market share.
You should not place undue reliance on our financial guidance,
nor should you rely on quarter-to-quarter comparisons of our
operating results as indicators of likely future performance.
As of June 30, 2008, we had total indebtedness under our
senior secured credit facility of $869 million. Our
indebtedness could have important consequences to you.
For example, it could:
In addition, our senior secured credit facility permits us to
incur substantial additional indebtedness in the future. As of
June 30, 2008, we had $73 million available to us for
additional borrowing under our $150 million revolving
credit facility portion of our senior secured credit facility.
If we increase our indebtedness by borrowing under the revolving
credit facility or incur other new indebtedness, the risks
described above would increase.
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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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.
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 32%
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 foods and
that quick service restaurant marketing practices have targeted
children and encouraged obesity. We have been sued in California
under Proposition 65 to force disclosure of warnings that
certain of our products, such as french fries, flame-broiled
hamburgers and grilled chicken, may expose customers to
potentially cancer-causing chemicals. We have also been sued by
the Center for Science in the Public Interest over our use of
trans fat oils in seven franchise restaurants located in
Washington, D.C. Adverse publicity about these allegations
may negatively affect us and our franchisees, regardless of
whether the allegations are true, by discouraging customers from
buying our products. In addition, we face the risk of lawsuits
and negative publicity resulting from illnesses and injuries,
including injuries to infants and children, allegedly caused by
our products, toys and other promotional items available in our
restaurants or our playground equipment.
In addition to decreasing our sales and profitability and
diverting our management resources, adverse publicity or a
substantial judgment against us could negatively impact our
business, results of operations, financial condition and brand
reputation, hindering our ability to attract and retain
franchisees and grow our business in the United States and
internationally.
In addition, activist groups, including animal rights activists
and groups acting on behalf of franchisees, the workers who work
for our suppliers and others, have in the past, and may in the
future, use pressure tactics to generate adverse publicity about
us by alleging, for example, inhumane treatment of animals by
our suppliers, poor working conditions or unfair purchasing
policies. These groups may be able to coordinate their actions
with other groups, threaten strikes or boycotts or enlist the
support of well-known persons or organizations in order to
increase the pressure on us to achieve their stated aims. In the
future, these actions or the threat of these actions may force
us to change our business practices or pricing policies, which
may have a material adverse effect on our business, results of
operations and financial condition.
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
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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. In many of our markets, including the
United States and Europe, we are subject to increasing
regulation regarding our products, which may significantly
increase our cost of doing business.
Many governmental bodies, particularly those in the United
States, the U.K. and Spain, have begun to legislate or regulate
high-fat and high-sodium foods as a way of combating concerns
about obesity and health. Public interest groups have also
focused attention on the marketing of high-fat and high-sodium
foods to children in a stated effort to combat childhood obesity
and legislators in the United States have proposed legislation
to restore the FTC’s authority to regulate children’s
advertising. Further, regulators in the U.K. have adopted
restrictions on television advertising of foods high in fat,
salt or sugar targeted at children. In addition, the Spanish
government and certain industry organizations have focused on
reducing advertisements that promote large portion sizes.
Additional cities or states may propose or adopt similar
regulations. We have made voluntary commitments to change our
advertising to children under the age of 12 in the United States
and European Union. The cost of complying with these regulations
could increase our expenses and the negative publicity arising
from such legislative initiatives could reduce our future sales.
Our food products are also subject to significant complex, and
sometimes contradictory, health and safety regulatory risks
including:
Additional U.S. or foreign jurisdictions may propose to
adopt similar regulations. The cost of complying with these
regulations could increase our expenses. Additionally, menu
labeling legislation may cause some of our guests to avoid
certain of our products
and/or alter
the frequency of their visits.
If we fail to comply with existing or future laws and
regulations governing our products, we may be subject to
governmental or judicial fines or sanctions. In addition, our
and our franchisees’ capital expenditures could increase
due to remediation measures that may be required if we are found
to be noncompliant with any of these laws or regulations.
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Our legal and regulatory environment worldwide exposes us to
complex compliance regimes and similar risks that affect our
operations and results of operations in material ways. In many
of our markets, including the United States and Europe, we
are subject to increasing regulation regarding our operations,
which may significantly increase our cost of doing business. In
developing markets, we face the risks associated with new and
untested laws and judicial systems. Among the more important
regulatory risks regarding our operations we face are the
following:
We are also subject to a Federal Trade Commission rule and to
various state and foreign laws that govern the offer and sale of
franchises. These laws regulate various aspects of the franchise
relationship, including terminations and the refusal to renew
franchises. The failure to comply with these laws and
regulations in any jurisdiction or to obtain required government
approvals could result in a ban or temporary suspension on
future franchise sales, fines, other penalties or require us to
make offers of rescission or restitution, any of which could
adversely affect our business and operating results. We could
also face lawsuits by our franchisees based upon alleged
violations of these laws.
The Americans with Disabilities Act, or ADA, prohibits
discrimination on the basis of disability in public
accommodations and employment. We have, in the past, been
required to make certain modifications to our restaurants
pursuant to the ADA. Although our obligations under those
requirements are substantially complete, future mandated
modifications to our facilities to make different accommodations
for disabled persons and modifications required under the
Department of Justice’s proposal to 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.
Possession and use of employee, franchisee, vendor and consumer
personal information in the ordinary course of our business
subjects us to risks and costs that could harm our business. We
collect, process, transmit and retain personal information
regarding our employees and their families, such as social
security numbers, banking and tax ID information, and health
care information. We also collect, process, transmit and retain
personal information of our franchisees and vendors. In
connection with credit card sales, we transmit confidential
credit card information securely over public networks. Some of
this personal information is held and managed by certain of our
vendors.
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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.
Furthermore, any such breach could result in substantial fines,
penalties and potential litigation which could negatively impact
our results of operations and financial condition. In addition,
errors in the storage, use or transmission of personal
information could result in a breach of privacy. Possession and
use of personal information in our operations also subjects us
to legislative and regulatory burdens that could require
notification of data breaches and restrict our use of personal
information. We cannot assure you that a breach, loss or theft
of personal information will not occur. A major breach, theft or
loss of personal information regarding our employees and their
families or our franchisees, vendors and consumers that is held
by us or our vendors could have a material adverse effect on our
reputation and results of operations and result in further
regulation and oversight by federal and state authorities and
increased costs of compliance.
Computer viruses or terrorism may disrupt our operations and
harm our operating results. Despite our implementation of
security measures, all of our technology systems are vulnerable
to disability or failures due to hacking, viruses, acts of war
or terrorism and other causes. In addition, some 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 and prepare our
financial statements. If our technology systems were to fail,
and we were unable to recover in a timely way, or if we do not
adequately manage our financial reporting and information
systems, our results of operations and financial condition could
be adversely affected.
We are subject to various federal, state, local and foreign
environmental laws and regulations. These laws and regulations
govern, among other things, discharges of pollutants into the
air and water as well as the presence, handling, release and
disposal of and exposure to, hazardous substances. These laws
and regulations provide for significant fines and penalties for
noncompliance. If we fail to comply with these laws or
regulations, we could be fined or otherwise sanctioned by
regulators. Third parties may also make personal injury,
property damage or other claims against owners or operators of
properties associated with releases of, or actual or alleged
exposure to, hazardous substances at, on or from our properties.
Environmental conditions relating to prior, existing or future
restaurants or restaurant sites, including franchised sites, may
have a material adverse effect on us. Moreover, the adoption of
new or more stringent environmental laws or regulations could
result in a material environmental liability to us and the
current environmental condition of the properties could be
harmed by tenants or other third parties or by the condition of
land or operations in the vicinity of our properties.
Unforeseen events, including war, terrorism and other
international conflicts, public health issues, and natural
disasters such as earthquakes, hurricanes and other adverse
weather and climate conditions, whether occurring in the United
States or abroad, could disrupt our operations, disrupt the
operations of franchisees, suppliers or customers, have an
adverse impact on consumer spending and confidence levels or
result in political or economic instability. These events could
reduce demand for our products or make it difficult or
impossible to receive products from distributors.
The private equity funds controlled by the Sponsors beneficially
own approximately 32% of our outstanding common stock. In
addition, three of our 10 directors are representatives of
the private equity funds controlled by the
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Sponsors. Although each Sponsor has currently elected to
nominate only one director, each Sponsor retains the right to
nominate two directors, subject to reduction and elimination as
the stock ownership percentage of the private equity funds
controlled by the applicable Sponsor declines. 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 our
decision to enter into any corporate transaction and may have
the ability to prevent any transaction that requires the
approval of stockholders, regardless of whether or not other
stockholders believe that such transaction is in their own best
interests. Such concentration of voting power could have the
effect of delaying, deterring or preventing a change of control
or other business combination that might otherwise be beneficial
to our stockholders.
Since November 19, 2007, the private equity funds
controlled by the Sponsors have collectively owned less than 50%
of the total voting power of our common stock, and we have no
longer been a “controlled company” under the New York
Stock Exchange, or NYSE, corporate governance listing standards.
The NYSE rules require that each of our compensation committee
and our nominating and corporate governance committee has only
independent directors by November 19, 2008. During the
transition period, from November 19, 2007 through
November 19, 2008, we are entitled to continue utilizing
certain exemptions under the NYSE standards that free us from
these requirements. For that portion of the transition period
that we use these “controlled company” exemptions, you
will not have the same protection afforded to stockholders of
companies that are subject to all of the NYSE corporate
governance requirements. At this time, our audit committee is
fully independent. A majority of the members of our compensation
and nominating and corporate governance committees is
independent and these committees will be fully independent by
November 19, 2008.
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. 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.
Future sales of a substantial number of shares of our common
stock, or the perception that such sales might occur, could
cause the market price of our common stock to decline. The
private equity funds controlled by the Sponsors have
approximately 43 million shares, which represents
approximately 32% of our common stock issued and outstanding at
June 30, 2008 and all of which are subject to registration
rights.
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
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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.
None.
Our global restaurant support center 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 2007 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, 2008:
Cowley v. Burger King Corporation, Case
No. 07-21772
(U.S. District Court for the Southern District of Florida).
On July 10, 2007, a purported class action lawsuit was
filed against us in the United States District Court for the
Southern District of Florida. The case alleged liability under
the Fair and Accurate Credit Transactions Act or FACTA for
failure to truncate credit and debit card account numbers
and/or omit
the expiration date on customer receipts. In May 2008, Congress
passed the FACTA Reform Act, which provides that any company
that printed the expiration date on customer receipts prior to
the effective date of the bill was not in willful violation of
FACTA so long as the company was complying with FACTA’s
requirement of truncating the customer’s credit card number
at all times. Shortly after the bill was enacted, the plaintiff
offered to voluntarily dismiss the case with prejudice, and the
case was dismissed on May 28, 2008.
Ramalco Corp. et al. v. Burger King Corporation,
Case
No. 08-43704CA05
(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. While we believe that
we have the right under our franchise agreements to mandate
extended operating hours, the case is in the preliminary stages
and we are unable to predict the ultimate outcome of the
litigation.
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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.
None.
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 25, 2008, there were
approximately 222 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:
The following table presents information related to the
repurchase of our common stock during the three months ended
June 30, 2008:
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During the last two quarters of fiscal 2007 and each quarter of
fiscal 2008, 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.
On February 21, 2006, we paid an aggregate cash dividend of
$367 million to holders of record of our common stock on
February 9, 2006. At the same time, we paid a compensatory
make-whole payment of $33 million to holders of our options
and restricted stock unit awards, primarily members of senior
management. This compensatory make-whole payment and related
taxes was recorded as compensation expense in the third quarter
of fiscal 2006.
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.
The following table presents information regarding options
outstanding under our compensation plans as of June 30,
2008:
Included in the 6.8 million total number of securities in
column (a) above are approximately 1.4 million
restricted stock units, performance-based restricted stock
awards and deferred stock awards. The weighted average exercise
price in column (b) is based only on stock options as
restricted stock units, performance-based restricted stock
awards and deferred stock awards have no exercise price. The
Company does not currently have warrants or rights outstanding.
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Stock
Performance Graph
This graph compares the cumulative total return of the
Company’s 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,
2008, the last trading day of the Company’s fiscal year.
The graph assumes an investment in the Company’s common
stock and the indices of $100 at May 18, 2006 and that all
dividends were reinvested.
All amounts rounded to nearest dollar.
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, 2008 and 2007 and
for the fiscal years ended June 30, 2008, 2007 and 2006
have been derived from our audited consolidated financial
statements and the notes thereto included in this report. The
selected historical financial data as of June 30, 2006,
2005 and 2004, and for fiscal years ended June 30, 2005 and
2004 have been derived from our audited consolidated financial
statements and the notes thereto, which are not included in this
report.
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The selected historical consolidated financial and other
operating data included below and elsewhere in this report are
not necessarily indicative of future results. The information
presented below should be read in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II,
Item 7 and “Financial Statements and Supplementary
Data” in Part II, Item 8 of this report.
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39
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40
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The following table is a reconciliation of our net income to
EBITDA:
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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.
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 2009, fiscal 2008, fiscal 2007 and
fiscal 2006 in this section are to our fiscal year ending
June 30, 2009 and our fiscal years ended June 30,
2008, 2007 and 2006, 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.
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 business operates in three reportable segments: the
United States and Canada; Europe, the Middle East, Africa and
Asia Pacific, or EMEA/APAC; and Latin America. In fiscal 2008,
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segment revenues and income from operations, excluding
unallocated corporate general and administrative expenses, were
allocated as follows:
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 2008, Company restaurant revenues and
franchise revenues represented 73% and 22% of total revenues,
respectively. The remaining 5% of total revenues was derived
from property income.
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 2008,
franchise restaurants generated 88% 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.
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 all other direct costs of
operating our Company restaurants, including the cost of rent or
real estate depreciation (for restaurant properties owned by
us), depreciation on equipment, repairs and maintenance,
insurance, restaurant supplies and utilities. As average
restaurant sales increase, we can leverage payroll and employee
benefits costs and occupancy and other costs, resulting in a
direct improvement in restaurant profitability. As a result, we
believe our continued focus on increasing average restaurant
sales will result in improved profitability to our restaurants
system-wide.
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. We made
additional discretionary contributions of $5 million,
$9 million and $1 million in fiscal 2008, fiscal 2007
and fiscal 2006, respectively.
Our selling, general and administrative expenses include the
costs of field management for Company and franchise restaurants,
costs of our operational excellence programs (including program
staffing, training and Clean & Safe certifications),
corporate overhead, including corporate salaries and facilities,
advertising and bad debt expenses, 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.
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Property expenses include costs of depreciation and rent on
properties we lease and sublease to franchisees.
Fees paid to affiliates were primarily management fees paid to
our Sponsors under a management agreement that we entered into
in connection with our acquisition of BKC and terminated upon
completion of our initial public offering. Under this agreement,
we paid a management fee to the Sponsors equal to 0.5% of fiscal
2006 revenues, which amount was limited to 0.5% of the prior
year’s total revenues. The management agreement was
terminated in the fourth quarter of fiscal 2006. We paid a one
time fee of $30 million to the Sponsors in May 2006 to
terminate the management agreement.
Other operating (income) expenses, net include income and
expenses that are not directly derived from the Company’s
primary business such as gains and losses on asset and business
disposals, write-offs associated with Company restaurant
closures, impairment charges, settlement losses 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.
Our accomplishments for fiscal 2008 include:
Key
Business Measures
We track our results of operations and manage our business by
using three key business measures: comparable sales growth,
average restaurant sales and sales growth. System-wide results
are driven primarily by our franchise restaurants as
approximately 90% of our system-wide restaurants are franchised.
Comparable sales growth and sales growth are provided by
reportable segments and are analyzed on a constant currency
basis, which means they are calculated using the same exchange
rate over the periods under comparison to remove the effects of
currency fluctuations from these trend analyses. We believe
these constant currency measures provide a more meaningful
analysis of our business by identifying the underlying business
trend, without distortion from the effect of foreign currency
movements. System-wide data represents measures for both Company
restaurants and franchise
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restaurants. Unless otherwise stated, comparable sales growth,
average restaurant sales and sales growth are presented on a
system-wide basis.
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, in each case by reportable
segment. We believe comparable sales growth is a key indicator
of our performance, as influenced by our strategic initiatives
and those of our competitors.
Our comparable sales growth in fiscal 2008 and fiscal 2007 was
driven by our strategic initiatives related to our global growth
pillars — marketing, products, operations and
development — including our barbell menu strategy of
innovative indulgent products and value menu items and continued
development of our breakfast and late night dayparts. These
results are driven mostly by our franchise restaurants, as
approximately 90% of our system-wide restaurants are franchised.
In the United States and Canada, our comparable sales growth
performance increased for fiscal 2008 compared to fiscal 2007,
as a result of our innovative advertising, our barbell menu
strategy, which featured new indulgent products such as the
A-1
Steakhouse Burger, BBQ Bacon Tendercrisp chicken sandwich
and Homestyle Melts as well as new offerings on our BK
Value Menu and BK Breakfast Value Menu, such as the
Spicy Chick‘N
Crisp®
sandwich and the Cheesy Bacon BK
Wrappertm.
Our results were also fueled by successful product promotions,
such as the Whopper
50th anniversary
promotion featuring the Whopper Freakout media campaign
in the United States and the Whopper Superiority
promotion, late-night hours and successful movie tie-ins, such
as The
Simpsonstm
Movie,
Transformerstm,
SpongeBob
SquarePantstm,
Snoopy®,
Indiana
Jonestm
and the Kingdom of the Crystal
Skulltm,
Iron
Mantm
and The Incredible
Hulktm.
Comparable sales growth in EMEA/APAC was driven primarily by
continued growth in EMEA due to our continued focus on
operational improvements, marketing and advertising, and on high
quality indulgent offerings, such as the limited time offer
Angrytm
Whopper®
sandwich and Aberdeen Angus Burger, the continued success of the
King Ahorro value menu in Spain and the BK
Fusionstm
Real Dairy Ice Cream offerings in the U.K.
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Latin America demonstrated strong results in comparable sales
for fiscal 2008 as this segment continues to grow. The
improvement in comparable sales reflects continued strength in
Central America and South America, driven by sales of higher
margin indulgent products, such as the Steakhouse Burger,
Extreme Whopper sandwich and
BKtm
Stacker sandwich and Whopper sandwich limited time
offers. In addition, promotional tie-ins with global marketing
properties, such as The
Simpsonstm
Movie,
Transformerstm,
Scooby
Dootm,
Snoopy®,
Indiana
Jonestm
and the Kingdom of the Crystal
Skulltm
and Iron
Mantm
as well as combo meal offerings also drove sales. This increase
was partially offset by softer performance in Puerto Rico due to
current economic conditions in that U.S. territory as well
as the introduction of a VAT tax which has negatively affected
disposable income.
In the United States and Canada our comparable sales growth
performance increased for fiscal 2007 compared to fiscal 2006,
as a result of our provocative advertising, menu enhancements,
such as the introduction of new products like the BK
Stacker sandwich, as well as limited time offers, such as
the Angus Cheesy Bacon sandwich, Texas Double
Whopper®
sandwich, and Western Whopper sandwich. Other
comparable sales growth drivers included the BK Value
Menu, late-night hours and successful movie tie-ins and
innovative promotions such as
Spider-Mantm
3, SpongeBob Pest of the
Westtm,
Fantastic
4tm
and the
Xbox®
game collection.
Comparable sales growth in EMEA/APAC reflected positive sales
performance in all major countries in this segment for fiscal
2007. Strong comparable sales in the U.K. were driven by the
introduction of fresh, high quality indulgent products, such as
the Aberdeen Angus Burger and 3 Pepper Angus Burger and the
Spider-Mantm
3 movie tie-in which featured the
Spider-Mantm
Dark Whopper sandwich limited time offer. In addition, a
strategic investment of $7 million was made to the U.K.
marketing fund to improve brand recognition and introduce new
products through commercials, such as the “Manthem”
and the Have It Your Way brand promise.
Latin America achieved strong results in comparable sales for
fiscal 2007 compared to fiscal 2006. These strong results were
fueled by the introduction of new products, limited time offers,
innovative promotions and marketing campaigns, such as the
Have It Your Way brand promise.
Average restaurant sales, or ARS, is an important measure of the
financial performance of our restaurants and changes in the
overall direction and trends of sales. ARS is influenced mostly
by comparable sales performance and restaurant openings and
closures and also includes the impact of movement in foreign
currency exchange rates.
Our ARS improvement during fiscal 2008 was primarily due to
improved worldwide comparable sales growth of 5.4% for the
period as discussed above, the opening of new restaurants with
higher than average sales volumes, a $32 thousand favorable
impact from the movement of foreign currency exchange rates,
primarily in EMEA, and, to a lesser extent, the closure of
under-performing restaurants. We and our franchisees opened
282 net new restaurants during fiscal 2008. We believe that
continued improvement in the ARS of existing restaurants and
strong sales at new restaurants, combined with the closure of
under-performing restaurants, will result in financially
stronger operators throughout our system.
Our ARS improvement during fiscal 2007 was primarily due to
improved comparable sales of 3.4% for the period, the opening of
new restaurants with higher than average sales volumes and, to a
lesser extent, the closure of under-performing restaurants. We
and our franchisees opened 441 new restaurants and closed 287
restaurants during fiscal 2007.
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
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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.
Sales growth continued on a positive trend during fiscal 2008,
as comparable sales and restaurant count continued to increase
on a system-wide basis. We expect net restaurant openings to
accelerate in most regions.
Our sales growth in the United States and Canada during fiscal
2008 reflects comparable sales growth and an increase in the
amount of revenues earned by net new restaurants. We had 7,512
restaurants in the United States and Canada as of June 30,
2008, compared to 7,488 restaurants as of June 30, 2007.
EMEA/APAC demonstrated strong sales growth during fiscal 2008,
reflecting net openings of new restaurants and comparable sales
growth in most major markets. We had 3,051 restaurants in
EMEA/APAC as of June 30, 2008, compared to 2,892
restaurants as of June 30, 2007, a 5% increase in the
number of restaurants.
Latin America’s sales growth was driven by net new
restaurant openings and strong comparable sales growth in fiscal
2008. We had 1,002 restaurants in Latin America as of
June 30, 2008, compared to 903 restaurants as of
June 30, 2007, an 11% increase in the number of restaurants.
Sales growth continued on a positive trend during fiscal 2007,
as comparable sales and the number of restaurants continued to
increase on a system-wide basis.
Our sales growth in the United States and Canada during fiscal
2007, reflects positive comparable sales growth and an increase
in the amount of revenues earned by new restaurants, offset by a
net reduction in restaurant count. We had 7,488 restaurants in
the United States and Canada as of June 30, 2007, compared
to 7,534 restaurants as of June 30, 2006.
EMEA/APAC demonstrated strong sales growth during fiscal 2007
reflecting restaurant openings and positive comparable sales in
all the major markets, including the U.K., Germany, Spain,
Australia and New Zealand and smaller markets in the
Mediterranean and the Middle East. Sales performance improved in
the U.K. during the second half of fiscal 2007 as a result of
our strategic investments in that country.
Latin America’s sales growth was driven by new restaurant
openings and strong comparable sales growth in fiscal 2007.
In May 2007, BKC terminated the lease for its proposed new
global headquarters facility, which was to be constructed in
Coral Gables, Florida (the “Coral Gables Lease”). We
determined that remaining at our current headquarters location
would avoid the cost and disruption of moving to a new facility
and that the current headquarters facility would continue to
meet our needs for a global headquarters more effectively and
cost efficiently. The Coral Gables Lease provided for the lease
of approximately 225,000 square feet for a term of
15 years at an estimated initial annual rent of
approximately $6 million per year, subject to escalations.
By terminating the Coral Gables Lease, we will save
approximately $24 million in future rent payments between
October 2008 and September 2018 and approximately
$23 million of tenant improvements and moving costs, which
were expected to be paid over an
18-month
period. Total costs associated with the termination of the Coral
Gables Lease were $7 million, including a termination fee
of $5 million we paid to the landlord, which includes a
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reimbursement of the landlord’s expenses. See
Note 15 to the Consolidated Financial Statements in
Part II, Item 8 of this
Form 10-K.
These costs are reflected in other operating (income)
expense, net in our consolidated statements of income for fiscal
2007.
During fiscal 2006, we regionalized the activities associated
with our European and Asian businesses, including: the transfer
of rights of existing franchise agreements; the ability to grant
future franchise agreements; and utilization of our intellectual
property assets in EMEA/APAC, in new European and Asian holding
companies. In connection with our global realignment of our
European and Asian businesses, and the resulting corporate
restructuring, we incurred costs of $4 million and
$10 million in fiscal 2007 and fiscal 2006, respectively,
consisting primarily of consulting and severance-related costs,
which included severance payments, outplacement services and
relocation costs.
Results
of Operations
The following table presents our results of operations for the
periods indicated:
Fiscal
Year Ended June 30, 2008 Compared to Fiscal Year Ended
June 30, 2007
Revenues
Total Company restaurant revenues increased by
$138 million, or 8%, to $1.8 billion in fiscal 2008,
primarily as a result of the addition of 57 Company restaurants
(net of closures and refranchisings) during fiscal 2008 and
worldwide Company comparable sales growth of 2.9%. Approximately
$70 million, or 51%, of the increase in
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Company restaurant revenues was generated by the favorable
impact from the movement of foreign currency exchange rates,
primarily in EMEA.
In the United States and Canada, Company restaurant revenues
increased by $90 million, or 8%, to $1.2 billion in
fiscal 2008, primarily as a result of a net increase of 87
Company restaurants during fiscal 2008, including the
acquisition of 56 franchise restaurants in April 2008, and
Company comparable sales growth of 2.6% for the period in this
segment. Approximately $16 million, or 18%, of the increase
in Company restaurant revenues was generated by the favorable
impact from the movement of foreign currency exchange rates in
Canada.
In EMEA/APAC, Company restaurant revenues increased by
$40 million, or 8%, to $555 million in fiscal 2008,
primarily as a result of Company comparable sales growth of 3.8%
for the period in this segment and a $53 million favorable
impact from the movement of foreign currency exchange rates.
Partially offsetting these factors was a decrease in revenues
from a net decrease of 37 Company restaurants during fiscal
2008, which was primarily attributable to 15 closures and 16
refranchisings in the U.K.
In Latin America, Company restaurant revenues increased by
$8 million, or 13%, to $69 million in fiscal 2008,
primarily as a result of a net increase of seven Company
restaurants during fiscal 2008, Company comparable sales growth
of 1.8% for the period in this segment and a $1 million
favorable impact from the movement of foreign currency exchange
rates.
Total franchise revenues increased by $77 million, or 17%,
to $537 million in fiscal 2008, driven by a net increase of
225 franchise restaurants during fiscal 2008, worldwide
franchise comparable sales growth of 5.7% for the period and a
$16 million favorable impact from the movement of foreign
currency exchange rates.
In the United States and Canada, franchise revenues increased by
$34 million, or 12%, to $318 million in fiscal 2008,
primarily as a result of franchise comparable sales growth of
5.8% for the period in this segment and higher effective royalty
rates, partially offset by the elimination of royalties from 63
fewer franchise restaurants driven by acquisitions by the
Company and closures during fiscal 2008, including the
acquisition of 56 franchise restaurants in April 2008.
In EMEA/APAC, franchise revenues increased by $38 million,
or 28%, to $173 million in fiscal 2008, driven by a net
increase of 196 franchise restaurants during fiscal 2008,
franchise comparable sales growth of 5.6% for the period in this
segment and a $16 million favorable impact from the
movement of foreign currency exchange rates.
Latin America franchise revenues increased by $5 million,
or 12%, to $46 million in fiscal 2008, as a result of the
net addition of 92 franchise restaurants during fiscal 2008 and
franchise comparable sales growth of 4.5% for the period in this
segment.
Total property revenues increased by $6 million, or 5%, to
$122 million in fiscal 2008, primarily as a result of
worldwide franchise comparable sales growth of 5.7% resulting in
increased contingent rents and a $2 million favorable
impact from the movement of foreign currency exchange rates,
partially offset by the net effect of changes to our property
portfolio, which includes the impact of the closure or
acquisition of restaurants leased to franchisees.
In the United States and Canada, property revenues increased by
$4 million, or 5%, to $89 million in fiscal 2008. This
increase was driven by increased contingent rent payments from
increased franchise sales.
Our EMEA/APAC property revenues increased by $2 million, or
6%, to $33 million, primarily from increased contingent
rents as a result of an increase in franchise sales and a
$2 million favorable impact from the movement of foreign
currency exchange rates, partially offset by the effect of a net
reduction in the number of properties we lease or sublease to
franchisees in EMEA.
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Operating
Costs and Expenses
Total food, paper and product costs increased by
$65 million, or 13%, to $564 million in fiscal 2008,
as a result of an 8% increase in Company restaurant revenues, a
significant increase in commodity costs and a $21 million
unfavorable impact from the movement of foreign currency
exchange rates, primarily in EMEA. As a percentage of Company
restaurant revenues, food, paper and product costs increased
1.3% to 31.4%, primarily due to the increase in commodity and
other food costs in the U.S. and Canada.
In the United States and Canada, food, paper and product costs
increased by $48 million, or 14%, to $381 million in
fiscal 2008, as a result of an 8% increase in Company restaurant
revenues in this segment, a significant increase in commodity
costs and a $6 million unfavorable impact from the movement
of foreign currency exchange rates. Food, paper and product
costs as a percentage of Company restaurant revenues increased
1.7% to 32.5%, primarily due to an increase in beef, cheese,
chicken and other food costs, partially offset by sales of
higher margin products.
In EMEA/APAC, food, paper and product costs increased by
$14 million, or 10%, to $158 million in fiscal 2008,
primarily as a result of an 8% increase in Company restaurant
revenues in this segment, an increase in commodity costs and a
$15 million unfavorable impact from the movement of foreign
currency exchange rates. Food, paper and product costs as a
percentage of Company restaurant revenues increased 0.6% to
28.5%, reflecting the unfavorable impact from product mix and
commodity pressures during fiscal 2008.
In Latin America, food, paper and product costs increased by
$3 million, or 14%, to $25 million in fiscal 2008, as
a result of a 13% increase in Company restaurant revenues in
this segment. As a percentage of revenues, food, paper and
product costs remained relatively unchanged at 36.7% for fiscal
2008 compared to 36.6% for fiscal 2007.
Payroll and employee benefits costs increased by
$43 million, or 9%, to $535 million in fiscal 2008.
This increase was primarily due to the net addition of 57
Company restaurants in fiscal 2008, additional labor needed to
service increased traffic, inflationary increases in salaries
and wages, increases in fringe benefit costs and a
$21 million unfavorable impact from the movement of foreign
currency exchange rates, primarily in EMEA. As a percentage of
Company restaurant revenues, payroll and employee benefits costs
remained relatively unchanged at 29.8% in fiscal 2008 compared
to 29.7% in fiscal 2007, reflecting inflationary increases in
salaries and wages, partially offset by worldwide Company
comparable sales growth of 2.9% for the period.
In the United States and Canada, payroll and employee benefits
costs increased by $28 million, or 9%, to $357 million
in fiscal 2008. This increase was primarily due to the net
addition of 87 Company restaurants in fiscal 2008, additional
labor needed to service increased traffic, inflationary
increases in salaries and wages and a $5 million
unfavorable impact from the movement of foreign currency
exchange rates in Canada. As a percentage of Company restaurant
revenues, payroll and employee benefits costs remained
relatively unchanged at 30.5% in fiscal 2008 compared to 30.4%
in fiscal 2007, reflecting inflationary increases in salaries
and wages, partially offset by Company comparable sales growth
of 2.6% for the period in this segment.
In EMEA/APAC, payroll and employee benefits costs increased by
$14 million, or 9%, to $170 million in fiscal 2008.
This increase was primarily due to an increase in temporary
staffing, inflationary increases in salaries and wages,
increases in fringe benefit costs and a $16 million
unfavorable impact from the movement of foreign currency
exchange rates, partially offset by the net reduction of 37
Company restaurants in fiscal 2008. As a percentage of Company
restaurant revenues, payroll and employee benefits costs
increased 0.2% to 30.5% as a result of inflationary increases in
salaries and wages and increases in fringe benefit costs,
partially offset by Company comparable sales growth of 3.8% for
the period in this segment.
In Latin America, payroll and employee benefits increased by
$1 million, or 14%, to $8 million in fiscal 2008. This
increase was primarily due to a net increase of seven Company
restaurants during fiscal 2008. As a percentage of Company
restaurant revenues, payroll and employee benefits remained
relatively unchanged at 11.8% compared to 11.7% in fiscal 2007.
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Occupancy and other operating costs increased by
$21 million, or 5%, to $439 million in fiscal 2008.
This increase was primarily attributable to the net addition of
57 Company restaurants in fiscal 2008 and an $18 million
unfavorable impact from the movement of foreign currency
exchange rates, primarily in EMEA. As a percentage of Company
restaurant revenues, occupancy and other operating costs
decreased by 0.7% to 24.5% as a result of the benefits realized
from the new flexible batch broilers in the United States and
Canada, which includes accelerated depreciation expense on the
old broilers recorded in fiscal 2007, the closure of
under-performing restaurants and the refranchising of Company
restaurants in the U.K. (including benefits from the write-off
of unfavorable leases) and worldwide Company comparable sales
growth of 2.9% for the period. These benefits were partially
offset by the unfavorable impact of accelerated depreciation
expense related to our restaurant reimaging program in the
United States and Canada.
In the United States and Canada, occupancy and other operating
costs increased by $17 million, or 7%, to $271 million
in fiscal 2008. This increase was primarily driven by the net
addition of 87 Company restaurants in fiscal 2008, accelerated
depreciation expense related to our restaurant reimaging program
and a $4 million unfavorable impact from the movement in
foreign currency exchange rates in Canada. As a percentage of
Company restaurant revenues, occupancy and other operating costs
decreased by 0.4% to 23.1% primarily as a result of the benefits
realized from the accelerated depreciation expense on the old
broilers recorded in fiscal 2007 and not recurring this year,
and Company comparable sales growth of 2.6% for the period in
this segment, partially offset by the unfavorable impact of
accelerated depreciation expense related to our restaurant
reimaging program.
In EMEA/APAC, occupancy and other operating costs increased by
$2 million, or 1%, to $150 million in fiscal 2008.
This increase was primarily due to a $14 million
unfavorable impact from the movement in foreign currency
exchange rates, partially offset by the net reduction of 37
Company restaurants in fiscal 2008. As a percentage of Company
restaurant revenues, occupancy and other operating costs
decreased by 1.7% to 27.1%, reflecting the benefits realized
from the closure of under-performing restaurants and the
refranchising of Company restaurants in the U.K. (including
benefits from the write-off of unfavorable leases) as well as
Company comparable sales growth of 3.8% for the period in this
segment.
In Latin America, occupancy and other operating costs increased
by $2 million, or 13%, to $18 million in fiscal 2008
primarily due to the net addition of seven new Company
restaurants in fiscal 2008. As a percentage of Company
restaurant revenues, occupancy and other operating costs
increased by 0.3% to 26.1% primarily as a result of an increase
in utilities, property taxes and the cost of information
technology upgrades, including POS systems associated with the
additional restaurants.
Selling expenses increased by $8 million, or 10%, to
$91 million in fiscal 2008. The increase was primarily
attributable to $4 million of additional sales promotions
and advertising expenses generated by higher Company restaurant
revenues, a $4 million reduction in the amount of bad debt
recoveries compared to the prior year and a $4 million
unfavorable impact from the movement of foreign currency
exchange rates, primarily in EMEA, partially offset by a
$4 million reduction in the amount of discretionary
contributions to advertising funds in EMEA.
General and administrative expenses increased by
$18 million, or 5%, to $409 million in fiscal 2008.
The increase was primarily attributable to a $6 million
increase in stock-based compensation expense, as an additional
year of grants is included in the expense amount. In addition,
general and administrative expenses increased as a result of a
$5 million increase in corporate salary, fringe benefits
and other employee-related costs, a $5 million increase in
general corporate travel and meeting costs and a
$15 million unfavorable impact from the movement of foreign
currency exchange rates, primarily in EMEA. These increases were
partially offset by a $2 million decrease in operating
costs, which includes a decrease in rent expense, utility
expense and repairs and maintenance and $8 million in
miscellaneous cost savings and other items, including decreased
insurance costs and an increase in the amount of capitalized
indirect labor costs on capital projects. Annual stock-based
compensation expense is expected to increase through fiscal year
2010, as a result of our adoption of Financial Accounting
Standards Board (“FASB”) Statement of Financial
Accounting Standards (“SFAS”) No. 123R,
“Share-based Payment” in fiscal 2007, which has
resulted in stock-based compensation expense only for awards
granted subsequent to our initial
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public offering. See Note 3 to our Consolidated
Financial Statements in Part II, Item 8 of this
Form 10-K
for further information regarding our stock-based
compensation.
Property expenses increased by $1 million, or 2%, to
$62 million in fiscal 2008, primarily as a result of an
increase in contingent rent expense generated by comparable
sales growth in the United States and Canada, as well as a
$2 million unfavorable impact from the movement of foreign
currency exchange rates in EMEA. These increases were partially
offset by a net reduction in the number of properties we lease
or sublease to franchisees in EMEA. Property expenses were 37%
of property revenues in the United States and Canada in both
fiscal 2008 and fiscal 2007. Our property expenses in EMEA/APAC
approximate our property revenues because most of the EMEA/APAC
property operations consist of properties that are subleased to
franchisees on a pass-through basis.
Other operating (income) expense, net was $1 million of
expense in fiscal 2008, compared to $1 million of income in
fiscal 2007. Other operating expense, net in fiscal 2008
includes $4 million of franchise system distress costs in
the U.K., which includes a $1 million payment made to our
sole distributor, $2 million of foreign currency
transaction losses, $2 million of charges associated with
the acquisition of franchise restaurants, $1 million in
charges for litigation reserves and a loss of $1 million
from forward currency contracts used to hedge intercompany loans
denominated in foreign currencies. These costs were partially
offset by net gains of $10 million from the disposal of
assets and restaurant closures, primarily in Germany and the
United States, which includes the refranchising of Company
restaurants in Germany.
Other operating income, net in fiscal 2007 included a net gain
of $5 million from the disposal of assets and a gain of
$7 million from forward currency contracts used to hedge
intercompany loans denominated in foreign currencies, partially
offset by $7 million in costs associated with the
termination of the Coral Gables Lease, $2 million in
charges for litigation reserves and $3 million in franchise
workout costs.
Income from operations increased by $63 million, or 22%, to
$354 million in fiscal 2008, primarily due to a
$77 million increase in franchise revenues driven by
worldwide franchise comparable sales growth of 5.7% for the
period and an increase in the effective royalty rate. See
Note 21 to our audited consolidated financial statements
for segment information disclosed in accordance with
SFAS No. 131, “Disclosures about Segments of
an Enterprise and Related Information.” The favorable
impact that the movement in foreign currency exchange rates had
on revenues was partially offset by the unfavorable impact on
operating costs and expenses, resulting in a $8 million net
favorable impact on income from operations during fiscal 2008.
In the United States and Canada, income from operations
increased by $12 million, or 4%, to $348 million in
fiscal 2008, primarily as a result of a $34 million
increase in franchise revenues, reflecting franchise comparable
sales growth of 5.8% for the period in this segment and an
increase in the effective royalty rate. This increase was
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partially offset by higher selling, general and administrative
expenses of $316 million, driven primarily by increased
salaries and wages, fringe benefit costs and increased
stock-based compensation expense.
Income from operations in EMEA/APAC increased by
$38 million, or 70%, to $92 million in fiscal 2008,
primarily as a result of a $38 million increase in
franchise revenues, reflecting franchise comparable sales growth
of 5.6% for the period in this segment and the net increase of
196 franchise restaurants during fiscal 2008. The favorable
impact that the movement in foreign currency exchange rates had
on revenues was partially offset by the unfavorable impact on
operating costs and expenses, resulting in a $8 million net
favorable impact on income from operations.
Income from operations in Latin America increased by
$6 million, or 17%, to $41 million in fiscal 2008,
primarily as a result of an increase in franchise revenues,
reflecting comparable sales growth of 4.5% for the period in
this segment, and a net increase of 92 franchise restaurants
during fiscal 2008.
Our unallocated corporate expenses decreased by $7 million
during fiscal 2008, primarily as a result of non-recurring
professional services fees incurred associated with the
realignment of our European and Asian businesses during fiscal
2007.
Interest expense, net decreased by $6 million during fiscal
2008, reflecting a reduction in the amount of borrowings
outstanding due to early prepayments of our debt and a decrease
in rates paid on borrowings during the period. The weighted
average interest rates for fiscal 2008 and fiscal 2007 were
6.02% and 6.91%, respectively, which included the impact of
interest rate swaps on 56% and 57% of our term debt,
respectively.
Income tax expense was $103 million in fiscal 2008.
Compared to the same period in the prior fiscal year, our
effective tax rate increased slightly by 1.6 percentage
points to 35.2%.
See Note 14 to our consolidated financial statements for
further information regarding our effective tax rate. See
Item 1A “Risk Factors” in Part I of this
report for a discussion regarding our ability to utilize foreign
tax credits and estimate deferred tax assets.
Net income increased by $42 million, or 28%, to
$190 million in fiscal 2008, primarily as a result of a net
increase in restaurants and strong comparable sales growth,
which increased franchise revenues by $77 million, Company
restaurant margin by $9 million and net property revenues
by $5 million. We also benefited from a $6 million
decrease in interest expense. These improvements were partially
offset by a $26 million increase in selling, general and
administrative expenses and a $28 million increase in
income tax expense.
Fiscal
Year Ended June 30, 2007 Compared to Fiscal Year Ended
June 30, 2006
Revenues
Total Company restaurant revenues increased by 9% to
$1.7 billion in fiscal 2007, primarily as a result of the
addition of 63 Company restaurants (net of closures and
refranchisings) during fiscal 2007 and positive worldwide
Company comparable sales of 2.1%. Approximately
$40 million, or 28%, of the increase in Company restaurant
revenues was generated by the favorable impact from the movement
of foreign currency exchange rates primarily in EMEA.
In the United States and Canada, Company restaurant revenues
increased by 5% to $1.1 billion in fiscal 2007, primarily
as a result of positive Company comparable sales in this segment
of 2.1% and a net increase of 19 Company restaurants during
fiscal 2007. Approximately $4 million, or 8%, of the
increase in Company
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restaurant revenues was generated by the favorable impact from
the movement of foreign currency exchange rates in Canada.
In EMEA/APAC, Company restaurant revenues increased by 20% to
$515 million in fiscal 2007, primarily as a result of a net
increase of 36 Company restaurants in this segment during fiscal
2007. The net increase of 36 Company restaurants reflects
41 acquisitions in the U.K., and 20 openings offset by 15
closures and 10 refranchisings. Company comparable sales
for EMEA/APAC was a positive 2.2% overall in this segment
reflecting positive comparable sales in Germany, Spain, The
Netherlands and the U.K. The increase in revenues also reflects
$37 million, or 9%, due to the favorable impact in the
movement of foreign currency exchange rates.
In Latin America, Company restaurant revenues increased by 9% to
$61 million in fiscal 2007, primarily as a result of the
addition of eight Company restaurants to this segment during
fiscal 2007, and Company comparable sales growth of 1.1%. The
increase in revenues was offset by an unfavorable
$1 million, or 1%, due to the impact from the movement of
foreign currency exchange rates.
Total franchise revenues increased by 10% to $460 million
in fiscal 2007, driven by positive worldwide franchise
comparable sales of 3.6% during that period and by
$7 million of favorable impact from the movement of foreign
currency exchange rates. The number of franchise restaurants
(net of closures and acquisitions of franchise restaurants by
us) increased by 91 during fiscal 2007.
In the United States and Canada, franchise revenues increased by
6% to $284 million in fiscal 2007, primarily as a result of
positive franchise comparable sales in this segment of 3.8% and
higher effective royalty rates partially offset by the
elimination of royalties from a net reduction of 65 franchise
restaurants during fiscal 2007.
In EMEA/APAC, franchise revenues increased by 13% to
$135 million in fiscal 2007, driven by an increase of 69
restaurants (net of closures and acquisitions of franchise
restaurants by us) during fiscal 2007, franchise comparable
sales in this segment of 3.1% and the favorable impact from the
movement of foreign currency exchange rates of $7 million.
Latin America franchise revenues increased by 21% to
$41 million in fiscal 2007, as a result of positive
franchise comparable sales in this segment of 3.7% and the
addition of 87 franchise restaurants (net of closures) during
fiscal 2007.
Total property revenues increased by 4% to $116 million in
fiscal 2007, primarily as a result of higher contingent rent
payments driven by our franchise comparable sales growth and the
favorable impact of foreign currency exchange rates in Europe,
partially offset by a decrease in the number of properties that
we lease or sublease to franchisees due to franchise restaurants
that were closed or acquired by us during the period. In fiscal
2006, property revenues decreased by 7% to $112 million, as
a result of a decrease in the number of properties that we lease
or sublease to franchisees due to franchise restaurants that
were closed or acquired by us during the period, partially
offset by higher contingent rent payments.
In the United States and Canada, property revenues increased to
$85 million in fiscal 2007 from $83 million in fiscal
2006. The revenues for both fiscal years in this segment were
driven by higher contingent rent payments from increased
franchise sales offset by the decrease in the number of
properties that we lease or sublease to franchisees due to
franchise restaurants that were closed or acquired by us.
Our EMEA/APAC property revenues increased by $2 million to
$31 million, primarily as a result of the favorable impact
of foreign currency exchange rates in Europe. In fiscal 2006,
property revenues in this segment decreased by $8 million
to $29 million primarily as a result of the closure of
franchise restaurants in the U.K.
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Operating
Costs and Expenses
Total food, paper and product costs increased by 6% to
$499 million in fiscal 2007, as a result of a 9% increase
in Company restaurant revenues and the unfavorable impact of
foreign currency exchange rates primarily in EMEA. As a
percentage of Company restaurant revenues, food, paper and
product costs decreased 0.9% to 30.1%, primarily from a decrease
in the cost of beef and tomatoes for most of the year and the
sale of higher margin products.
In the United States and Canada, food, paper and product costs
increased by 3% in fiscal 2007, as a result of a 5% increase in
Company restaurant revenues in this segment offset by a benefit
from lower food costs. Food, paper and product costs as a
percentage of Company restaurant revenues decreased 0.6% to
30.8%, primarily due to decreases in the cost of beef and
tomatoes for most of the year. The cost of beef increased in the
fourth quarter of fiscal 2007 placing downward pressures on
Company restaurant margins in the U.S. and Canada.
In EMEA/APAC, food, paper and product costs increased by 15% in
fiscal 2007, primarily as a result of a 20% increase in Company
restaurant revenues in this segment and from the unfavorable
impact of foreign currency exchange rates. Food, paper and
product costs as a percentage of Company restaurant revenues
decreased 1.2% to 27.9% driven by price increases for our
products and promotions geared towards higher margin products.
In Latin America, food, paper and product costs increased by 10%
in fiscal 2007 as a result of a 9% increase in Company
restaurant revenues in this segment. As a percentage of
revenues, food, paper and product costs remained relatively
unchanged at 36.6% for fiscal 2007 compared to 36.4% for fiscal
2006.
Payroll and employee benefits costs increased by 10% to
$492 million in fiscal 2007. This increase was primarily
due to the addition of 63 Company restaurants (net of closures)
in fiscal 2007, increased wages and health insurance benefit
costs, and unfavorable impact of foreign currency exchange
rates. As a percentage of Company restaurant revenues, payroll
and employee benefits costs remained relatively unchanged at
29.7% in fiscal 2007 compared to 29.4% in fiscal 2006 reflecting
the increase from the items above offset by labor efficiencies.
In the United States and Canada, payroll and employee benefits
increased by 5%, as a result of a net increase in the number of
Company restaurants, additional labor hours required for late
night hours and the increase in Company comparable sales, and
inflationary increases in salaries and wages and benefits.
Payroll and employee benefits remained relatively unchanged as a
percentage of Company restaurant revenues reflecting positive
comparable sales and labor efficiencies as an offset to
inflationary increases.
In EMEA/APAC, payroll and employee benefits increased by 23% in
fiscal 2007, primarily as a result of 36 additional Company
restaurants (net of closures and refranchisings) in fiscal 2007
and the unfavorable impact of foreign currency exchange rates.
Payroll and employee benefits as a percentage of Company
restaurant revenues increased 0.5% to 30.3% primarily due to the
acquisition of franchise restaurants in the U.K. generating
lower sales.
In Latin America, payroll and employee benefits increased by 9%
in fiscal 2007, primarily as a result of the opening of eight
new Company restaurants during fiscal 2007. Payroll and employee
benefits remained relatively unchanged as a percentage of
Company restaurant revenues in fiscal 2007 compared to fiscal
2006.
Occupancy and other operating costs increased by 10% to
$418 million in fiscal 2007, compared to the prior year.
This increase was primarily attributable to escalating rent and
utility costs in EMEA, the addition of 63 Company
restaurants (net of closures and refranchisings) in fiscal 2007
and the unfavorable impact of foreign currency exchange rates.
Occupancy and other operating costs remained relatively
unchanged as a percentage of worldwide Company restaurant
revenues in fiscal 2007 compared to fiscal 2006.
In the United States and Canada, occupancy and other operating
costs increased by 2% in fiscal 2007, compared to fiscal 2006,
driven by 19 additional Company restaurants (net of closures and
refranchisings) in fiscal
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2007, and an increase in utility costs to operate during late
night hours. These costs decreased as a percentage of Company
restaurant revenues by 0.8% to 23.5% as a result of a reduction
in casualty and hurricane-related losses.
In EMEA/APAC, occupancy and other operating costs increased by
28% in fiscal 2007, compared to the same period in the prior
year, primarily due to the addition of 36 Company restaurants
(net of closures and refranchisings) in fiscal 2007, and
unfavorable impact of foreign currency exchange rates. As a
percentage of Company restaurant revenues, occupancy and other
operating costs increased to 28.8%, compared to 27.2% in fiscal
2006. The increase in these costs as a percentage of revenues
reflects increases in utilities and rents in all major markets.
In Latin America, occupancy and other operating costs increased
by 16%, primarily as a result of an increase of eight Company
restaurants in fiscal 2007. As a percentage of Company
restaurant revenues, these costs increased by 0.6% to 25.9% in
fiscal 2007 compared to the prior year, primarily as a result of
an increase in utilities, property taxes, repairs and
maintenance and the cost of information technology including POS
systems.
Selling expenses increased by $11 million for the twelve
months ended June 30, 2007, compared to the same period in
the prior year. This increase includes $9 million of
additional sales promotions and advertising expenses generated
by higher Company restaurant revenues, and $7 million
related to incremental contributions made by the Company to the
marketing fund in the U.K. and Germany, offset by a
$5 million recovery of bad debt. The incremental
contribution to the marketing fund in the U.K. was used to
improve brand recognition in that market and to introduce new
premium products with commercials such as, the
“Manthem” and the Have It Your Way brand
promise, and promotions for the £1.99 Whopper
sandwich and Aberdeen Angus burger. The overall increase in
selling expenses for fiscal 2007 of $11 million also
includes the unfavorable impact of approximately $3 million
from the movement in foreign currency exchange rates.
General and administrative expenses decreased by
$25 million to $391 million for fiscal 2007, compared
to the same period in the prior year. This decrease was
primarily driven by a non-recurring compensation expense and
taxes related to the compensatory make-whole payment of
$34 million in the prior year, and by a reduction in
severance and relocation of $3 million, offset by
$4 million in professional fees including $1 million
of expenses related to the secondary offering by private equity
funds controlled by the Sponsors, $5 million of stock-based
compensation, an increase in corporate salary and fringe
benefits of $3 million, and an increase in travel and
meetings of $4 million. The overall decrease of
$25 million also includes the unfavorable impact of
approximately $8 million from the movement in foreign
currency exchange rates.
Property expenses increased by $4 million to
$61 million in fiscal 2007, as a result of lower
amortization of unfavorable leases in the United States and
Canada and the unfavorable impact of foreign currency exchange
rates in Europe. Property expenses decreased by $7 million
to $57 million in fiscal 2006, as a result of a decrease in
the number of properties that we lease or sublease to
franchisees, primarily due to restaurant closures and the
acquisition of franchise restaurants. Additionally, the revenues
from properties that we lease or sublease to
non-restaurant
businesses after restaurant closures is treated as a reduction
in property expenses, resulting in decreased property revenues
and expenses in fiscal 2006. Property expenses were 37% of
property revenues in the United States and Canada in fiscal 2007
compared to 35% in fiscal 2006. Our property expenses in
EMEA/APAC approximate our property revenues because most of the
EMEA/APAC property operations consist of properties that are
subleased to franchisees on a pass-through basis.
During fiscal 2007, we incurred no fees to
affiliates. Fees paid to affiliates were
$39 million during fiscal 2006, consisting of
$30 million paid to our Sponsors to terminate the
management agreement and $9 million from regular recurring
monthly management fees.
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Other operating income, net for fiscal 2007 was $1 million,
compared to $2 million for the same period in the prior
year. The $1 million of other operating income, net for
fiscal 2007 includes a net gain of $5 million from the
disposal of assets, a gain of $7 million from forward
currency contracts used to hedge intercompany loans denominated
in foreign currencies offset by $7 million in costs
associated with the termination of the lease for a new
headquarters which we had proposed to build in Coral Gables,
Florida, $2 million in litigation reserves, and
$3 million in franchise workout costs. The $2 million
of other operating income, net for the twelve months ended
June 30, 2006 included a gain of $3 million from the
disposal of assets including the termination of unfavorable
leases in the U.S., Canada, and the U.K., a $2 million gain
from the recovery of an investment in franchisee debt, and a
$1 million recovery from an investment in New Zealand that
has since been dissolved. These gains were offset by
$4 million of closed restaurant expenses in the U.K. and
the U.S.
Income from operations increased by $121 million to
$291 million in fiscal 2007 compared to the prior year,
primarily as a result of a reduction in fees paid to affiliates
and decreased selling, general and administrative expenses from
the non-recurrence of management fees of $39 million paid
to our Sponsors, as well as the compensation expense and taxes
of $34 million recorded in fiscal 2006 related to the
compensatory make-whole payment. Improvement in restaurant sales
driven by strong comparable sales increased franchise revenues
and Company restaurant revenues and margins. See Note 21
to our audited consolidated financial statements contained in
this report for income from operations by segment. The
favorable impact that the movement in foreign currency exchange
rates had on revenues was offset by the unfavorable impact on
operating costs and expenses, resulting in a $1 million
favorable overall impact on income from operations.
In the United States and Canada, income from operations
increased by $41 million to $336 million during fiscal
2007 compared to the prior year, primarily as a result of an
increase in Company restaurant margins of $20 million and
an increase in franchise revenues of $17 million, driven by
lower Company restaurant expenses and positive comparable sales
for both Company and franchise restaurants.
Income from operations in EMEA/APAC decreased by $8 million
to $54 million in fiscal 2007 compared to the prior year,
driven primarily by an increase of $34 million in selling,
general and administrative expenses, offset by an increase in
Company restaurant margins of $5 million, an increase in
franchise revenues of $16 million and an increase in other
operating income of $5 million generated by a gain on the
sale of a joint venture in New Zealand in fiscal 2007. The
increase in selling, general and administrative expenses of
$34 million reflects increases in the following:
advertising expenses of $11 million; salaries and fringe
benefits of $6 million; relocation, severance and training
expenses of $5 million; professional fees of
$4 million; travel and meeting expenses of $3 million;
and bad debt expense of $2 million.
Income from operations in Latin America increased by
$6 million to $35 million in fiscal 2007 compared to
the prior year, due to an increase in franchise revenues from
comparable sales of 3.7% and a net increase of 87 franchise
restaurants during fiscal 2007.
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Interest expense, net decreased by $5 million during the
twelve months ended June 30, 2007, compared to the same
period in the prior year reflecting a decrease in interest
expense of $8 million offset by a decrease in interest
income of $3 million. The decrease in interest expense is
primarily due to a reduction in the amount of borrowings
outstanding, which reduced interest expense by $12 million.
An increase in rates paid on borrowings increased interest
expense by $10 million during the period, offset by the
benefit from interest rate swaps of $6 million. The
decrease in interest income of $3 million is due to a
reduction in the amount of interest earning cash equivalents
combined with a reduction in yields.
Loss on early extinguishment of debt was $1 million in
fiscal 2007 compared to $18 million in fiscal 2006. The
decrease of $17 million was due to the write off of
deferred financing costs recognized in conjunction with the
refinancing of our secured debt in July 2005, the incremental
$350 million borrowing made in February 2006, and the
$350 million prepayment of term debt from the proceeds of
our initial public offering.
Income tax expense was $75 million in fiscal 2007. Compared
to the prior fiscal year, our effective tax rate decreased
approximately 33 percentage points to 33.6%, primarily as a
result of tax benefits realized from an operational realignment
of our European and Asian businesses, and from the reduction in
tax accruals due to the resolution of certain tax audit matters.
See Note 14 to our consolidated financial statements for
further information regarding our effective tax rate. See
Item 1A “Risk Factors” in Part I of this
report for a discussion regarding our ability to utilize foreign
tax credits.
Net income increased by $121 million to $148 million
in fiscal 2007 compared to the prior year, primarily as a result
of a reduction in fees paid to affiliates and decreased selling,
general and administrative expenses from the non-recurrence of
management fees of $39 million paid to our Sponsors, as
well as the compensation expense and taxes of $34 million
recorded in fiscal 2006 related to the compensatory make-whole
payment. Improvement in restaurant sales driven by strong
comparable sales increased franchise revenues and Company
restaurant revenues and improved our margins. The increase in
net income was also attributed to the net decrease in interest
expense of $5 million, decrease in early extinguishment of
debt of $17 million, offset by an increase in income tax
expense of $22 million.
Cash provided by operations was $243 million in fiscal
2008, compared to $110 million in fiscal 2007.
Our leverage ratio, as defined by our credit agreement, was 1.8x
as of June 30, 2008, compared to 2.1x as of June 30,
2007. The weighted average interest rate on our term debt for
fiscal 2008 was 6.0%, which included the benefit of interest
rates swaps on 56% of our debt.
On January 30, 2008, we entered into interest rate swaps
with an aggregate notional value of $275 million, which
became effective on March 31, 2008 and mature on
December 31, 2011, and in September 2007, interest rate
swaps with an aggregate notional value of $60 million
matured. At June 30, 2008, 75% of our debt was hedged using
interest rate swaps.
During fiscal 2008, we declared and paid four quarterly
dividends of $0.0625 per share, resulting in $34 million of
cash payments to shareholders of record. During the first
quarter of fiscal 2009, we declared a quarterly dividend of
$0.0625 that is payable on September 30, 2008 to
shareholders of record on September 12, 2008.
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During fiscal 2008, we repurchased 1.2 million shares of
common stock under our previously announced share repurchase
program at an aggregate cost of $32 million, which we will
retain in treasury for future use. As of July 1, 2008, we
had $68 million remaining under the share repurchase
program. We intend to use a portion of our excess cash to
repurchase shares under our share repurchase program depending
on market conditions.
We had cash and cash equivalents of $166 million as of
June 30, 2008. In addition, as of June 30, 2008, we
had a borrowing capacity of $73 million under our
$150 million revolving credit.
On July 16, 2008, we acquired 72 restaurants in Nebraska
and Iowa from one of our franchisees for a purchase price of
approximately $67 million.
We expect that cash on hand, cash flow from operations and our
borrowing capacity under our revolving credit facility will
allow us to meet cash requirements, including capital
expenditures, tax payments, dividends, debt service payments and
share repurchases, if any, over the next twelve months and for
the foreseeable future. If additional funds are needed for
strategic initiatives or other corporate purposes, we believe we
could incur additional debt or raise funds through the issuance
of our equity securities.
Comparative
Cash Flows
Cash provided by operating activities was $243 million in
fiscal 2008, compared to $110 million in fiscal 2007. The
$133 million increase in the amount of cash provided by
operating activities in fiscal 2008 is primarily attributable to
the non-recurrence of $82 million of tax payments made in
connection with the operational realignment of our European and
Asian businesses in fiscal 2007 and increases in earnings and
cash provided by other changes in working capital, partially
offset by a $22 million payment to establish a rabbi trust
to invest compensation deferred under our Executive Retirement
Plan and fund future deferred compensation obligations.
Cash provided by operating activities was $110 million and
$67 million in fiscal 2007 and 2006, respectively. The
$110 million provided in fiscal 2007 includes net income of
$148 million, offset by a usage of cash from a change in
working capital of $112 million, including tax payments of
$151 million, which were primarily comprised of payments of
$82 million made in connection with the operational
realignment of our European and Asian businesses and
$37 million of quarterly estimated U.S. federal and
state tax payments. The $67 million provided in fiscal 2006
includes an interest payment to affiliates of $103 million
on PIK notes and a usage of cash from a change in working
capital of $29 million.
Cash used for investing activities was $199 million in
fiscal 2008, compared to $77 million in fiscal 2007. The
$122 million increase in the amount of cash used in fiscal
2008 was primarily attributable to a $91 million increase
in capital expenditures and a $37 million increase in cash
used for acquisitions of franchise restaurants.
Cash used for investing activities was $77 million in
fiscal 2007, compared to $67 million in fiscal 2006. The
$10 million increase in the amount of cash used in fiscal
2007, compared to the prior fiscal year, was due primarily to an
increase in cash used of $13 million for acquisitions of
franchise restaurants, investments in third party debt, and
payments for property and equipment offset by an increase in
proceeds of $4 million from asset disposals and restaurant
closures.
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.
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Other capital expenditures include investments in information
technology systems and corporate furniture and fixtures. The
following table presents capital expenditures by type of
expenditure:
Our capital expenditures increased in fiscal 2008 primarily as a
result a $32 million increase in the construction of new
Company restaurants and properties leased to franchisees, a
$30 million increase in costs associated with our
restaurant reimaging program, a $12 million increase in
real estate purchases and a $7 million increase in capital
expenditures related to operational initiatives.
For fiscal 2009, we expect capital expenditures of approximately
$170 million to $190 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.
Cash used by financing activities was $62 million in fiscal
2008, compared to $127 million in fiscal 2007. The
$65 million decrease in the amount of cash used in fiscal
2008 was primarily attributable to a $124 million reduction
in net repayments of debt, partially offset by a
$33 million increase in cash used to repurchase our common
stock and a $17 million increase in cash dividends paid to
our shareholders.
Financing activities used cash of $127 million in fiscal
2007 and $173 million in fiscal 2006. Uses of cash in
financing activities in fiscal 2007 primarily consisted of
repayments of debt and capital leases of $131 million, two
quarterly cash dividend payments totaling $17 million and
the purchase of treasury stock of $2 million, offset by
$14 million in tax benefits from stock-based compensation,
$8 million from proceeds of stock-option exercises and
$1 million of proceeds from a foreign credit facility. Uses
of cash in financing activities in fiscal 2006 included the
repayment of $2.3 billion in long-term debt and capital
leases, payment of a $367 million cash dividend and payment
of financing costs of $19 million, offset by
$2.1 billion of proceeds received from the refinancing of
our credit facility.
The following table presents information relating to our
contractual obligations as of June 30, 2008:
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See Note 16 to our audited consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for information about our leasing arrangements.
As of June 30, 2008, the projected benefit obligation of
our U.S. and international defined benefit pension plans
exceeded pension assets by $54 million. We use the
Moody’s long-term corporate bond yield indices for Aa bonds
(“Moody’s Aa rate”), plus an additional
25 basis points to reflect the longer duration of our
plans, as the discount rate used in the calculation of the
projected benefit obligation as of the measurement date. We made
contributions totaling $6 million into our pension plans
and estimated benefit payments of $5 million out of these
plans during fiscal 2008. 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.
We have commitments outstanding and contingent obligations
relating to our FFRP Program, 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 20
to the Consolidated Financial Statements in Part II,
Item 8 of this
Form 10-K.
We believe that our results of operations are not materially
impacted by moderate changes in the inflation rate. Inflation
and changing commodity prices did not have a material impact on
our operations in fiscal 2008, fiscal 2007 or fiscal 2006.
Severe increases in inflation, however, could affect the global
and U.S. economies and could have an adverse impact on our
business, financial condition and results of operations.
Critical
Accounting Policies and Estimates
This discussion and analysis of financial condition and results
of operations is based on our consolidated financial statements,
which have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of these
financial statements requires our management to make estimates
and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, as well as related
disclosures of contingent assets and liabilities. We evaluate
our estimates on an ongoing basis and we base our estimates on
historical experience and various other assumptions we deem
reasonable to the situation. These estimates and assumptions
form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Changes in our estimates could materially impact our
results of operations and financial condition in any particular
period.
We consider our critical accounting policies and estimates to be
as follows based on the high degree of judgment or complexity in
their application:
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 regularly review long-lived assets for
indications of impairment. Some of the events or changes in
circumstances that would trigger an impairment test include, but
are not limited to:
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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.
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.
Definite-lived intangible assets, consisting primarily of
franchise agreements and reacquired franchise rights, are
grouped for impairment reviews at the country level. Other
long-lived assets and related liabilities are grouped together
for impairment reviews 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 larger long-lived asset concentrations (the U.K. and
Germany) are made up of geographic regions within those
countries (three in the U.K. and four in Germany). These
operating market definitions are based upon the following
primary factors:
In countries in which we have 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, we have defined operating markets as the entire
country in the case of The Netherlands, Spain, Italy, Mexico and
China.
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, and capital
requirements for property and equipment. We formulate estimates
from historical experience and assumptions of future
performance, based on business plans and forecasts, recent
economic and business trends, and competitive conditions. In the
event that our estimates or related assumptions change in the
future, we may be required to record an impairment charge in
accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets.”
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
in accordance with SFAS No. 141, “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, in accordance with
SFAS No. 142, “Goodwill and Other Intangible
Assets.”
Our impairment test for goodwill requires us to compare the
carrying value of a reporting unit with assigned goodwill to its
fair value. Our reporting units are our operating segments, as
we have defined them under SFAS No. 131,
“Disclosures About Segments of an Enterprise and Related
Information.” If the carrying value of the 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
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consolidated basis, with impairment equal to the amount by which
the carrying value of the Brand exceeds its fair value.
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 in accordance with
SFAS No. 142.
We completed our impairment testing of goodwill and the Brand as
of the beginning of our fourth fiscal quarter. Impairment
charges did not result from these impairment tests for fiscal
2008, fiscal 2007 and fiscal 2006.
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. Effective July 1, 2007,
we adopted FASB Interpretation No. (“FIN”) 48,
“Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109.”
FIN 48 contains 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.
We carry insurance to cover claims such as workers’
compensation, general liability, automotive liability, executive
risk and property, and we are self-insured for healthcare claims
for eligible participating employees. Through the use of
insurance program deductibles (ranging from $0.5 million to
$1 million) and self insurance, we retain a significant
portion of the expected losses under these programs. Insurance
reserves have been recorded based on our estimates of the
anticipated ultimate costs to settle all claims, both reported
and incurred-but-not-reported (IBNR).
Our accounting policies regarding these insurance programs
include judgments and independent actuarial assumptions about
economic conditions, the frequency or severity of claims and
claim development patterns and claim reserve, management and
settlement practices. Since there are many estimates and
assumptions involved in
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recording insurance reserves, differences between actual future
events and prior estimates and assumptions could result in
adjustments to these reserves.
Stock-based compensation expense for stock options is estimated
on the grant date using a Black-Scholes option pricing model. We
only grant non-qualified stock options and do not grant
incentive stock options. Our specific weighted average
assumptions for the risk-free interest rate, expected term,
expected volatility and expected dividend yield are documented
in Note 3 to our audited consolidated financial statements
included in Part II, Item 8 of this
Form 10-K.
Additionally, under SFAS No. 123 (revised 2004),
“Share-Based Payment”
(“SFAS No. 123R”), we are required to
estimate pre-vesting forfeitures for purposes of determining
compensation expense to be recognized. Future expense amounts
for any quarterly or annual period could be affected by changes
in our assumptions or changes in market conditions.
In connection with the adoption of SFAS No. 123R, we
have determined the expected term of stock options granted using
the simplified method as discussed in Section D,
Certain Assumptions Used in Valuation Methods, of SEC Staff
Accounting Bulletin (“SAB”) No. 107. Based
on the results of applying the simplified method, we have
determined that 6.25 years is an appropriate expected term
for awards with four-year ratable vesting and 6.50 years
for awards with five-year ratable vesting.
As a newly public company, we had previously elected, for stock
options granted subsequent to our adoption of
SFAS No. 123R to base our estimate of the expected
volatility of our common stock for the Black-Scholes model
solely on the historical volatility of a group of our peers, as
permitted under SFAS No. 123R and
SAB No. 107. Beginning in fiscal 2008, we determined
that we had sufficient information regarding the historical
volatility of our stock price and implied volatility of our
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 our peers.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and
Financial Liabilities,” which allows entities to
voluntarily choose, at specified election dates, to measure
certain financial assets and financial liabilities (as well as
certain nonfinancial instruments that are similar to financial
instruments) at fair value (the “fair value option”).
The election is made on an
instrument-by-instrument
basis and is irrevocable. If the fair value option is elected
for an instrument, SFAS No. 159 specifies that all
subsequent changes in fair value for that instrument must be
reported in earnings. SFAS No. 159 is effective as of
the beginning of an entity’s first fiscal year that begins
after November 15, 2007, which for us was July 1,
2008. We do not expect to make an election to measure any of our
currently eligible financial assets or liabilities at fair value
upon the adoption of SFAS No. 159 and, therefore, do
not expect the adoption of SFAS No. 159 will have a
material impact on our statements of operations or financial
position.
In December 2007, the FASB issued SFAS No. 141(revised
2007), “Business Combinations”
(“SFAS 141R”). SFAS No. 141R replaces
SFAS No. 141 but retains the fundamental requirements
in SFAS No. 141 that the acquisition method of
accounting be used for all business combinations and for an
acquirer to be identified for each business combination.
SFAS No. 141 defines the acquirer as the entity that
obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date
that the acquirer achieves control. SFAS No. 141R
requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree at their fair values at the acquisition date. Costs
incurred by the acquirer to effect the acquisition are not
allocated to the assets acquired or liabilities assumed, but are
recognized separately. SFAS No. 141R is effective
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008, which for
us will be business combinations with an acquisition date
beginning on or after July 1, 2009. We have not yet
determined the impact that SFAS No. 141R will have on
our consolidated balance sheet and income statement.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51.”
SFAS No. 160 amends ARB No. 51 to establish
accounting and
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reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary and
clarifies that a noncontrolling interest in a subsidiary is an
ownership interest that should be reported as equity in the
consolidated financial statements. SFAS No. 160
establishes a single method of accounting for changes in a
parent’s ownership interest in a subsidiary that do not
result in deconsolidation and requires a parent to recognize a
gain or loss in net income when a subsidiary is deconsolidated.
SFAS No. 160 also requires consolidated net income to
be reported at amounts that include the amounts attributable to
both the parent and the noncontrolling interest and to disclose,
on the face of the consolidated statement of income, the amounts
of consolidated net income attributable to the parent and to the
noncontrolling interest. SFAS No. 160 is effective for
fiscal years beginning on or after December 15, 2008, which
for us will be our fiscal year beginning on July 1, 2009.
We have not yet determined the impact, if any, that
SFAS No. 160 will have on our consolidated balance
sheet and income statement.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements,” which defines fair
value, establishes a framework for measuring fair value in GAAP,
and enhances disclosures about fair value measurements. In
February 2008, the FASB amended SFAS No. 157 by
issuing FASB Staff Position (“FSP”)
FAS 157-1,
“Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements that
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement
No. 13”, which states that SFAS No. 157
does not address fair value measurements for purposes of lease
classification or measurement. FSP
FAS 157-1
does not apply to assets acquired or liabilities assumed in a
business combination that are required to be measured at fair
value under SFAS No. 141 or SFAS No. 141(R),
regardless of whether those assets and liabilities are related
to leases. In February 2008, the FASB also issued FSP
FAS 157-2,
“Effective Date of FASB Statement
No. 157”, which delayed the effective date of
SFAS No. 157 to fiscal years beginning after
November 15, 2008, for nonfinancial assets and liabilities,
except for items that are recognized or disclosed at fair value
in the financial statements on a recurring basis.
SFAS No. 157 applies when other accounting
pronouncements require fair value measurements but does not
require new fair value measurements. We will be required to
adopt the provisions of SFAS No. 157 effective
July 1, 2008 for financial assets and liabilities. We do
not expect this adoption to have a material impact on our
statements of operations or financial position. We have not yet
determined the impact, if any, of applying the provisions of
SFAS No. 157 to our nonfinancial assets and
liabilities for the purpose of assessing goodwill and brand
impairment, the valuation of our other intangible and long-lived
assets when assessing them for impairment and the valuation of
assets acquired and liabilities assumed in business combinations.
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement
No. 133,” which establishes, among other things,
the disclosure requirements for derivative instruments and
hedging activities. SFAS No. 161 requires qualitative
disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts
of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in
derivative agreements. SFAS No. 161 is effective for
fiscal periods and interim periods beginning after
November 15, 2008, which for us will be of our fiscal year
beginning July 1, 2009.
We are exposed to financial market risks associated with foreign
currency exchange rates, interest rates and commodity prices. In
the normal course of business and in accordance with our
policies, we manage these risks through a variety of strategies,
which may include the use of derivative financial instruments to
hedge our underlying exposures. Our policies prohibit the use of
derivative instruments for speculative purposes, and we have
procedures in place to monitor and control their use.
Movements in foreign currency exchange rates may affect the
translated value of our earnings and cash flow associated with
our foreign operations, as well as the translation of net asset
or liability positions that are denominated in foreign
currencies. In countries outside of the United States where we
operate Company restaurants, we generate revenues and incur
operating expenses and selling, general and administrative
expenses denominated in
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local currencies. In many foreign countries where we do not have
Company restaurants our franchisees pay royalties in
U.S. dollars. However, as the royalties are calculated
based on local currency sales, our revenues are still impacted
from fluctuations in exchange rates. In fiscal 2008, income from
operations would have decreased or increased $14 million if
all foreign currencies uniformly weakened or strengthened 10%
relative to the U.S. dollar.
We use foreign exchange forward contracts as economic hedges to
offset the future impact of gains and losses resulting from
changes in the expected amount of functional currency cash flows
to be received or paid upon settlement of intercompany loans
denominated in foreign currencies. Changes in the fair value of
the forward contracts attributable to changes in the current
spot rates between the U.S. Dollar and the foreign
currencies are offset by the remeasurement of the intercompany
loans. The portion of the fair value of the forward contracts
attributable to the spot-forward difference (the difference
between the spot exchange rate and the forward exchange rate) is
recognized in earnings as a gain or loss on foreign exchange
(See Note 12 to the Consolidated Financial Statements). The
contracts outstanding as of June 30, 2008 mature at various
dates through December 2008 and we intend to continue to renew
these contracts to hedge our foreign exchange impact.
We have a market risk exposure to changes in interest rates,
principally in the United States. We attempt to minimize this
risk and lower our overall borrowing costs through the
utilization of interest rate swaps. These swaps are entered into
with financial institutions and have reset dates and key terms
that match those of the underlying debt. Accordingly, any change
in market value associated with interest rate swaps is offset by
the opposite market impact on the related debt.
As of June 30, 2008, we had interest rate swaps with a
notional value of $655 million that qualify as cash flow
hedges under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” as
amended. The interest rate swaps help us manage exposure to
changes in forecasted LIBOR-based interest payments made on
variable rate debt. A 1% change in interest rates on our
existing debt of $871 million would result in an increase
or decrease in interest expense of approximately $2 million
in a given year, as we have hedged interest payments on
$655 million of our debt.
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 2008. As a result, we purchase beef and other
commodities at market prices, which fluctuate on a daily basis.
The estimated change in Company restaurant food, paper and
product costs from a hypothetical 10% change in average prices
of our commodities would have been approximately
$55 million for fiscal 2008. The hypothetical change in
food, paper and product costs could be positively or negatively
affected by changes in prices or product sales mix.
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BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
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Management’s
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
management’s 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, 2008.
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 Company’s 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
Company’s assets that could have a material effect on the
financial statements.
Management performed an assessment of the effectiveness of the
Company’s internal control over financial reporting as of
June 30, 2008 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 Company’s internal control over
financial reporting was effective as of June 30, 2008.
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 Company’s internal control over
financial reporting as of June 30, 2008 has been audited by
KPMG LLP, the Company’s independent registered public
accounting firm, as stated in its report which is included
herein.
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Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Burger King Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
Burger King Holdings, Inc. and subsidiaries (the Company) as of
June 30, 2008 and 2007, 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, 2008. These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Burger King Holdings, Inc. and subsidiaries as of
June 30, 2008 and 2007, and the results of their operations
and their cash flows for each of the years in the three-year
period ended June 30, 2008, in conformity with
U.S. generally accepted accounting principles.
As discussed in notes 2 and 14 to the consolidated
financial statements, the Company changed its method of
accounting for uncertain tax positions by adopting Financial
Accounting Standards Board Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,”
effective July 1, 2007. As discussed in notes 2 and 18
to the consolidated financial statements, the Company adopted
Statement of Financial Accounting Standards No. 158,
“Employer’s Accounting for Defined Benefit Pension
and Other Postretirement Plans — An Amendment of FASB
Statements No. 87, 88, 106 and 132 (R),” as of
June 30, 2007. As discussed in notes 2 and 3 to the
consolidated financial statements, effective July 1, 2006,
the Company adopted Statement of Financial Accounting Standards
No. 123R (revised 2004), “Share-Based
Payment”.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of
June 30, 2008, 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 28, 2008 expressed an
unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
/s/ KPMG LLP
Miami, Florida
August 28, 2008
Certified Public Accountants
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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 (the Company) as of
June 30, 2008, based on criteria established in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s 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 Management’s Report
on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the Company’s 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 company’s 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 company’s
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
company’s 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, the Company maintained, in all material
respects, effective internal control over financial reporting as
of June 30, 2008, based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of June 30,
2008 and 2007, 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, 2008, and our report dated August 28, 2008
expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG LLP
Miami, Florida
August 28, 2008
Certified Public Accountants
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BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
See accompanying notes to consolidated financial statements.
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BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Statements of Income
See accompanying notes to consolidated financial statements.
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BURGER
KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Equity and Comprehensive
Income
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