Burger King Holdings, Inc.
As filed with the Securities and Exchange Commission on
May 2, 2006
Registration
No. 333-131897
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BURGER KING HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware |
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5812 |
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75-3095469 |
(State or Other Jurisdiction of
Incorporation or Organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(I.R.S. Employer
Identification Number) |
5505 Blue Lagoon Drive
Miami, Florida 3312
(305) 378-3000
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant’s Principal Executive Offices)
ANNE CHWAT
General Counsel
Burger King Holdings, Inc.
5505 Blue Lagoon Drive
Miami, Florida 33126
(305) 378-3000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copies to:
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JEFFREY SMALL
DEANNA KIRKPATRICK
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
(212) 450-4000 |
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WILLIAM F. GORIN
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, NY 10006
(212) 225-2000 |
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
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Proposed Maximum |
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Proposed Maximum |
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Title of Each Class |
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Amount to be |
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Offering Price |
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Aggregate Offering |
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Amount of |
of Securities To Be Registered |
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Registered(1) |
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Per Unit(2) |
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Price |
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Registration Fee(3) |
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Common Stock, par value $0.01 per share
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28,750,000 shares |
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$17.00 |
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$488,750,000 |
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$52,296.25 |
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(1) |
Includes shares issuable upon exercise of the underwriters’
option to purchase additional shares of common stock. |
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(2) |
Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the
Securities Act of 1933. |
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(3) |
A registration fee of $42,800 was previously paid. Accordingly,
a registration fee of $9,496.25 is due in connection with this
filing. |
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and it is not soliciting an offer
to buy these securities in any state where the offer or sale is
not permitted.
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Subject to Completion. Dated
May 1, 2006.
25,000,000 Shares
Burger King Holdings, Inc.
Common Stock
This is an initial public offering of shares of common stock of
Burger King Holdings, Inc. We are offering
25,000,000 shares of common stock to be sold in this
offering.
Prior to this offering, there has been no public market for our
common stock. It is currently estimated that the initial public
offering price will be between $15.00 and $17.00 per share.
We have applied to list our common stock on the New York Stock
Exchange under the symbol “BKC.”
See “Risk Factors” beginning on page 12 to
read about factors you should consider before buying shares of
our common stock.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
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Underwriting | |
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Price to | |
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Public | |
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Commissions | |
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to Us | |
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Per Share
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Total
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To the extent that the underwriters sell more than
25,000,000 shares of common stock, the underwriters have an
option to purchase up to an additional 3,750,000 shares of
common stock from the selling stockholders at the initial public
offering price less the underwriting discount. We will not
receive any of the proceeds from a sale of the shares by the
selling stockholders if the underwriters exercise their option
to purchase additional shares of common stock.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2006.
JPMorgan
Morgan Stanley
Wachovia Securities
Loop Capital Markets, LLC
Prospectus
dated ,
2006
TABLE OF CONTENTS
In this prospectus, we rely on and refer to information
regarding the restaurant industry, the quick service restaurant
segment and the fast food hamburger restaurant category that has
been prepared by industry research firms, including NPD Group,
Inc. (which prepares and disseminates the Consumer Report of
Eating Share Trends, or CREST) and Research International (which
provides us with proprietary National Adult Tracking data) or
compiled from market research reports, research analyst reports
and other publicly available information. All industry and
market data that are not cited as being from a specified source
are from internal analyses based upon data available from noted
sources or other proprietary research and analysis.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in
this prospectus. This summary does not contain all of the
information you should consider before investing in our common
stock. You should read this entire prospectus carefully,
including the risks of investing in our common stock discussed
under “Risk Factors” and the financial statements and
notes included elsewhere in this prospectus.
On December 13, 2002, we acquired Burger King
Corporation, which we refer to as “BKC”, through
private equity funds controlled by Texas Pacific Group, Bain
Capital Partners and the Goldman Sachs Funds, or the
“sponsors”. In this prospectus, unless the context
otherwise requires, all references to “we”,
“us” and “our” refer to Burger King
Holdings, Inc. and its subsidiaries, including BKC, for all
periods subsequent to our December 13, 2002 acquisition of
BKC. All references to our “predecessor” refer to BKC
and its subsidiaries for all periods prior to the acquisition,
which operated under a different ownership and capital
structure.
The King of Burgers
When the first Burger
King®
restaurant opened its doors back in 1954, our founders had a
smart idea: serve great-tasting food fast and allow guests to
customize their hamburgers their way. Much has changed in the
half century since our founders sold the first
Whopper®
sandwiches in a Miami
drive-up hamburger
stand in 1957, but these core principles have remained.
We believe that the Burger King and Whopper brands
are two of the world’s most widely-recognized consumer
brands. These brands, together with our signature flame-broiled
products and the Have It Your
Way®
brand promise, are among the strategic assets that we believe
set Burger King restaurants apart from other regional and
national fast food hamburger restaurant chains. Have It Your
Way is increasingly relevant as consumers continue to demand
personalization and choice over mass production. In a
competitive industry, we believe we have differentiated
ourselves through our attention to individual customers’
preferences by offering great tasting fresh food served fast and
in a friendly manner and by recent advertising campaigns aimed
at becoming a part of the popular culture.
We’re the world’s second largest fast food hamburger
restaurant chain as measured by the number of restaurants
and system-wide sales. We own or franchise
11,109 restaurants in 65 countries and
U.S. territories. The fast food hamburger restaurant
category in the United States had estimated annual sales of over
$50 billion for the year ended October 31, 2005 and
has a projected annual growth rate of 4.2% over the next five
years, according to NPD Group, Inc.
Where We Started
Our founders sold Burger King Corporation to The Pillsbury
Company in 1967, taking it from a small privately held
franchised chain to a subsidiary of a large food conglomerate.
The Pillsbury Company was purchased by Grand Metropolitan plc,
which, in turn, merged with Guinness plc to form Diageo
plc, a British spirits company. As a result, Burger King
Corporation became a small, non-core subsidiary of a large
conglomerate, making it difficult for the brand to prosper.
From 1989, when Grand Metropolitan plc acquired Burger King
Corporation, to 2002, we were subjected to frequently changing
strategies and an absence of consistent focus. Burger King
Corporation operated globally, but marketing, operations and
product development approaches were decided locally, leading to
inconsistencies, despite a very strong brand.
Then in December 2002, Burger King Corporation was acquired by
private equity funds controlled by Texas Pacific Group, Bain
Capital Partners and the Goldman Sachs Funds, which we refer to
as our sponsors. At the time of the acquisition, we faced
significant challenges, including declining average restaurant
sales which resulted in lower restaurant profits compared to our
competitors. Additionally, the number of U.S. franchise
restaurants was shrinking, many of our franchisees in the United
States and Canada were in financial distress, our menu and
marketing strategies did not resonate with customers,
relationships with franchisees were strained and many of our
restaurants had poor service.
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We’re Focused on Turning a Great Brand into a Great
Business
In response to the challenges we faced in December 2002, the
sponsors began building an experienced management team,
including our current Chief Executive Officer, John Chidsey, who
joined the company in March 2004, and our former Chief Executive
Officer, Greg Brenneman, who joined the company in August 2004.
Mr. Chidsey has extensive experience in managing and
leading franchised and branded businesses through his long
tenures at Cendant and PepsiCo, and Mr. Brenneman brought
extensive experience in successfully turning around distressed
businesses. They inherited a strong core of an experienced
management team and together finished assembling the
company’s leaders by recruiting executives with significant
experience in relevant areas. The team has considerable consumer
brand experience from such companies as Avis, Budget Rent A Car
System, The Coca-Cola Company, Dr Pepper/
Seven-Up,
McDonald’s, PepsiCo, Seagram, Wendy’s and
Yum! Brands.
The team quickly put in place a strategic plan, called the Go
Forward Plan. The plan has four guiding principles: Grow
Profitably (a market plan); Fund the Future (a financial plan);
Fire-up the Guest (a product plan); and Working Together (a
people plan). We believe that a strong, simple, measurable,
clearly communicated strategic plan gets results. All of our
employees are measured by their contribution to the Go
Forward Plan. In addition, all of our franchisees know
exactly what we’re working on and can measure how well
we’re doing; they, in turn, are able to contribute
constant, constructive feedback. We benefit from having a group
of employees and franchisees who have pulled together and worked
hard during the last two years, as we focus on turning a great
brand into a great business.
What We’ve Accomplished by Going Forward
Together
Guided by our Go Forward Plan and strong executive team
leadership, our accomplishments include:
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eight consecutive quarters of positive comparable sales growth
in the United States as compared to negative comparable sales
growth in the previous seven consecutive quarters, our best
comparable sales growth in a decade; |
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increasing average restaurant sales in the United States by 11%
over the past two fiscal years and continued growth in the first
nine months of fiscal 2006; |
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improving the financial health of our franchise system in the
United States and Canada as demonstrated by improved royalty
collections and the significant reduction in the number of
franchise restaurants in our Franchisee Financial Restructuring
Program, or the FFRP program, which declined from over 2,540 in
August 2003 to approximately 125 as of March 31, 2006,
accomplished primarily through franchisee financial
restructurings, as well as the closing of approximately
400 restaurants participating in the FFRP program and our
acquisition of approximately 150 franchise restaurants; |
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launching an award-winning advertising and promotion program
focused on our core customers; |
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implementing operational initiatives that enhanced
restaurant-level economics in the United States; |
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implementing a new product development process aimed at
improving our menu and generating a pipeline of new products; |
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designing a new, smaller restaurant model that reduced the
current average non-real estate cost to build a new restaurant
using that design by approximately 25%, making building new
restaurants more attractive; |
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improving relationships with our franchisees in the United
States. Together we have achieved all time high customer
satisfaction scores, as well as record speed of service and
cleanliness scores; |
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increasing our international restaurant base by 122 restaurants
in 2005 and 122 in the first nine months of fiscal 2006 (net of
closures); and |
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increasing net income from $5 million in fiscal 2004 to
$47 million in fiscal 2005, with EBITDA increasing by 65%,
from $136 million in fiscal 2004 to $225 million in
fiscal 2005. Net income decreased from $45 million in the
first nine months of fiscal 2005 to $37 million (including
a $14 million pre-tax debt extinguishment charge and the
$33 million pre-tax compensatory make-whole payment
described below) in the first nine months of fiscal 2006 and
EBITDA increased 22%, from $180 million to
$219 million over the same nine-month period. See
Note 5 to the Summary Consolidated Financial and Other Data
for a definition of EBITDA, its calculation, and an explanation
of its usefulness to management. As of March 31, 2006, we
had total indebtedness of $1.35 billion. |
Why We Are “The King”
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Distinctive brand with global platform: We believe that
our Burger King and Whopper brands are two of the
most widely-recognized consumer brands in the world. In June
2005, Brandweek magazine ranked Burger King number
15 among the top 2,000 brands in the United States. |
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Attractive business model: Approximately 90% of our
restaurants are franchised, which is a higher percentage than
our major competitors in the fast food hamburger restaurant
category. We believe that our franchise restaurants will
generate a consistent, profitable royalty stream to us, with
minimal associated capital expenditures or incremental expense
by us. We also believe this will provide us with significant
cash flow to reinvest in strengthening our brand and enhancing
shareholder value. Although we believe that this restaurant
ownership mix is beneficial to us, it also presents a number of
drawbacks, such as our limited control over franchisees and
limited ability to facilitate changes in restaurant ownership. |
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Established and scalable international business: We have
one of the largest restaurant networks in the world, with more
than 3,800 franchise and company-owned restaurants outside the
United States. We believe that the demand for new international
franchise restaurants is growing and our established
infrastructure is capable of supporting substantial restaurant
expansion internationally. |
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Experienced management team with significant ownership:
We have a seasoned management team with significant experience
in growing companies. Following this offering, our executive
officers will own approximately 1.2% of our common stock, on a
fully-diluted basis, which we believe aligns their interests
with those of our other shareholders. |
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Our Way Going Forward
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Drive sales growth and profitability of our U.S.
business: We believe that we have a long way to go to
achieve our comparable sales and average restaurant sales growth
potential in our core U.S. business. We will continue to
promote innovative marketing campaigns, launch new products to
fill gaps in our menu, enhance the price/value proposition of
our products, improve restaurant operations and extend hours of
operations to meet our customers’ needs and drive sales
growth. We also have reduced the capital costs to build a
restaurant, which, together with the improved financial health
of our franchise system in the United States, is leading to
increased restaurant development in our U.S. business. |
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Expand our large international platform: We will continue
to build upon our substantial international infrastructure,
franchise network and restaurant base, focusing mainly on
under-penetrated markets where we already have a presence.
Internationally we are about one-fourth of the size of our
largest competitor, which we believe demonstrates significant
growth opportunities for us. |
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Continue to build relationships with franchisees: We
succeed when our franchisees succeed, and we will continue
building our relationships with our franchisees. In the past two
years, we have implemented advisory committees for marketing,
operations, finance and people, realigned our global convention
and established quarterly officer and director franchisee
visits. We will continue |
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to dedicate resources toward the creation of a cohesive
organization that is focused on supporting the Burger King
brand globally. |
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Become a world-class global company: Since 2004, we have
integrated our domestic and international operations into one
global company. This realignment of our company allows us to
operate as a global brand and to execute our global growth
strategy while remaining responsive to national differences in
consumer preferences and local requirements. |
Recent Developments
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Payment of a $367 million dividend, $33 million
compensatory make-whole payment and a $30 million sponsor
management termination fee |
On February 21, 2006, we paid a cash dividend of
$367 million, or $3.42 per share, to holders of record of
our common stock on February 9, 2006, primarily the private
equity funds controlled by the sponsors which owned
approximately 95% of the outstanding shares of our common stock
at that date, and members of senior management. We refer to this
cash dividend as the February 2006 dividend. Our board of
directors decided to pay the February 2006 dividend based on our
strong business performance, the deleveraging of our business
and cash generation in excess of our business needs. In July
2005, we used excess cash on hand to pay down our indebtedness
by $232 million. In August, we further paid down our
indebtedness by $47 million. As a result, our debt coverage
ratio improved significantly. The payment of the February 2006
dividend was financed, in large part, by the February 2006
financing described below and returned our level of indebtedness
and debt coverage ratios back to approximately June 30,
2005 levels (our indebtedness at June 30, 2005 was
$1.28 billion and our indebtedness at March 31, 2006
after financing the February 2006 dividend was
$1.35 billion).
At the same time, we paid $33 million, or $3.42 for each
vested and unvested option and restricted stock unit award, to
holders of our options and restricted stock unit awards on
February 9, 2006, primarily members of senior management.
We refer to this payment as the compensatory make-whole payment.
This compensatory make-whole payment and $2 million in
related taxes were recorded as compensation expense in the third
quarter of fiscal 2006. Our board decided to pay the
compensatory make-whole payment because it recognized that the
payment of the February 2006 dividend and the February 2006
financing would decrease the value of the equity interests of
holders of our options and restricted stock unit awards as these
holders were not otherwise entitled to receive the dividend. Our
board also recognized that the holders of our options and
restricted stock unit awards had significantly contributed to
the improvement in our business performance and equity value
over the past two years. Accordingly, it decided to pay the same
amount of the February 2006 dividend, on a per share basis, to
the holders of our options and restricted stock unit awards to
compensate them for this decline in the value of their equity
interests.
On February 3, 2006, we agreed to pay a one-time
$30 million fee to terminate our management agreement with
the sponsors effective upon completion of this offering, which
we refer to as the sponsor management termination fee. The
management agreement currently obligates us to pay approximately
$9 million per year to the sponsors. The sponsor management
termination fee resulted from negotiations with the sponsors to
terminate the management agreement which obligated us to pay the
quarterly management fee. Our board concluded that it was in the
best interests of the company to terminate these arrangements
with the sponsors and the resulting payments upon becoming a
publicly-traded company because the directors believed that
these affiliated-party payments should not continue after this
offering. See “Certain Relationships and Related
Transactions—Management Agreement.”
On February 15, 2006, we amended our senior secured credit
facility in order to declare and pay the February 2006 dividend
and pay the compensatory make-whole payment and the sponsor
management termination fee. At that time, we also borrowed an
additional $350 million under our senior secured credit
facility, all the proceeds of which were used to pay, along with
$50 million of cash on hand, the February 2006 dividend and
the compensatory make-whole payment. We refer to this financing
as the February 2006 financing. We expect to use almost all of
the net proceeds from this offering to repay the
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$350 million borrowed in the February 2006 financing. See
“Use of Proceeds,” “Description of Our Credit
Facility,” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—
Liquidity.”
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February 2006 Employee Option Grant |
On February 14, 2006, we granted options to purchase
53 shares of our common stock to each of approximately
5,000 of our employees worldwide who were not previously
eligible to receive option grants, such as restaurant managers
and support staff. These options generally vest on
February 14, 2011, so long as the employee remains employed
by us, and expire on February 14, 2016.
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Realignment of our European and Asian Businesses |
Our board has authorized the realignment of the regional
management of our European and Asian businesses, including the
granting of franchises and utilization of our intellectual
property assets, in new European and Asian entities. This
realignment of our regional management, legal structure and
franchise/intellectual property assets is expected to have a
positive impact on our future effective tax rate. As a result of
this realignment, we expect to incur approximately $125 to
$143 million in tax liability, which is expected to be
partially offset by the utilization of approximately
$25 million of net operating loss carryforwards and other
foreign tax credits and be paid in the first quarter of fiscal
2007. We also expect to incur $10 million in other related
costs during calendar 2006. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations— Liquidity and Capital Resources—
Realignment of our European and Asian businesses” for
additional discussion of this realignment.
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Recent Management Changes |
On April 7, 2006, we announced that John Chidsey, our
former president and chief financial officer, had been named
chief executive officer. We also announced that Brian Swette, a
current independent director, had been appointed non-executive
chairman of our board of directors. In addition, we announced
that Ben Wells, our former senior vice president and treasurer,
had been promoted to chief financial officer and treasurer.
Mr. Chidsey replaced Greg Brenneman, our former chairman
and CEO, who is returning to his private equity firm, TurnWorks,
Inc. Mr. Brenneman has agreed to continue to work with the
Board of Directors as a consultant during the transition.
Ownership by Sponsors
Our principal stockholders are the private equity funds
controlled by the sponsors. As of May 1, 2006, these funds
beneficially owned approximately 95% of our outstanding common
stock. Following completion of this offering, these funds will
beneficially own approximately 77.1% of our common stock, or
74.3% if the underwriters’ option to purchase additional
shares is fully exercised.
Our Headquarters
Our global headquarters are located at 5505 Blue Lagoon
Drive, Miami, Florida 33126. Our telephone number is
(305) 378-3000. Our website is accessible through
www.burgerking.com or www.bk.com. Information on,
or accessible through, this website is not a part of, and is not
incorporated into, this prospectus.
Burger
King®,
Whopper®,
Whopper
Jr.®,
Have It Your
Way®,
Tendercrisp®,
Burger King Bun Halves and Crescent Logo, Wake Up With The
Kingtm,
BK
Joetm,
BKtm
Chicken Fries and
BKtm
Value Menu trademarks are protected under applicable
intellectual property laws and are the property of Burger King
Brands, Inc., an indirect wholly-owned subsidiary of Burger King
Holdings, Inc. Other registered trademarks referred to in this
prospectus are the property of their respective owners.
5
The Offering
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Common stock offered by us |
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25,000,000 shares(1) |
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Common stock to be outstanding after this offering |
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132,578,053 shares(2) |
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Voting Rights |
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One vote per share. |
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Use of Proceeds |
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We will receive net proceeds from this offering of approximately
$374 million, assuming an initial public offering price of
$16.00 per share, the midpoint of the range set forth on
the cover page of this prospectus, and after deducting
underwriting discounts and commissions and estimated offering
expenses. We expect to use almost all of the net proceeds to
repay the $350 million borrowed under our senior secured
credit facility in connection with the February 2006 financing
and the February 2006 dividend with the balance used for general
corporate purposes. As a result, almost all of the proceeds of
this offering will not be invested in our business. A
$1.00 change in the per share offering price would change
net proceeds by approximately $24 million. |
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We will not receive any of the net proceeds from a sale of
shares of common stock by the selling stockholders if the
underwriters exercise their option to purchase additional shares
of common stock from the selling stockholders. |
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Dividend Policy |
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We do not currently intend to pay cash dividends on shares of
our common stock. |
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New York Stock Exchange Symbol |
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BKC |
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Risk Factors |
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See “Risk Factors” and the other information included
in this prospectus for a discussion of the factors you should
consider carefully before deciding to invest in shares of our
common stock. |
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(1) |
Excludes 3,750,000 shares that may be sold by the selling
stockholders upon exercise of the underwriters’ option to
purchase additional shares. |
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(2) |
Excludes (i) 9,628,913 shares of our common stock
issuable upon the exercise of options or the settlement of
restricted stock unit awards outstanding as of March 31,
2006, of which options to purchase 1,834,609 shares were
exercisable as of March 31, 2006, (ii) 2,589,925
additional shares of our common stock issuable under the Burger
King Holdings, Inc. Equity Incentive Plan and
(iii) 7,113,442 additional shares of our common stock
issuable under the Burger King Holdings, Inc. 2006 Omnibus
Incentive Plan. While we have not issued any options to
employees or directors since March 31, 2006, we intend to
grant approximately 447,884 options, restricted shares or
restricted stock units at a price equal to the initial offering
price to several employees at the effective time of this
offering. |
|
Unless we specifically state otherwise, the information in this
prospectus does not take into account the sale of up to
3,750,000 shares of common stock which the underwriters
have the option to purchase from the selling stockholders.
6
Summary Consolidated Financial And Other Data
The following summary consolidated financial and other data
should be read in conjunction with, and are qualified by
reference to, the disclosures set forth under
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” as well as in the
consolidated financial statements and their notes.
All references to our “predecessor” refer to BKC and
its subsidiaries for all periods prior to our December 13,
2002 acquisition of BKC, which operated under a different
ownership and capital structure. The acquisition was accounted
for under the purchase method of accounting and resulted in
purchase accounting allocations that affect the comparability of
results of operations between periods before and after the
acquisition. In addition, the combined financial data for the
combined fiscal year ended June 30, 2003 have been derived
from the audited consolidated financial statements and notes
thereto of our predecessor and us, but have not been audited on
a combined basis and, as a result, do not comply with generally
accepted accounting principles and are not intended to represent
what our operating results would have been if the acquisition of
BKC had occurred at the beginning of the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King | |
|
|
|
|
|
|
Predecessor | |
|
Holdings, Inc. | |
|
|
|
Burger King Holdings, Inc. | |
|
|
| |
|
| |
|
|
|
| |
|
|
For the | |
|
For the | |
|
For the | |
|
Combined | |
|
For the | |
|
For the | |
|
|
Fiscal Year | |
|
Period from | |
|
Period from | |
|
Twelve | |
|
Fiscal Year | |
|
Nine Months | |
|
|
Ended | |
|
July 1, | |
|
December 13, | |
|
Months | |
|
Ended | |
|
Ended | |
|
|
June 30, | |
|
2002 to | |
|
2002 to | |
|
Ended | |
|
June 30, | |
|
March 31, | |
|
|
| |
|
December 12, | |
|
June 30, | |
|
June 30, | |
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2002 | |
|
2003 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except per share data) | |
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
1,541 |
|
|
$ |
1,646 |
|
|
$ |
751 |
|
|
$ |
906 |
|
|
$ |
1,657 |
|
|
$ |
1,754 |
|
|
$ |
1,940 |
|
|
$ |
1,437 |
|
|
$ |
1,515 |
|
Total company restaurant expenses
|
|
|
894 |
|
|
|
987 |
|
|
|
465 |
|
|
|
557 |
|
|
|
1,022 |
|
|
|
1,087 |
|
|
|
1,195 |
|
|
|
886 |
|
|
|
961 |
|
Selling, general and administrative expenses(1)
|
|
|
400 |
|
|
|
429 |
|
|
|
225 |
|
|
|
253 |
|
|
|
478 |
|
|
|
482 |
|
|
|
496 |
|
|
|
363 |
|
|
|
361 |
|
Property expenses
|
|
|
59 |
|
|
|
58 |
|
|
|
27 |
|
|
|
28 |
|
|
|
55 |
|
|
|
58 |
|
|
|
64 |
|
|
|
43 |
|
|
|
42 |
|
Impairment of goodwill(2)
|
|
|
43 |
|
|
|
5 |
|
|
|
875 |
|
|
|
— |
|
|
|
875 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other operating expenses (income), net(2)
|
|
|
114 |
|
|
|
45 |
|
|
|
39 |
|
|
|
(7 |
) |
|
|
32 |
|
|
|
54 |
|
|
|
34 |
|
|
|
18 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
$ |
1,510 |
|
|
$ |
1,524 |
|
|
$ |
1,631 |
|
|
$ |
831 |
|
|
$ |
2,462 |
|
|
$ |
1,681 |
|
|
$ |
1,789 |
|
|
$ |
1,310 |
|
|
$ |
1,359 |
|
Income (loss) from operations
|
|
|
31 |
|
|
|
122 |
|
|
|
(880 |
) |
|
|
75 |
|
|
|
(805 |
) |
|
|
73 |
|
|
|
151 |
|
|
|
127 |
|
|
|
156 |
|
Interest expense, net
|
|
|
48 |
|
|
|
105 |
|
|
|
46 |
|
|
|
35 |
|
|
|
81 |
|
|
|
64 |
|
|
|
73 |
|
|
|
53 |
|
|
|
53 |
|
Loss on early extinguishment of debt
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
(Loss) income before income taxes
|
|
$ |
(17 |
) |
|
$ |
17 |
|
|
$ |
(926 |
) |
|
$ |
40 |
|
|
$ |
(886 |
) |
|
$ |
9 |
|
|
$ |
78 |
|
|
$ |
74 |
|
|
$ |
89 |
|
Income tax expense (benefit)
|
|
|
21 |
|
|
|
54 |
|
|
|
(34 |
) |
|
|
16 |
|
|
|
(18 |
) |
|
|
4 |
|
|
|
31 |
|
|
|
29 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(38 |
) |
|
$ |
(37 |
) |
|
$ |
(892 |
) |
|
$ |
24 |
|
|
$ |
(868 |
) |
|
$ |
5 |
|
|
$ |
47 |
|
|
$ |
45 |
|
|
$ |
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King | |
|
|
|
|
|
|
Predecessor | |
|
Holdings, Inc. | |
|
|
|
Burger King Holdings, Inc. | |
|
|
| |
|
| |
|
|
|
| |
|
|
For the | |
|
For the | |
|
For the | |
|
Combined | |
|
For the | |
|
For the | |
|
|
Fiscal Year | |
|
Period from | |
|
Period from | |
|
Twelve | |
|
Fiscal Year | |
|
Nine Months | |
|
|
Ended | |
|
July 1, | |
|
December 13, | |
|
Months | |
|
Ended | |
|
Ended | |
|
|
June 30, | |
|
2002 to | |
|
2002 to | |
|
Ended | |
|
June 30, | |
|
March 31, | |
|
|
| |
|
December 12, | |
|
June 30, | |
|
June 30, | |
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2002 | |
|
2003 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except per share data) | |
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income basic
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
$ |
0.23 |
|
|
|
* |
|
|
$ |
0.05 |
|
|
$ |
0.44 |
|
|
$ |
0.42 |
|
|
$ |
0.35 |
|
|
Net income diluted
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
0.23 |
|
|
|
* |
|
|
|
0.05 |
|
|
|
0.44 |
|
|
|
0.42 |
|
|
|
0.33 |
|
|
Pro forma net income, basic(3)
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
0.37 |
|
|
|
* |
|
|
|
0.29 |
|
|
Pro forma net income, diluted(3)
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
0.37 |
|
|
|
* |
|
|
|
0.28 |
|
|
Adjusted pro forma net income, basic(4)
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
0.22 |
|
|
|
* |
|
|
|
0.11 |
|
|
|
0.45 |
|
|
|
0.41 |
|
|
|
0.35 |
|
|
Adjusted pro forma net income, diluted(4)
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
$ |
0.22 |
|
|
|
* |
|
|
$ |
0.11 |
|
|
$ |
0.44 |
|
|
$ |
0.41 |
|
|
$ |
0.34 |
|
Shares outstanding, basic
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
105 |
|
|
|
* |
|
|
|
106 |
|
|
|
106 |
|
|
|
106 |
|
|
|
107 |
|
Shares outstanding, diluted
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
105 |
|
|
|
* |
|
|
|
106 |
|
|
|
107 |
|
|
|
107 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King | |
|
|
|
|
|
|
Predecessor | |
|
Holdings, Inc. | |
|
|
|
Burger King Holdings, Inc. | |
|
|
| |
|
| |
|
|
|
| |
|
|
For the | |
|
For the | |
|
For the | |
|
Combined | |
|
For the | |
|
For the | |
|
|
Fiscal Year | |
|
Period from | |
|
Period from | |
|
Twelve | |
|
Fiscal Year | |
|
Nine Months | |
|
|
Ended | |
|
July 1, | |
|
December 13, | |
|
Months | |
|
Ended | |
|
Ended | |
|
|
June 30, | |
|
2002 to | |
|
2002 to | |
|
Ended | |
|
June 30, | |
|
March 31, | |
|
|
| |
|
December 12, | |
|
June 30, | |
|
June 30, | |
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2002 | |
|
2003 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except per share data) | |
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$ |
324 |
|
|
$ |
212 |
|
|
$ |
1 |
|
|
$ |
81 |
|
|
$ |
82 |
|
|
$ |
199 |
|
|
$ |
218 |
|
|
$ |
151 |
|
|
$ |
21 |
|
Cash provided by (used for) investing activities
|
|
|
(271 |
) |
|
|
(349 |
) |
|
|
(102 |
) |
|
|
(485 |
) |
|
|
(587 |
) |
|
|
(184 |
) |
|
|
(5 |
) |
|
|
(243 |
) |
|
|
(42 |
) |
Cash provided by (used for) financing activities
|
|
|
(52 |
) |
|
|
155 |
|
|
|
112 |
|
|
|
607 |
|
|
|
719 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(214 |
) |
Capital expenditures
|
|
|
199 |
|
|
|
325 |
|
|
|
95 |
|
|
|
47 |
|
|
|
142 |
|
|
|
81 |
|
|
|
93 |
|
|
|
51 |
|
|
|
48 |
|
EBITDA(2)(5)
|
|
$ |
182 |
|
|
$ |
283 |
|
|
$ |
(837 |
) |
|
$ |
118 |
|
|
$ |
(719 |
) |
|
$ |
136 |
|
|
$ |
225 |
|
|
$ |
180 |
|
|
$ |
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006 | |
|
|
| |
|
|
|
|
Pro Forma | |
|
|
Actual | |
|
Pro Forma(6) | |
|
as Adjusted(7) | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
197 |
|
|
$ |
42 |
|
|
$ |
66 |
|
Total assets
|
|
|
2,466 |
|
|
|
2,331 |
|
|
|
2,355 |
|
Total debt and capital lease obligations
|
|
|
1,412 |
|
|
|
1,412 |
|
|
|
1,062 |
|
Total liabilities
|
|
|
2,303 |
|
|
|
2,186 |
|
|
|
1,836 |
|
Total stockholders’ equity
|
|
$ |
163 |
|
|
$ |
145 |
|
|
$ |
519 |
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King Holdings, Inc. | |
|
|
|
|
| |
|
|
Combined | |
|
For the | |
|
For the | |
|
|
Twelve Months | |
|
Fiscal Year Ended | |
|
Nine Months Ended | |
|
|
Ended | |
|
June 30, | |
|
March 31, | |
|
|
June 30, | |
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In constant currencies) | |
Other System-Wide Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable sales growth(8)(9)
|
|
|
(5.9 |
)% |
|
|
1.0 |
% |
|
|
5.6 |
% |
|
|
7.0 |
% |
|
|
2.0 |
% |
Average restaurant sales (in thousands)(8)
|
|
$ |
972 |
|
|
$ |
994 |
|
|
$ |
1,066 |
|
|
$ |
791 |
|
|
$ |
814 |
|
System-wide sales growth(8)
|
|
|
(4.7 |
)% |
|
|
1.2 |
% |
|
|
6.1 |
% |
|
|
7.9 |
% |
|
|
1.9 |
% |
Company restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
735 |
|
|
|
759 |
|
|
|
844 |
|
|
|
818 |
|
|
|
877 |
|
|
EMEA/ APAC(10)
|
|
|
280 |
|
|
|
277 |
|
|
|
283 |
|
|
|
276 |
|
|
|
286 |
|
|
Latin America(11)
|
|
|
46 |
|
|
|
51 |
|
|
|
60 |
|
|
|
54 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurants
|
|
|
1,061 |
|
|
|
1,087 |
|
|
|
1,187 |
|
|
|
1,148 |
|
|
|
1,227 |
|
Franchise restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
7,529 |
|
|
|
7,217 |
|
|
|
6,876 |
|
|
|
6,999 |
|
|
|
6,712 |
|
|
EMEA/ APAC(10)
|
|
|
2,179 |
|
|
|
2,308 |
|
|
|
2,373 |
|
|
|
2,326 |
|
|
|
2,449 |
|
|
Latin America(11)
|
|
|
566 |
|
|
|
615 |
|
|
|
668 |
|
|
|
649 |
|
|
|
721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total franchise restaurants
|
|
|
10,274 |
|
|
|
10,140 |
|
|
|
9,917 |
|
|
|
9,974 |
|
|
|
9,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restaurants
|
|
|
11,335 |
|
|
|
11,227 |
|
|
|
11,104 |
|
|
|
11,122 |
|
|
|
11,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
(551 |
) |
|
$ |
115 |
|
|
$ |
255 |
|
|
$ |
193 |
|
|
$ |
219 |
|
|
EMEA/ APAC(10)
|
|
|
(143 |
) |
|
|
95 |
|
|
|
36 |
|
|
|
36 |
|
|
|
51 |
|
|
Latin America(11)
|
|
|
22 |
|
|
|
26 |
|
|
|
25 |
|
|
|
19 |
|
|
|
22 |
|
|
Unallocated(12)
|
|
|
(133 |
) |
|
|
(163 |
) |
|
|
(165 |
) |
|
|
(121 |
) |
|
|
(136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$ |
(805 |
) |
|
$ |
73 |
|
|
$ |
151 |
|
|
$ |
127 |
|
|
$ |
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Restaurant Revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
768 |
|
|
$ |
802 |
|
|
$ |
923 |
|
|
$ |
678 |
|
|
$ |
761 |
|
|
EMEA/ APAC(10)
|
|
|
363 |
|
|
|
429 |
|
|
|
435 |
|
|
|
329 |
|
|
|
319 |
|
|
Latin America(11)
|
|
|
43 |
|
|
|
45 |
|
|
|
49 |
|
|
|
36 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant revenues
|
|
$ |
1,174 |
|
|
$ |
1,276 |
|
|
$ |
1,407 |
|
|
$ |
1,043 |
|
|
$ |
1,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Restaurant Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
12.1 |
% |
|
|
11.3 |
% |
|
|
14.2 |
% |
|
|
13.9 |
% |
|
|
13.6 |
% |
|
EMEA/ APAC(10)
|
|
|
12.4 |
% |
|
|
18.9 |
% |
|
|
15.2 |
% |
|
|
15.7 |
% |
|
|
14.1 |
% |
|
Latin America(11)
|
|
|
32.6 |
% |
|
|
37.8 |
% |
|
|
30.6 |
% |
|
|
30.5 |
% |
|
|
28.6 |
% |
|
|
Total company restaurant margin
|
|
|
12.9 |
% |
|
|
14.8 |
% |
|
|
15.1 |
% |
|
|
15.0 |
% |
|
|
14.3 |
% |
Franchise Revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
261 |
|
|
$ |
234 |
|
|
$ |
269 |
|
|
$ |
201 |
|
|
$ |
197 |
|
|
EMEA/ APAC(10)
|
|
|
84 |
|
|
|
102 |
|
|
|
114 |
|
|
|
84 |
|
|
|
87 |
|
|
Latin America(11)
|
|
|
23 |
|
|
|
25 |
|
|
|
30 |
|
|
|
21 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total franchise revenues
|
|
$ |
368 |
|
|
$ |
361 |
|
|
$ |
413 |
|
|
$ |
306 |
|
|
$ |
309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise sales (in millions)(13)
|
|
$ |
9,812 |
|
|
$ |
10,055 |
|
|
$ |
10,817 |
|
|
$ |
9,056 |
|
|
$ |
8,106 |
|
|
|
|
|
(1) |
Selling, general and administrative expenses included
$73 million and $72 million of intangible asset
amortization in the fiscal years ended June 30, 2001 and
2002, respectively. Selling, general and administrative expenses
also included $14 million and $7 million of fees paid
to Diageo plc in the fiscal years ended June 30, 2001 and
2002, respectively. |
9
|
|
|
|
(2) |
In connection with our acquisition of BKC, our predecessor
recorded $35 million of intangible asset impairment charges
within other operating expenses (income), net and goodwill
impairment charges of $875 million during the period from
July 1, 2002 to December 12, 2002. |
|
|
|
(3) |
Pro forma net income, basic and diluted, per share for the year
ended June 30, 2005 and nine months ended March 31,
2006 has been computed to give effect to the number of shares to
be sold in this offering that would have been necessary to pay
the portion of the February 2006 dividend of $367 million
in excess of current period earnings. |
|
|
|
|
(4) |
Amounts in calculation as compared to basic and diluted earnings
per share adjusted as follows: (a) net income adjusted for
reduction in interest expense at the weighted average interest
rate during the period multiplied by $350 million of the
net proceeds from this offering used to repay debt, and
(b) weighted average shares during the period increased by
the 25,000,000 shares issued in this offering. |
|
|
|
|
(5) |
EBITDA is defined as net income before interest, taxes,
depreciation and amortization, and is used by management to
measure operating performance of the business. Management
believes that EBITDA incorporates certain operating drivers of
our business such as sales growth, operating costs, general and
administrative expenses and other income and expense. Capital
expenditures, which impact depreciation and amortization,
interest expense, and income tax expense, are reviewed and
monitored separately by management. EBITDA is also one of the
measures used by us to calculate incentive compensation for
management and corporate-level employees. Further, management
believes that EBITDA is a useful measure as it improves
comparability of predecessor and successor results of
operations, as purchase accounting renders depreciation and
amortization non-comparable between predecessor and successor
periods. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations— Factors
Affecting Comparability of Results— Purchase
Accounting”. |
|
|
|
|
|
|
While EBITDA is not a recognized
measure under generally accepted accounting principles, we
believe EBITDA is useful to investors because it is frequently
used by security analysts, investors and other interested
parties to evaluate companies in our industry and us. EBITDA is
not intended to be a measure of liquidity or cash flows from
operations nor a measure comparable to net income as it does not
consider certain requirements such as capital expenditures and
related depreciation, principal and interest payments and tax
payments.
|
|
|
|
The following table is a
reconciliation of our net income to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King | |
|
|
|
|
|
|
Predecessor | |
|
Holdings, Inc. | |
|
|
|
Burger King Holdings, Inc. | |
|
|
| |
|
| |
|
|
|
| |
|
|
For the | |
|
For the | |
|
For the | |
|
Combined | |
|
For the | |
|
For the | |
|
|
Fiscal Year | |
|
Period from | |
|
Period from | |
|
Twelve | |
|
Fiscal Year | |
|
Nine Months | |
|
|
Ended | |
|
July 1, | |
|
December 13, | |
|
Months | |
|
Ended | |
|
Ended | |
|
|
June 30, | |
|
2002 to | |
|
2002 to | |
|
Ended | |
|
June 30, | |
|
March 31, | |
|
|
| |
|
December 12, | |
|
June 30, | |
|
June 30, | |
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2002 | |
|
2003 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net (loss) income
|
|
$ |
(38 |
) |
|
$ |
(37 |
) |
|
$ |
(892 |
) |
|
$ |
24 |
|
|
$ |
(868 |
) |
|
$ |
5 |
|
|
$ |
47 |
|
|
$ |
45 |
|
|
$ |
37 |
|
Interest expense, net(14)
|
|
|
48 |
|
|
|
105 |
|
|
|
46 |
|
|
|
35 |
|
|
|
81 |
|
|
|
64 |
|
|
|
73 |
|
|
|
53 |
|
|
|
67 |
|
Income tax expense (benefit)
|
|
|
21 |
|
|
|
54 |
|
|
|
(34 |
) |
|
|
16 |
|
|
|
(18 |
) |
|
|
4 |
|
|
|
31 |
|
|
|
29 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$ |
31 |
|
|
$ |
122 |
|
|
$ |
(880 |
) |
|
$ |
75 |
|
|
$ |
(805 |
) |
|
$ |
73 |
|
|
$ |
151 |
|
|
$ |
127 |
|
|
$ |
156 |
|
Depreciation, and amortization
|
|
|
151 |
|
|
|
161 |
|
|
|
43 |
|
|
|
43 |
|
|
|
86 |
|
|
|
63 |
|
|
|
74 |
|
|
|
53 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
182 |
|
|
$ |
283 |
|
|
$ |
(837 |
) |
|
$ |
118 |
|
|
$ |
(719 |
) |
|
$ |
136 |
|
|
$ |
225 |
|
|
$ |
180 |
|
|
$ |
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This presentation of EBITDA may
not be directly comparable to similarly titled measures of other
companies, since not all companies use identical calculations.
|
|
|
|
|
|
(6) |
Pro forma amounts give effect to (a) the sponsor management
termination fee of $30 million resulting in an after-tax
adjustment of $18 million to stockholders’ equity and
(b) an assumed payment of $125 million in taxes
associated with the realignment of our European and Asian
businesses. See “Prospectus Summary— Recent
Developments” and “Management Discussion and
Analysis — Liquidity.” |
|
|
|
|
(7) |
Pro forma as adjusted amounts give effect to (a) the
sponsor management termination fee, (b) an assumed payment
of $125 million in taxes associated with the realignment of
our European and Asian businesses and (c) the issuance and
sale of 25,000,000 shares of common stock by us in this
offering at an assumed initial public offering price of
$16.00 per share, the midpoint of the range set forth on
the cover page of this prospectus, and the application of the
net proceeds of this offering, after deducting estimated
underwriting discounts and commissions and offering expenses
payable by us, as set forth under “Use of Proceeds.”
See “Use of Proceeds” and “Capitalization.” |
|
|
|
|
(8) |
These are our key business measures, which are analyzed on a
constant currency basis, which means they are calculated using
the same exchange rate over the periods under comparison, to
remove the effects of currency fluctuations from these trend
analyses. We believe these constant currency measures provide a
more meaningful analysis of our business by identifying the
underlying business trend, without distortion from the effect of
foreign currency movements. System-wide sales growth includes
sales at company restaurants and franchise restaurants. We do
not record franchise restaurant sales as revenues. However, our |
|
10
|
|
|
|
|
royalty revenues are calculated
based on a percentage of franchise restaurant sales. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations— Key Business
Measures.”
|
|
|
|
|
(9) |
Comparable sales growth refers to the change in restaurant sales
in one period from a comparable period for restaurants that have
been open for thirteen months or longer. Comparable sales growth
includes sales at company restaurants and franchise restaurants.
We do not record franchise restaurant sales as revenues.
However, our royalty revenues are calculated based on a
percentage of franchise restaurant sales. |
|
|
|
(10) |
Refers to our operations in Europe, the Middle East, Africa,
Asia, Australia and Guam. |
|
|
|
(11) |
Refers to our operations in Mexico, Central and South America,
the Caribbean and Puerto Rico. |
|
|
|
(12) |
Unallocated includes corporate support costs in areas such as
facilities, finance, human resources, information technology,
legal, marketing and supply chain management. |
|
|
|
(13) |
Franchise sales represent sales at franchise restaurants and
revenue to our franchisees. We do not record franchise
restaurant sales as revenues. However, our royalty revenues are
calculated based on a percentage of franchise restaurant sales. |
|
|
|
(14) |
Includes $14 million recorded as a loss on early
extinguishment of debt in connection with our July 2005
refinancing and February 2006 financing. |
|
11
RISK FACTORS
You should carefully consider the following risks and all of
the other information set forth in this prospectus before
deciding to invest in shares of our common stock. The following
risks comprise all the material risks of which we are aware;
however, these risks and uncertainties may not be the only ones
we face. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also adversely
affect our business or financial performance. If any of the
events or developments described below actually occurred, our
business, financial condition or results of operations would
likely suffer. In that case, the trading price of our common
stock would likely decline, and you would lose all or part of
your investment in our common stock.
Risks Related to Our Business
Our recent improvements in comparable sales, average
restaurant sales and system-wide sales may not be indicative of
future operating results.
Although our comparable sales, average restaurant sales and
system-wide sales have improved significantly, these positive
results may not continue. Our results of operations may
fluctuate significantly because of a number of factors,
including the risk factors discussed in this section. Moreover,
we may not be able to successfully implement the business
strategy described in this prospectus and implementing our
business strategy may not sustain or improve our results of
operations or increase our market share. As a result of the
factors discussed in this section, operating results for any one
quarter are not necessarily indicative of results to be expected
for any other quarter or for any year and system-wide sales,
comparable sales, and average restaurant sales for any future
period may decrease. In the future, our operating results may
fall below investor expectations. In that event, the price of
our common stock would likely decrease.
Our success depends on our ability to compete with our major
competitors.
The restaurant industry is intensely competitive and we compete
in the United States and internationally with many
well-established food service companies on the basis of price,
service, location and food quality. Our competitors include a
large and diverse group of restaurant chains and individual
restaurants that range from independent local operators to
well-capitalized national and international restaurant
companies. McDonald’s Corporation, or McDonald’s, and
Wendy’s International, Inc., or Wendy’s, are our
principal competitors. As our competitors expand their
operations, including through acquisitions or otherwise, we
expect competition to intensify. 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. We also compete against regional hamburger restaurant
chains, such as Carl’s Jr., Jack in the Box and Sonic.
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. During the past year,
the fast food hamburger restaurant, or FFHR, category has
experienced flat or declining traffic which we believe is due in
part to competition from these competitors. In one of our major
European markets, the United Kingdom, much of the growth in the
quick service restaurant segment is expected to come from
bakeries and new entrants that are diversifying into healthier
options to respond to nutritional concerns. We believe that the
large hamburger chains in the United Kingdom have experienced
declining sales as they face increased competition from not only
the bakeries, but also from pubs that are repositioning
themselves as family venues and offering inexpensive food.
Finally, the restaurant industry has few non-economic barriers
to entry, and therefore new competitors may emerge at any time.
To the extent that one of our existing or future competitors
offers items that are better priced or more appealing to
consumer tastes or a competitor increases the number of
restaurants it operates in one of our key markets or offers
financial incentives to personnel, franchisees or prospective
12
sellers of real estate in excess of what we offer, it could have
a material adverse effect on our financial condition and results
of operations. We also compete with other restaurant chains and
other retail businesses for quality site locations and hourly
employees.
Our operating results are closely tied to the success of our
franchisees. Over the last several years, many franchisees in
the United States, Canada and the United Kingdom have
experienced severe financial distress, and our franchisees may
experience financial distress in the future.
We receive revenues in the form of royalties and fees from our
franchisees. As a result, our operating results substantially
depend upon our franchisees’ restaurant profitability,
sales volumes and financial viability. In December 2002, over
one-third of our franchisees in the United States and Canada
were facing financial distress primarily due to over-leverage.
Many of these franchisees became over-leveraged because they
took advantage of the lending environment in the late 1990s to
incur additional indebtedness without having to offer
significant collateral. Others became over-leveraged because
they financed the acquisition of restaurants from other
franchisees at premium prices on the assumption that sales would
continue to grow. When sales began to decline, many of these
franchisees were unable to service their indebtedness. Our
largest franchisee, with over 300 restaurants, declared
bankruptcy in December 2002 and a number of our other large
franchisees defaulted on their indebtedness. This distress
affected our results of operations as the franchisees did not
pay, or delayed or reduced payments of royalties, national
advertising fund contributions and rents for properties we
leased to them.
In response to this situation, we established the Franchisee
Financial Restructuring Program, or FFRP program, in February
2003 to address our franchisees’ financial problems in the
United States and Canada. At the FFRP program’s peak in
August 2003, over 2,540 restaurants were in the FFRP program.
From December 2002 through June 30, 2005, we wrote off
approximately $106 million in the United States in
uncollectible accounts receivable (principally royalties,
advertising fund contributions and rents). We have introduced a
similar program on a smaller scale in the United Kingdom to
respond to negative trends in that market. For more information
on the FFRP program and its financial impact on us, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations— Factors Affecting
Comparability of Results— Historical Franchisee Financial
Distress.”
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 connection with sales of company restaurants to franchisees,
we have guaranteed certain lease payments of franchisees arising
from leases assigned to the franchisees as part of the sale, by
remaining secondarily liable for base and contingent rents under
the assigned leases of varying terms. The aggregate contingent
obligation arising from these assigned lease guarantees was
$119 million at March 31, 2006, expiring over an
average period of 10 years. In addition, franchisees that
have completed the FFRP program in the United States, Canada or
the United Kingdom, and franchisees that have not experienced
financial distress in the past may experience financial distress
in the future. The resolution of future franchisee financial
difficulties, if possible, could be difficult and would likely
result in additional costs to us, including potentially under
our lease guarantees, and might result in a decrease in our
revenues and earnings. In addition, lenders to our franchisees
were affected by the financial distress and there can be no
assurance that current or prospective franchisees can obtain
necessary financing in light of the history of financial
distress.
Approximately 90% of our restaurants are franchised and this
restaurant ownership mix presents a number of disadvantages and
risks.
Approximately 90% of our restaurants are franchised and we do
not expect the percentage of franchise restaurants to change
significantly as we implement our growth strategy. Although we
believe that this restaurant ownership mix is beneficial to us
because the capital required to grow and maintain our system is
funded primarily by franchisees, it also presents a number of
drawbacks, such as our limited control over franchisees and
limited ability to facilitate changes in restaurant ownership.
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Franchisees are independent operators and have a significant
amount of flexibility in running their operations, including the
ability to set prices of our products in their restaurants.
Their employees are not our employees. Although we can exercise
control over our franchisees and their restaurant operations to
a limited extent through our ability under the franchise
agreements to mandate signage, equipment and standardized
operating procedures and approve suppliers, distributors and
products, the quality of franchise restaurant operations may be
diminished by any number of factors beyond our control.
Consequently, franchisees may not successfully operate
restaurants in a manner consistent with our standards and
requirements, or may not hire and train qualified managers and
other restaurant personnel. In addition, we set minimum
restaurant opening hours, but we have no right to mandate longer
hours. While we ultimately can take action to terminate
franchisees that do not comply with the standards contained in
our franchise agreements, we may not be able to identify
problems and take action quickly enough and, as a result, our
image and reputation may suffer, and our franchise and property
revenues could decline.
Our principal competitors may have greater control over their
respective restaurant systems than we do. 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.
Our business plan includes price discounting which may lead
to declines in our margins and operating profits.
In order to respond to competitive pressures and to improve
customer traffic in our restaurants, we have regionally tested a
new BK Value Menu over an 18 month period at
approximately 1,000 restaurants. We launched this BK
Value Menu nationally in the United States in February 2006 and
it includes a number of nationally mandated products, such as
the Whopper Jr. sandwich, small fries and small sodas
priced at no more than $1 and local options to sell other
products at varying maximum prices. While the BK Value
Menu has been extensively tested and has the support of our
franchisees, it may not ultimately succeed due to the potential
reaction of our major competitors, including the introduction of
similar discounting, flaws in our testing methodologies or other
factors. In addition, the BK Value Menu may not prove
successful in every market in the United States due to existing
franchisee pricing patterns and business conditions in those
markets.
We have frequently in the past responded to competitive
pressures by discounting our products and while this discounting
has increased the number of customers that frequent our
restaurants in the short term, it often has significantly eroded
margins and profitability. For example, in fiscal 2003, we
introduced without prior regional testing a different value menu
that offered a variety of new products at $0.99. Our customers
responded by purchasing these less expensive items instead of
higher margin products like our flagship product, the Whopper
sandwich. At the same time, McDonald’s introduced a
competing $1 menu, and we responded by discounting the
Whopper sandwich and other menu items not part of the
initial value menu, which further eroded our margins and
profitability. We believe that our new BK Value Menu
differs substantially from the one introduced in fiscal 2003.
The margins on the products on the new BK Value Menu are
higher than the margins on the products on the old value menu.
In addition, unlike in fiscal 2003, we currently offer a variety
of premium products which we have continued to advertise as we
launch the BK Value Menu. However, there can be no
assurance that launching the BK Value Menu on a national
basis will be successful and will not ultimately lead to
declines in our margins and operating profits due to the actions
of our competitors or for other reasons.
14
If we fail to successfully implement our international growth
strategy, our ability to increase our revenues and operating
profits could be adversely affected and our overall business
could be adversely affected.
A significant component of our growth strategy involves opening
new international restaurants in both existing and new markets.
We and our franchisees face many challenges in opening new
international restaurants, including, among others:
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the selection and availability of suitable restaurant locations; |
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the negotiation of acceptable lease terms; |
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the ability of franchisees to obtain acceptable financing terms; |
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securing required foreign governmental permits and approvals; |
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securing acceptable suppliers; and |
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employing and training qualified personnel. |
We are planning to expand our international operations in
markets where we currently operate and in selected new markets.
Operations in foreign markets may be affected by consumer
preferences and local market conditions. For example, we have
experienced declining sales and operating profits in certain
foreign markets, such as the United Kingdom, due in part to
franchisee financial distress and concerns about obesity as well
as high operating expenses. We may not be successful in
developing effective initiatives to reverse these trends.
Therefore, to the extent that we open new company restaurants in
existing foreign markets, we may not experience the operating
margins we expect, and our expected growth in our results of
operations may be negatively impacted.
We expect that most of our international growth will be
accomplished through the opening of additional franchise
restaurants. However, our franchisees may be unwilling or unable
to increase their investment in our system by opening new
restaurants, particularly if their existing restaurants are not
generating positive financial results. Moreover, opening new
franchise restaurants depends, in part, upon the availability of
prospective franchisees who meet our criteria, including
extensive knowledge of the local market. In the past, we have
approved franchisees that were unsuccessful in implementing
their expansion plans, particularly in new markets. There can be
no assurance that we will be able to find franchisees who meet
our criteria, or if we find such franchisees, that they will
successfully implement their expansion plans.
Our operating results depend on the effectiveness of our
marketing and advertising programs and franchisee support of
these programs.
Our revenues are heavily influenced by brand marketing and
advertising. Our marketing and advertising programs may not be
successful, which may lead us to fail to attract new customers
and retain existing customers. 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 marketing fund based on a
percentage of their gross sales, our marketing fund expenditures
are dependent upon sales volumes at system-wide restaurants. If
system sales decline, there will be a reduced amount available
for our marketing and advertising programs.
The support of our franchisees is critical for the success of
our marketing programs and any new strategic initiatives we seek
to undertake. In the United States, we poll our franchisees
before introducing any nationally-or locally-advertised price or
discount promotion to gauge the level of support for the
campaign. While we can mandate certain strategic initiatives
through enforcement of our franchise agreements, we need the
active support of our franchisees if the implementation of these
initiatives is to be successful. At the time of the December
2002 acquisition, our relationships with franchisees were
strained. Although we believe that our current relationships
with our franchisees are generally good, there can be no
assurance that our franchisees will continue to support our
marketing programs and strategic initiatives. The failure of our
franchisees to support our marketing programs and strategic
initiatives would adversely
15
affect our ability to implement our business strategy and could
materially harm our business, results of operations and
financial condition.
We recently promoted members of our existing senior
management team as a result of the departure of our Chairman and
Chief Executive Officer; failure to manage a smooth transition
of those senior management into their new positions, the loss of
key management personnel or our inability to attract and retain
new qualified personnel could hurt our business and inhibit our
ability to operate and grow successfully.
On April 7, 2006, we announced the promotion of John
Chidsey, who had been our President and Chief Financial Officer,
to Chief Executive Officer as a result of the departure of Greg
Brenneman, who had been our Chairman and Chief Executive Officer
since August 2004. On the same date, we announced the promotion
of Ben Wells, who had been our Senior Vice President and
Treasurer, to Chief Financial Officer and Treasurer. Changes in
senior management, even changes involving the promotion of
existing senior management, involve inherent disruptions. If we
fail to manage a smooth transition of Messrs. Chidsey and
Wells into their new positions, our ability to operate and grow
successfully and our business generally could be harmed.
In addition, 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
Messrs. Chidsey and Wells; Chief Marketing Officer, Russell
Klein; Chief Operations Officer, Jim Hyatt; 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 would suffer.
Incidents of food-borne illnesses or food tampering could
materially damage our reputation and reduce our restaurant
sales.
Our business is susceptible to the risk of food-borne illnesses
(such as e-coli, bovine
spongiform encephalopathy or “mad 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 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 illness 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. Furthermore, other illnesses, such as foot and mouth
disease or avian influenza, could adversely affect the supply of
some of our food products and significantly increase our costs.
In addition, our industry has long been subject to the threat of
food tampering by suppliers, employees or customers, such as the
addition of foreign objects in the food that we sell. Reports,
whether or not true, of injuries caused by food tampering have
in the past severely injured the reputations of restaurant
chains in the quick service restaurant segment and could affect
us in the future as well. Instances of food tampering, even
those occurring solely at restaurants of our competitors could,
by resulting in negative publicity about the restaurant
industry, adversely affect our sales on a local, regional,
national or system-wide basis. A decrease in customer traffic as
a result of these health concerns or negative publicity could
materially harm our business, results of operations and
financial condition.
16
Our business is affected by changes in consumer preferences
and consumer discretionary spending.
The restaurant industry is affected by consumer preferences and
perceptions. If prevailing health or dietary preferences and
perceptions cause consumers to avoid our products in favor of
alternative or healthier foods, our business could suffer.
Our success depends to a significant extent on discretionary
consumer spending, which is influenced by general economic
conditions and the availability of discretionary income. Changes
in economic conditions affecting our customers could reduce
traffic in some or all of our restaurants or limit our ability
to raise prices, either of which could have a material adverse
effect on our financial condition and results of operations.
Accordingly, we may experience declines in sales during economic
downturns or periods of prolonged elevated energy prices or due
to possible terrorist attacks. Any material decline in the
amount of discretionary spending either in the United States or,
as we continue to expand internationally, in other countries in
which we operate, could have a material adverse effect on our
business, results of operations and financial condition.
A substantial number of franchise agreements will expire in
the next five years and there can be no assurance that the
franchisees can or will renew their franchise agreements with
us.
Our franchise agreements typically have a
20-year term, and
franchise agreements covering approximately 2,000 restaurants,
or approximately 20% of the total number of franchise
restaurants, will expire in the next five years. These
franchisees may not be willing or able to renew their franchise
agreements with us. For example, franchisees may decide not to
renew due to low sales volumes or may be unable to renew due to
the failure to secure lease renewals. In order for a franchisee
to renew its franchise agreement with us, it typically must pay
a $50,000 franchise fee, remodel its restaurant to conform to
our current standards and, in many cases, renew its property
lease with its landlord. The average cost to remodel a
stand-alone restaurant in the United States is approximately
$230,000 and franchisees generally require additional capital to
undertake the required remodeling and pay the franchise fee,
which may not be available to the franchisee on acceptable terms
or at all.
Over the past two fiscal years and during the nine-month period
ended March 31, 2006, we have experienced lower levels of
franchisees in the United States renewing their franchise
agreements for a standard additional
20-year term than we
have historically experienced. In many cases, however, we agreed
to extend the existing franchise agreements to avoid the closing
of restaurants by giving franchisees additional time to comply
with our renewal requirements. In addition, during fiscal 2000
and 2001, we offered an incentive program to franchisees in the
United States in which franchisees could renew their franchise
agreements prior to expiration and pay reduced royalties for a
limited period. Approximately 1,100 restaurants participated in
this incentive program. Many of these participants had franchise
agreements that would have otherwise expired over the next
several years. We believe that this program had a significant
impact on our renewal rates in fiscal 2004 and 2005 because
franchisees that would otherwise have renewed during those
fiscal years had already signed new franchise agreements for a
standard additional
20-year term.
During fiscal 2004 and 2005, a total of 333 and 435 franchise
agreements, respectively, expired in the United States,
including, for each year, an estimated 150 that had expired
during previous years but were extended. We expect that
approximately 450 franchise agreements will expire in fiscal
2006, including approximately 160 franchise agreements that had
expired during previous years but were extended. Of the 333
agreements that expired in fiscal 2004, 53, or 16%, were renewed
and 103, or 31%, were extended for periods that ranged from nine
months to two years. Of the 435 agreements that expired in
fiscal 2005, 168, or 39%, were renewed and 130, or 30%, were
extended for periods that also ranged from nine months to two
years. Of the approximately 300 agreements that have been
processed during the nine-month period ended March 31,
2006, 134, or 45%, were renewed and 88, or 29%, were extended
for similar periods. Additionally, 87, 89 and 71 restaurants
with expiring franchise agreements closed during fiscal 2004,
2005 and the nine-month period ended March 31, 2006,
respectively, or 26%, 20% and 24% of the total number of
expiring franchise agreements for such periods, respectively.
The balance of the restaurants with
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expiring franchise agreements had no agreement in place by the
end of the relevant fiscal period, in many cases because
franchisees had not completed the renewal documentation, but
continued to operate and pay royalty and advertising fund
contributions in compliance with the terms of their expired
franchise agreements.
We have instituted a program in the United States to allow
franchisees to pay the $50,000 franchise fee in installments and
delay the required restaurant remodel for up to two years, while
providing an incentive to accelerate the completion of the
remodel by offering reduced royalties for a limited period. If a
substantial number of our franchisees cannot or decide not to
renew their franchise agreements with us, then our business,
results of operations and financial condition would suffer.
Increases in the cost of food, paper products and energy
could harm our profitability and operating results.
The cost of the food and paper products we use depends on a
variety of factors, many of which are beyond our control. Food
and paper products typically represent approximately 31% of our
company restaurant revenues. Fluctuations in weather, supply and
demand and economic conditions could adversely affect the cost,
availability and quality of some of our critical products,
including beef. Our inability to obtain requisite quantities of
high-quality ingredients would adversely affect our ability to
provide the menu items that are central to our business, and the
highly competitive nature of our industry may limit our ability
to pass through increased costs to our customers.
We purchase large quantities of beef and our beef costs in the
United States represent approximately 19% of our food costs. The
market for beef is particularly volatile and is subject to
significant price fluctuations due to seasonal shifts, climate
conditions, industry demand and other factors. For example,
recent demand in beef constrained supply and required us to pay
significantly higher prices for the beef we purchased. If the
price of beef or other food products that we use in our
restaurants increase in the future and we choose not to pass, or
cannot pass, these increases on to our customers, our operating
margins would decrease.
The recent increase in energy costs in the United States has
also adversely affected our business. Energy costs in the United
States, principally electricity for lighting restaurants and
natural gas for our broilers, have increased 8% to
$30 million in fiscal 2005 and typically represent
approximately 4% of our cost of sales. We have generally not
been able to pass these increased costs on to our customers and
continued high energy costs could adversely affect our and our
franchisees’ business, results of operation 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. Five
distributors service approximately 84% of our U.S. system
and the loss of any one of these distributors would likely
adversely affect our business. Moreover, 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, further terrorist attacks or other conditions
could result in shortages or interruptions in the supply of
perishable food products. A disruption in our supply and
distribution network as a result of the financial distress of
our franchisees or otherwise could result in increased costs to
source needed products and could have a severe impact on our and
our franchisees’ ability to continue to offer menu items to
our customers. Such a disruption could adversely affect our and
our franchisees’ business, results of operation and
financial condition.
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Labor shortages or increases in labor costs could slow our
growth or harm our business.
Our success depends in part upon our ability to continue to
attract, motivate and retain regional operational and restaurant
general managers with the qualifications to succeed in our
industry and the motivation to apply our core service
philosophy. If we are unable to continue to recruit and retain
sufficiently qualified managers or to motivate our employees to
achieve sustained 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. We may be
unable to increase our prices in order to pass these increased
labor costs on to our customers, in which case our and our
franchisees’ margins would be negatively affected.
Our international operations subject us to additional risks
and costs and may cause our profitability to decline.
Our restaurants are currently operated, directly by us or by
franchisees, in 64 foreign countries and U.S. territories
(Guam and Puerto Rico, which are considered part of our
international business). During fiscal 2005 and the nine months
ended March 31, 2006, our revenues from international
operations were approximately $794 million and
$600 million, or 41% and 40% of total revenues,
respectively. Our financial condition and results of operations
may be adversely affected if international markets in which our
company and franchise restaurants compete are affected by
changes in political, economic or other factors. These factors,
over which neither we nor our franchisees have control, may
include:
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economic recessions; |
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changing labor conditions and difficulties in staffing and
managing our foreign operations; |
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increases in the taxes we pay and other changes in applicable
tax laws; |
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legal and regulatory changes and the burdens and costs of our
compliance with a variety of foreign laws; |
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changes in inflation rates; |
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changes in exchange rates; |
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difficulty in collecting our royalties and longer payment cycles; |
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expropriation of private enterprises; |
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political and economic instability and anti-American
sentiment; and |
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other external factors. |
These factors may increase in importance as we expect to open
additional company and franchise restaurants in international
markets as part of our growth strategy.
Our business is subject to fluctuations in foreign currency
exchange and interest rates.
Exchange rate fluctuations may affect the translated value of
our earnings and cash flow associated with our foreign
operations, as well as the translation of net asset or liability
positions that are denominated in foreign currencies. In
countries outside of the United States where we operate company
restaurants, we generate revenues and incur operating expenses
and selling, general and administrative expenses denominated in
local currencies. In fiscal 2005, operating income in these
countries would have decreased or increased $1 million if
all foreign currencies uniformly weakened or strengthened 10%
relative to the U.S. dollar.
In countries where we do not have company restaurants, our
franchise agreements require franchisees to pay us in
U.S. dollars. Royalty payments received from the
franchisees are based upon a percentage of
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sales that are denominated in the local currency and are
converted to U.S. dollars during the month of sales and as
a result we bear the foreign currency exposure associated with
revenues and expenses in these countries. In fiscal 2005,
operating income in these countries would have decreased or
increased $3 million if all foreign currencies uniformly
weakened or strengthened 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 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. We do not attempt to hedge all of our debt and, as
a result, may incur higher interest costs for portions of our
debt which are not hedged.
We or our franchisees may not be able to renew leases or
control rent increases at existing restaurant locations or
obtain leases for new restaurants.
Many of our company restaurants are presently located on leased
premises. In addition, our franchisees generally lease their
restaurant locations. At the end of the term of the lease, we or
our franchisees might be forced to find a new location to lease
or close the restaurant. If we are able to negotiate a new lease
at the existing location or an extension of the existing lease,
the rent may increase significantly. Any of these events could
adversely affect our profitability or our franchisees’
profitability. Some leases are subject to renewal at fair market
value, which could involve substantial rent increases, or are
subject to renewal with scheduled rent increases, which could
result in rents being above fair market value. We compete with
numerous other retailers and restaurants for sites in the highly
competitive market for retail real estate and some landlords and
developers may exclusively grant locations to our competitors.
As a result, we may not be able to obtain new leases or renew
existing ones on acceptable terms, which could adversely affect
our sales and brand-building initiatives. In the United Kingdom,
we have approximately 70 leases for properties that we sublease
to franchisees in which the lease term with our landlords are
longer than the sublease. As a result, we may be liable for
lease obligations if such franchisees do not renew their
subleases or if we cannot find substitute tenants.
Current restaurant locations may become unattractive, and
attractive new locations may not be available for a reasonable
price, if at all.
The success of any restaurant depends in substantial part on its
location. There can be no assurance that current locations will
continue to be attractive as demographic patterns change.
Neighborhood or economic conditions where restaurants are
located could decline in the future, thus resulting in
potentially reduced sales in these locations. If we or our
franchisees cannot obtain desirable locations at reasonable
prices, our ability to effect our growth strategy will be
adversely affected.
We may not be able to adequately protect our intellectual
property, which could harm the value of our brand and branded
products and adversely affect our business.
We depend in large part on our brand, which represents 37% of
the total assets on our balance sheet, and we believe that it 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.
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We may from time to time be required to institute litigation to
enforce our trademarks or other intellectual property rights, or
to protect our trade secrets. Such litigation could result in
substantial costs and diversion of resources and could
negatively affect our sales, profitability and prospects
regardless of whether we are able to successfully enforce our
rights.
Our indebtedness under our senior secured credit facility is
substantial and could limit our ability to grow our business.
In connection with the refinancing in July 2005 of our and
BKC’s existing indebtedness and our February 2006
financing, we incurred a significant amount of indebtedness. As
of March 31, 2006, we had total indebtedness under our
senior secured credit facility of $1.35 billion. While we
expect to pay down some of this indebtedness with the proceeds
of this offering, our substantial indebtedness could have
important consequences to you.
For example, it could:
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increase our vulnerability to general adverse economic and
industry conditions; |
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require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness if we do not
maintain specified financial ratios, thereby reducing the
availability of our cash flow for other purposes; or |
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate, thereby
placing us at a competitive disadvantage compared to our
competitors that may have less indebtedness. |
In addition, our senior secured credit facility permits us to
incur substantial additional indebtedness in the future. As of
March 31, 2006, we had $108 million available to us
for additional borrowing under our $150 million revolving
credit facility portion of our senior secured credit facility
(net of $42 million in letters of credit issued under the
revolving credit facility). We do not currently expect to borrow
under our revolving credit facility in the near term unless we
incur higher than expected costs in connection with our proposed
realignment of our European and Asian businesses. If we increase
our indebtedness by borrowing under the revolving credit
facility or incur other new indebtedness, the risks described
above would increase.
Our senior secured credit facility has restrictive terms and
our failure to comply with any of these terms could put us in
default, which would have an adverse effect on our business and
prospects.
Our senior secured credit facility contains a number of
significant covenants. These covenants limit our ability and the
ability of our subsidiaries to, among other things:
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incur additional indebtedness; |
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make capital expenditures and other investments above a certain
level; |
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merge, consolidate or dispose of our assets or the capital stock
or assets of any subsidiary; |
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pay dividends, make distributions or redeem capital stock in
certain circumstances; |
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enter into transactions with our affiliates; |
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grant liens on our assets or the assets of our subsidiaries; |
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enter into the sale and subsequent lease-back of real
property; and |
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make or repay intercompany loans. |
Our senior secured credit facility requires us to maintain
specified financial ratios. Our ability to meet these financial
ratios and tests can be affected by events beyond our control,
and we may not meet those ratios. A breach of any of these
restrictive covenants or our inability to comply with the
required financial ratios would result in a default under our
senior secured credit facility or require us to dedicate a
substantial portion of our cash flow from operations to payments
on our indebtedness. If the banks
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accelerate amounts owing under our senior secured credit
facility because of a default and we are unable to pay such
amounts, the banks have the right to foreclose on the stock of
BKC and certain of its subsidiaries.
We face risks of litigation and pressure tactics, such as
strikes, boycotts and negative publicity from 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. In addition, we face the risk
of lawsuits and negative publicity resulting from 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 and other
claims in the future based on, among other things, mismanagement
of the system, unfair or unequal treatment, discrimination,
harassment, wrongful termination and wage, rest break and meal
break issues, including those relating to overtime compensation.
We have been subject to these types of claims in the past, and
if one or more of these claims were to be successful or if there
is a significant increase in the number of these claims, our
business, results of operations and financial condition could be
harmed.
Our failure to comply with existing or increased government
regulations or becoming subject to future regulations relating
to the products that we sell could adversely affect our business
and operating results.
We are currently subject to numerous federal, state, local and
foreign laws and regulations, including those relating to:
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the preparation and sale of food; |
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• |
building and zoning requirements; |
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environmental protection and litter removal; |
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• |
minimum wage, overtime, immigration and other labor requirements; |
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• |
the taxation of our business; |
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• |
compliance with the Americans with Disabilities Act
(ADA); and |
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• |
working and safety conditions. |
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.
22
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. Additionally, 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 ADA prohibits discrimination on the basis of disability in
public accommodations and employment. We have, in the past, been
required to make certain modifications to our restaurants
pursuant to the ADA. Although our obligations under those
requirements are substantially complete, future mandated
modifications to our facilities to make different accommodations
for disabled persons could result in material unanticipated
expense to us and our franchisees.
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 and the United Kingdom. We
cannot predict whether we will become subject in the future to
these or other regulatory or tax regimes or how burdensome they
could be to our business. Any future regulation or taxation of
our products or payments from our franchisees could materially
adversely affect our business, results of operations and
financial condition.
Compliance with or cleanup activities required by
environmental laws may hurt our business.
We are subject to various federal, state, local and foreign
environmental laws and regulations. These laws and regulations
govern, among other things, discharges of pollutants into the
air and water as well as the presence, handling, release and
disposal of and exposure to, hazardous substances. These laws
and regulations provide for significant fines and penalties for
noncompliance. If we fail to comply with these laws or
regulations, we could be fined or otherwise sanctioned by
regulators. Third parties may also make personal injury,
property damage or other claims against owners or operators of
properties associated with releases of, or actual or alleged
exposure to, hazardous substances at, on or from our properties.
Environmental conditions relating to prior, existing or future
restaurants or restaurant sites, including franchised sites, may
have a material adverse effect on us. Moreover, the adoption of
new or more stringent environmental laws or regulations could
result in a material environmental liability to us and the
current environmental condition of the properties could be
harmed by tenants or other third parties or by the condition of
land or operations in the vicinity of our properties.
Regulation of genetically modified food products may force us
to find alternative sources of supply.
As is the case with many other companies in the restaurant
industry, some of our products contain genetically engineered
food ingredients. Our U.S. suppliers are not required to
label their products as such. Environmental groups, some
scientists and consumers, particularly in Europe, are raising
questions regarding the potential adverse side effects,
long-term risks and uncertainties associated with genetically
modified foods. Regulatory agencies in Europe and elsewhere have
imposed labeling requirements on genetically modified food
products. Increased regulation of and opposition to genetically
engineered food products have in the past forced us and may in
the future force us to use alternative non-genetically
engineered sources at increased costs.
Risks Related to Investing in Our Stock
The price of our common stock may be volatile and you may not
be able to sell your shares at or above the initial offering
price.
Prior to this offering, there has been no public market for our
common stock. An active and liquid public market for our common
stock may not develop or be sustained after this offering. The
price of our common stock in any such market may be higher or
lower than the price you pay. If you purchase shares
23
of common stock in this offering, you will pay a price that was
not established in a competitive market. Rather, you will pay
the price that we negotiated with the representatives of the
underwriters. Many factors could cause the market price of our
common stock to rise and fall, including the following:
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variations in our or our competitors’ actual or anticipated
operating results; |
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• |
our or our competitors’ growth rates; |
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• |
our or our competitors’ introduction of new locations, menu
items, concepts, or pricing policies; |
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• |
recruitment or departure of key personnel; |
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• |
changes in the estimates of our operating performance or changes
in recommendations by any securities analysts that follow our
stock; |
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• |
changes in the conditions in the restaurant industry, the
financial markets or the economy as a whole; |
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• |
substantial sales of our common stock; |
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• |
announcements of investigations or regulatory scrutiny of our
operations or lawsuits filed against us; and |
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• |
changes in accounting principles. |
In the past, following periods of volatility in the market price
of a company’s securities, securities class action
litigation has often been brought against that company. Due to
the potential volatility of our stock price, we may therefore be
the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert
management’s attention and resources from our business.
Our current principal stockholders will continue to own the
majority of our voting stock after this offering, which will
allow them to control substantially all matters requiring
stockholder approval.
Upon the completion of this offering, private equity funds
controlled by the sponsors will together beneficially own
approximately 77.1% of our outstanding common stock (or 74.3% if
the underwriters exercise their option to purchase additional
shares). In addition, we expect that six of our thirteen
directors following this offering will be representatives of the
private equity funds controlled by the sponsors. Following this
offering, each sponsor will retain the right to nominate two
directors, subject to reduction and elimination as the stock
ownership percentage of the private equity funds controlled by
the applicable sponsor declines. See “Certain Relationships
and Related Transactions— Shareholders’
Agreement”. As a result, these private equity funds will
have significant influence over our decision to enter into any
corporate transaction and may have the ability to prevent any
transaction that requires the approval of stockholders,
regardless of whether or not other stockholders believe that
such transaction is in their own best interests. Such
concentration of voting power could have the effect of delaying,
deterring or preventing a change of control or other business
combination that might otherwise be beneficial to our
stockholders.
We will be a “controlled company” within the
meaning of the New York Stock Exchange rules, and, as a result,
will qualify for, and intend to rely on, exemptions from certain
corporate governance requirements that provide protection to
stockholders of other companies.
After the completion of this offering, the private equity funds
controlled by the sponsors will collectively own more than 50%
of the total voting power of our common shares and we will be a
“controlled company” under the New York Stock
Exchange, or NYSE, corporate governance standards. As a
controlled company,
24
we intend to utilize certain exemptions under the NYSE standards
that free us from the obligation to comply with certain NYSE
corporate governance requirements, including the requirements:
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that a majority of our board of directors consists of
independent directors; |
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• |
that we have a nominating and governance committee that is
composed entirely of independent directors with a written
charter addressing the committee’s purpose and
responsibilities; |
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• |
that we have a compensation committee that is composed entirely
of independent directors with a written charter addressing the
committee’s purpose and responsibilities; and |
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• |
for an annual performance evaluation of the nominating and
governance committee and compensation committee. |
While our executive and corporate governance committee and our
compensation committee have charters that comply with New York
Stock Exchange requirements, we are not required to maintain
those charters. As a result of our use of the “controlled
company” exemptions, you will not have the same protection
afforded to stockholders of companies that are subject to all of
the NYSE corporate governance requirements.
Your percentage ownership in us may be diluted by future
issuances of capital stock, which could reduce your influence
over matters on which stockholders vote.
Following the completion of this offering, our board of
directors has the authority, without action or vote of our
stockholders, to issue all or any part of our authorized but
unissued shares of common stock, including shares issuable upon
the exercise of options, or shares of our authorized but
unissued preferred stock. Issuances of common stock or voting
preferred stock would reduce your influence over matters on
which our stockholders vote, and, in the case of issuances of
preferred stock, would likely result in your interest in us
being subject to the prior rights of holders of that preferred
stock.
The sale of a substantial number of shares of our common
stock after this offering may cause the market price of shares
of our common stock to decline.
Sales of our common stock by existing investors may begin
shortly after the completion of this offering. Sales of a
substantial number of shares of our common stock in the public
market following this offering, or the perception that these
sales could occur, could cause the market price of our common
stock to decline. The shares of our common stock outstanding
prior to this offering will be eligible for sale in the public
market at various times in the future. We, all of our executive
officers, directors and holders of substantially all of our
common stock and certain of our other officers have agreed,
subject to certain exceptions, not to sell any shares of our
common stock for a period of 180 days after the date of
this prospectus without the prior written consent of
J.P. Morgan Securities Inc. Upon expiration of the
lock-up period
described above, up to approximately 4,859,324 additional
shares of common stock may be eligible for sale in the public
market without restriction, and up to approximately
106,868,078 shares of common stock held by affiliates may
become eligible for sale, subject to the restrictions under
Rule 144 under the Securities Act of 1933. In addition,
holders of substantially all of our common stock have the right
to require us to register their shares. For more information,
see “Shares Eligible for Future Sale” and
“Certain Relationships and Related Transactions—
Shareholders’ Agreement”.
You will incur immediate and substantial dilution in the net
tangible book value of your shares.
If you purchase shares in this offering, the value of your
shares based on our actual book value will immediately be less
than the price you paid. This reduction in the value of your
equity is known as dilution. This dilution occurs in large part
because our earlier investors paid substantially less than the
initial public offering price when they purchased their shares
of our common stock. Based upon the issuance and sale of
25,000,000 shares of our common stock by us at an assumed
initial public offering price of $16.00 per share, the
midpoint of the price range set forth on the cover page of this
prospectus,
25
you will incur immediate dilution of $20.70 in the net tangible
book value per share. For more information, see
“Dilution”.
Investors will incur additional dilution upon the exercise of
outstanding stock options and the settlement of outstanding
restricted stock unit awards.
We will incur increased costs as a result of being a public
company, which may divert management attention from our business
and adversely affect our financial results.
As a public company, we will be subject to a number of
additional requirements, including the reporting requirements of
the Securities Exchange Act of 1934, as amended, the
Sarbanes-Oxley Act of 2002 and the listing standards of the New
York Stock Exchange. These requirements might place a strain on
our systems and resources. The Securities Exchange Act of 1934
requires, among other things, that we file annual, quarterly and
current reports with respect to our business and financial
condition. The Sarbanes-Oxley Act requires, among other things,
that we maintain effective disclosure controls and procedures
and internal control over financial reporting. In order to
maintain and improve the effectiveness of our disclosure
controls and procedures and internal control over financial
reporting, significant resources and management oversight will
be required. As a result, our management’s attention might
be diverted from other business concerns, which could have a
material adverse effect on our business, results of operations
and financial condition. Furthermore, we might not be able to
retain our independent directors or attract new independent
directors for our committees.
Provisions in our certificate of incorporation could make it
more difficult for a third party to acquire us and could
discourage a takeover and adversely affect existing
stockholders.
Our certificate of incorporation authorizes our board of
directors to issue up to 10,000,000 preferred shares and to
determine the powers, preferences, privileges, rights, including
voting rights, qualifications, limitations and restrictions on
those shares, without any further vote or action by our
stockholders. The rights of the holders of our common shares
will be subject to, and may be adversely affected by, the rights
of the holders of any preferred shares that may be issued in the
future. The issuance of preferred shares could have the effect
of delaying, deterring or preventing a change in control and
could adversely affect the voting power or economic value of
your shares. See “Description of Capital Stock—
Preferred Stock”.
We currently do not intend to pay dividends on our common
stock and consequently, your only opportunity to achieve a
return on your investment is if the price of our common stock
appreciates.
We currently do not plan to pay dividends on shares of our
common stock in the near future. The terms of our senior secured
credit facility limit our ability to pay cash dividends.
Furthermore, if we are in default under this credit facility,
our ability to pay cash dividends will be limited in certain
circumstances in the absence of a waiver of that default or an
amendment to that facility. 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. Consequently, your only opportunity to achieve a
return on your investment in our company will be if the market
price of our common stock appreciates.
26
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under the captions “Prospectus
Summary,” “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and “Business” and in other sections
of this prospectus that are forward-looking statements. In some
cases, you can identify these statements by forward-looking
words such as “may,” “might,”
“will,” “should,” “expect,”
“plan,” “anticipate,” “believe,”
“estimate,” “predict,” “potential”
or “continue,” the negative of these terms and other
comparable terminology. These forward-looking statements, which
are subject to risks, uncertainties and assumptions about us,
may include projections of our future financial performance,
based on our growth strategies and anticipated trends in our
business.
These statements are only predictions based on our current
expectations and projections about future events. There are
important factors that could cause our actual results, level of
activity, performance or achievements to differ materially from
the results, level of activity, performance or achievements
expressed or implied by the forward-looking statements. In
particular, you should consider the factors listed below and the
numerous risks outlined under “Risk Factors.”
These factors include, but are not limited to, the following:
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Our ability to compete domestically and internationally in an
intensely competitive industry; |
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• |
Our continued relationship with and the success of our
franchisees; |
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• |
Risks related to price discounting; |
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• |
Our ability to successfully implement our international growth
strategy; |
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|
• |
The effectiveness of our marketing and advertising programs and
franchisee support of these programs; |
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• |
Our ability to manage a smooth transition of our new CEO and CFO
and our ability to retain or replace our executive officers and
other key members of management with qualified personnel; |
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• |
Changes in consumer perceptions of dietary health and food
safety; |
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• |
Changes in consumer preferences and consumer discretionary
spending; |
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• |
Risks related to the renewal of franchise agreements by our
franchisees; |
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• |
Increases in our operating costs, including food and paper
products, energy costs and labor costs; |
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• |
Interruptions in the supply of necessary products to us; |
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• |
Risks related to our international operations; |
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|
• |
Fluctuations in international currency exchange and interest
rates; |
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• |
Our continued ability, and the ability of our franchisees, to
obtain suitable locations and financing for new restaurant
development; |
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• |
Changes in demographic patterns of current restaurant locations; |
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• |
Our ability to adequately protect our intellectual property; |
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|
• |
Adverse legal judgments, settlements or pressure
tactics; and |
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• |
Adverse legislation or regulation. |
These risks are not exhaustive. Other sections of this
prospectus may include additional factors which could adversely
impact our business and financial performance. Moreover, we
operate in a very competitive and rapidly changing environment.
New risk factors emerge from time to time and it is not possible
for our management to predict all risk factors, nor can we
assess the impact of all factors on our business or the extent
to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any
forward-looking statements.
Although we believe the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, level of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility
for the accuracy or completeness of any of these forward-looking
statements. You should not rely upon forward-looking statements
as predictions of future events. We are under no duty to update
any of these forward-looking statements after the date of this
prospectus to conform our prior statements to actual results or
revised expectations.
27
USE OF PROCEEDS
We will receive net proceeds from this offering of approximately
$374 million assuming an initial public offering price of
$16.00 per share, the midpoint of the range set forth on
the cover page of this prospectus, and after deducting
underwriting discounts and commissions and estimated offering
expenses. A $1.00 increase (decrease) in the assumed initial
public offering price of $16.00 per share would increase
(decrease) the net proceeds to us from this offering by
$24 million, assuming the number of shares offered by us,
as set forth on the cover page of this prospectus, remains the
same and after deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by us.
We expect to use almost all of the net proceeds to repay
$350 million in outstanding amounts under the term
loan A and the term
loan B-1 of our
senior secured credit facility that were incurred to finance, in
large part, the February 2006 dividend of $367 million,
which was paid principally to the private equity funds
controlled by the sponsors and members of senior management with
the balance used for general corporate purposes. As a result,
almost all of the proceeds of this offering will not be invested
in our business. The interest rate under the senior secured
credit facility for term loan A and the revolving credit
facility is at our option either (a) the greater of the
federal funds effective rate plus 0.50% and the prime rate,
which we refer to as ABR, plus a rate not to exceed 0.75%, which
varies according to our leverage ratio or (b) LIBOR plus a
rate not to exceed 1.75%, which varies according to our leverage
ratio. The interest rate for term loan B-1 is at our option
either (a) ABR, plus a rate of 0.50% or (b) LIBOR plus
1.50%, in each case so long as our leverage ratio remains at or
below certain levels (but in any event not to exceed 0.75%, in
the case of ABR loans, and 1.75% in the case of LIBOR loans).
The interest rate for term loan A and term
loan B-1 was 6.75%
and 6.50%, respectively, as of March 31, 2006. The term
loan A matures in June 2011 and the term
loan B-1 matures
in June 2012.
We will not receive any of the net proceeds from any sale of
common stock by the selling stockholders pursuant to the option
granted by the selling stockholders to the underwriters.
DIVIDEND POLICY
On February 21, 2006, we paid an aggregate cash dividend of
$367 million to holders of record of our common stock on
February 9, 2006. At the same time, we paid the
compensatory make-whole payment of $33 million to holders
of our options and restricted stock unit awards, primarily
members of senior management. This compensatory make-whole
payment was recorded as compensation expense in the third
quarter of fiscal 2006.
We currently do not plan to declare further dividends on shares
of our common stock in the near future. We expect to retain our
future earnings, if any, for use in the operation and expansion
of our business. The terms of our senior secured credit facility
limit our ability to pay cash dividends in certain
circumstances. Furthermore, if we are in default under our
credit facility, our ability to pay cash dividends will be
limited in the absence of a waiver of that default or an
amendment to that facility. 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 senior
secured credit facility. For more information on our senior
secured credit facility, see “Description of 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.
28
CAPITALIZATION
The following table sets forth our capitalization as of
March 31, 2006:
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on a historical basis; |
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• |
on a pro forma basis to reflect: |
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|
• |
the payment of the sponsor management termination fee of
$30 million; and |
|
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|
• |
an assumed payment of $125 million in taxes associated with
the realignment of our European and Asian businesses; and |
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|
• |
on a pro forma as adjusted basis to reflect: |
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|
|
|
• |
the payment of the sponsor management termination fee of
$30 million; |
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|
• |
an assumed payment of $125 million in taxes associated with
the realignment of our European and Asian businesses; and |
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• |
the sale by us of 25,000,000 shares of common stock in this
offering, assuming an initial public offering price of
$16.00 per share, the midpoint of the range set forth on
the cover page of this prospectus, and after deducting the
underwriting discounts and commissions and estimated offering
expenses and application of the net proceeds to us therefrom as
described in “Use of Proceeds”. |
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This table should be read in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the consolidated
financial statements and notes thereto appearing elsewhere in
this prospectus.
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|
|
|
|
|
|
|
March 31, 2006 (Unaudited) | |
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| |
|
|
|
|
Pro Forma | |
|
|
Historical | |
|
Pro Forma | |
|
as Adjusted | |
|
|
| |
|
| |
|
| |
Cash and cash equivalents
|
|
$ |
197 |
|
|
$ |
42 |
|
|
$ |
66 |
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$ |
30 |
|
|
$ |
30 |
|
|
$ |
30 |
|
Long-term debt
|
|
|
1,317 |
|
|
|
1,317 |
|
|
|
967 |
|
Capital leases
|
|
|
65 |
|
|
|
65 |
|
|
|
65 |
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value per share,
300,000,000 shares authorized, 132,578,053 shares
issued and outstanding as adjusted for this
offering(1)
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Restricted stock units
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Additional paid-in capital
|
|
|
146 |
|
|
|
146 |
|
|
|
519 |
|
Retained earnings
|
|
|
13 |
|
|
|
(5 |
) |
|
|
(5 |
) |
Unearned compensation
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Accumulated other comprehensive loss
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Treasury stock, at cost
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
$ |
163 |
|
|
$ |
145 |
|
|
$ |
519 |
|
|
|
|
|
|
|
|
|
|
|
Total
capitalization(2)
|
|
$ |
1,575 |
|
|
$ |
1,557 |
|
|
$ |
1,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Excludes (i) 9,628,913 shares of our common stock
issuable upon the exercise of options or the settlement of
restricted stock unit awards outstanding as of March 31,
2006, of which options to purchase 1,834,609 shares
were exercisable as of March 31, 2006, (ii) 2,589,925
additional shares of our common stock issuable under the Burger
King Holdings, Inc. Equity Incentive Plan and
(iii) 7,113,442 additional shares of our common stock
issuable under the Burger King Holdings, Inc. 2006 Omnibus
Incentive Plan. While we have not issued any options to
employees or directors since March 31, 2006, we intend to
grant approximately 447,884 options, restricted shares or
restricted stock units to several employees at the effective
time of this offering at the initial public offering price.
Shares authorized and outstanding give effect to the increase in
authorized shares and the stock split authorized on May 1,
2006. |
|
|
|
(2) |
A $1.00 increase (decrease) in the assumed initial public
offering price of $16.00 per share would increase
(decrease) each of cash and cash equivalents, additional
paid-in capital, total
stockholders’ equity and total capitalization by
$24 million, assuming the number of shares offered by us,
as set forth on the cover page of this prospectus, remains the
same and after deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by us. |
|
29
DILUTION
If you invest in our common stock in this offering, your
ownership interest will be diluted to the extent of the
difference between the initial public offering price per share
and the historical adjusted net tangible book value per share of
common stock upon the consummation of this offering.
Our adjusted net tangible book value as of March 31, 2006
was approximately $(997) million, or approximately
$(7.52) per share of common stock, as adjusted to reflect
the payment of the sponsor management termination fee of
$30 million and an assumed payment of $125 million in
taxes associated with the realignment of our European and Asian
businesses. The number of shares outstanding excludes
(i) 9,628,913 shares of our common stock issuable upon
the exercise of options or the settlement of restricted stock
unit awards outstanding as of March 31, 2006, of which
options to purchase 1,834,609 shares were exercisable
as of March 31, 2006, (ii) 2,589,925 additional shares
of our common stock issuable under the Burger King Holdings,
Inc. Equity Incentive Plan and (iii) 7,113,442 additional
shares of our common stock issuable under the Burger King
Holdings, Inc. 2006 Omnibus Incentive Plan. Adjusted net
tangible book value per share is determined by dividing our
tangible net worth, total tangible assets less total
liabilities, by the aggregate number of shares of common stock
outstanding. Our adjusted net tangible book value at
March 31, 2006 excludes the book value of our intangible
assets totaling $996 million, of which $900 million
related to the book value of our brand. After giving effect to
the sale by us of the 25,000,000 shares of common stock in
this offering, at an assumed initial public offering price of
$16.00 per share, the midpoint of the range set forth on
the cover page of this prospectus, and after deducting the
underwriting discounts and commissions and estimated offering
expenses and the receipt and application of the net proceeds,
our pro forma net tangible book value as of March 31, 2006
would have been approximately $(623) million, or
approximately $(4.70) per share. This represents an
immediate increase in pro forma net tangible book value to
existing stockholders of $2.82 per share and an immediate
dilution to new investors of $20.70 per share. The
following table illustrates this per share dilution:
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
$ |
16.00 |
|
|
Adjusted net tangible book value per share as of March 31,
2006 (excluding this offering)
|
|
|
(7.52 |
) |
|
Increase in net tangible book value per share attributable to
new investors
|
|
|
2.82 |
|
Pro forma net tangible book value per share after offering
|
|
|
(4.70 |
) |
|
|
|
|
Dilution per share to new investors
|
|
$ |
20.70 |
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $16.00 per share would increase
(decrease) our pro forma net tangible book value by
$24 million, the pro forma net tangible book value per
share after this offering by $0.18 and the dilution per share to
new investors by $0.18, assuming the number of shares offered by
us, as set forth on the cover page of this prospectus, remains
the same and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses
payable by us.
30
The following table summarizes as of March 31, 2006 the
number of shares of our common stock purchased from us, the
total consideration paid to us, and the average price per share
paid to us by our existing stockholders and to be paid by
holders of vested options exercisable as of March 31, 2006,
and to be paid by new investors purchasing shares of our common
stock in this offering, before deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us. The table assumes an initial public
offering price of $16.00 per share, as specified above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased | |
|
Total Consideration | |
|
Average | |
|
|
| |
|
| |
|
Price Per | |
|
|
Number | |
|
Percentage | |
|
Amount | |
|
Percentage | |
|
Share | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Existing
stockholders(1)
|
|
|
107,578,053 |
|
|
|
80.0 |
% |
|
$ |
84,000,000 |
|
|
|
17.1 |
% |
|
$ |
0.78 |
|
Vested options exercisable
|
|
|
1,834,609 |
|
|
|
1.4 |
% |
|
|
8,486,900 |
|
|
|
1.7 |
% |
|
|
4.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New investors
|
|
|
25,000,000 |
|
|
|
18.6 |
% |
|
$ |
400,000,000 |
|
|
|
81.2 |
% |
|
$ |
16.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
134,412,662 |
|
|
|
100.0 |
% |
|
$ |
492,486,900 |
|
|
|
100.0 |
% |
|
$ |
3.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Total consideration and average price per share paid by existing
stockholders gives effect to the $367 million February 2006
dividend. |
The number of shares outstanding excludes
(i) 9,628,913 shares of our common stock issuable upon
the exercise of options or the settlement of restricted stock
unit awards outstanding as of March 31, 2006, of which
options to purchase 1,834,609 shares were exercisable as of
March 31, 2006, (ii) 2,589,925 additional shares of
our common stock issuable under the Burger King Holdings, Inc.
Equity Incentive Plan and (iii) 7,113,442 additional
shares of our common stock issuable under the Burger King
Holdings, Inc. 2006 Omnibus Incentive Plan. Based on an
estimated initial public offering price of $16.00, the fair
value of the options outstanding at March 31, 2006 was
$83 million, of which $20 million related to vested
options and $63 million related to unvested options. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations— Newly Issued
Accounting Standards” for a discussion of the determination
of the fair value of vested and unvested options.
If these outstanding options are exercised, new investors will
experience further dilution.
31
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
On December 13, 2002, we acquired BKC through private
equity funds controlled by the sponsors. In this prospectus,
unless the context otherwise requires, all references to
“we”, “us” and “our” refer to
Burger King Holdings, Inc. and its subsidiaries, including BKC,
for all periods subsequent to our December 13, 2002
acquisition of BKC. All references to our
“predecessor” refer to BKC and its subsidiaries for
all periods prior to the acquisition, which operated under a
different ownership and capital structure. In addition, the
acquisition was accounted for under the purchase method of
accounting and resulted in purchase accounting allocations that
affect the comparability of results of operations between
periods before and after the acquisition.
The following tables present selected consolidated financial and
other data for us and our predecessor for each of the periods
indicated. The selected historical financial data for our
predecessor as of June 30, 2001 and 2002 and for the fiscal
years ended June 30, 2001 and 2002 have been derived from
the audited consolidated financial statements and notes thereto
of our predecessor, which are not included herein. The selected
historical financial data for our predecessor for the period
July 1, 2002 to December 12, 2002 have been derived
from the audited consolidated financial statements and notes
thereto of our predecessor for that period included herein.
The selected historical financial data as of June 30, 2004
and 2005 and for the period December 13, 2002 to
June 30, 2003, and for the fiscal years ended June 30,
2004 and 2005 have been derived from our audited financial
statements and the notes thereto included herein. The combined
financial data for the combined fiscal year ended June 30,
2003 have been derived from the audited consolidated financial
statements and notes thereto of our predecessor and us, but have
not been audited on a combined basis, do not comply with
generally accepted accounting principles and are not intended to
represent what our operating results would have been if the
acquisition of BKC had occurred at the beginning of the period.
The selected consolidated balance sheet data as of June 30,
2003 have been derived from our audited consolidated balance
sheet and the notes thereto, which are not included herein. The
selected historical financial data as of March 31, 2005 and
2006 and for the nine months ended March 31, 2005 and 2006
have been derived from our unaudited consolidated financial
statements and the notes thereto included herein. The other
operating data for the fiscal years ended June 30, 2001 and
2002, and for the period July 1, 2002 to December 12,
2002 have been derived from the internal records of our
predecessor. The other operating data for the period
December 13, 2002 to June 30, 2003, for the fiscal
years ended June 30, 2004 and 2005 and for the nine months
ended March 31, 2005 and 2006 have been derived from our
internal records.
32
The selected consolidated financial and other operating data
presented below contain all normal recurring adjustments that,
in the opinion of management, are necessary to present fairly
our financial position and results of operations as of and for
the periods presented. The selected historical consolidated
financial and other operating data included below and elsewhere
in this prospectus are not necessarily indicative of future
results. The information presented below should be read in
conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and our
audited and unaudited consolidated financial statements and
related notes and other financial information appearing
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King | |
|
|
|
|
|
|
Predecessor | |
|
Holdings, Inc. | |
|
|
|
Burger King Holdings, Inc. | |
|
|
| |
|
| |
|
|
|
| |
|
|
For the | |
|
For the | |
|
For the | |
|
Combined | |
|
For the | |
|
For the | |
|
|
Fiscal Year | |
|
Period from | |
|
Period from | |
|
Twelve | |
|
Fiscal Year | |
|
Nine Months | |
|
|
Ended | |
|
July 1, | |
|
December 13, | |
|
Months | |
|
Ended | |
|
Ended | |
|
|
June 30, | |
|
2002 to | |
|
2002 to | |
|
Ended | |
|
June 30, | |
|
March 31, | |
|
|
| |
|
December 12, | |
|
June 30, | |
|
June 30, | |
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2002 | |
|
2003 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except per share data) | |
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$ |
1,019 |
|
|
$ |
1,130 |
|
|
$ |
526 |
|
|
$ |
648 |
|
|
$ |
1,174 |
|
|
$ |
1,276 |
|
|
$ |
1,407 |
|
|
$ |
1,043 |
|
|
$ |
1,122 |
|
|
Franchise revenues
|
|
|
395 |
|
|
|
392 |
|
|
|
170 |
|
|
|
198 |
|
|
|
368 |
|
|
|
361 |
|
|
|
413 |
|
|
|
306 |
|
|
|
309 |
|
|
Property revenues
|
|
|
127 |
|
|
|
124 |
|
|
|
55 |
|
|
|
60 |
|
|
|
115 |
|
|
|
117 |
|
|
|
120 |
|
|
|
88 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
1,541 |
|
|
$ |
1,646 |
|
|
$ |
751 |
|
|
$ |
906 |
|
|
$ |
1,657 |
|
|
$ |
1,754 |
|
|
$ |
1,940 |
|
|
$ |
1,437 |
|
|
$ |
1,515 |
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
330 |
|
|
|
354 |
|
|
|
162 |
|
|
|
197 |
|
|
|
359 |
|
|
|
391 |
|
|
|
437 |
|
|
|
322 |
|
|
|
351 |
|
|
Payroll and employee benefits
|
|
|
298 |
|
|
|
335 |
|
|
|
157 |
|
|
|
192 |
|
|
|
349 |
|
|
|
382 |
|
|
|
415 |
|
|
|
308 |
|
|
|
330 |
|
|
Occupancy and other operating costs
|
|
|
266 |
|
|
|
298 |
|
|
|
146 |
|
|
|
168 |
|
|
|
314 |
|
|
|
314 |
|
|
|
343 |
|
|
|
256 |
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant expenses
|
|
$ |
894 |
|
|
$ |
987 |
|
|
$ |
465 |
|
|
$ |
557 |
|
|
$ |
1,022 |
|
|
$ |
1,087 |
|
|
$ |
1,195 |
|
|
$ |
886 |
|
|
$ |
961 |
|
Selling, general and administrative expenses(1)
|
|
|
400 |
|
|
|
429 |
|
|
|
225 |
|
|
|
253 |
|
|
|
478 |
|
|
|
482 |
|
|
|
496 |
|
|
|
363 |
|
|
|
361 |
|
Property expenses
|
|
|
59 |
|
|
|
58 |
|
|
|
27 |
|
|
|
28 |
|
|
|
55 |
|
|
|
58 |
|
|
|
64 |
|
|
|
43 |
|
|
|
42 |
|
Impairment of goodwill(2)
|
|
|
43 |
|
|
|
5 |
|
|
|
875 |
|
|
|
— |
|
|
|
875 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other operating expenses (income), net(2)
|
|
|
114 |
|
|
|
45 |
|
|
|
39 |
|
|
|
(7 |
) |
|
|
32 |
|
|
|
54 |
|
|
|
34 |
|
|
|
18 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
$ |
1,510 |
|
|
$ |
1,524 |
|
|
$ |
1,631 |
|
|
$ |
831 |
|
|
$ |
2,462 |
|
|
$ |
1,681 |
|
|
$ |
1,789 |
|
|
$ |
1,310 |
|
|
$ |
1,359 |
|
Income (loss) from operations
|
|
|
31 |
|
|
|
122 |
|
|
|
(880 |
) |
|
|
75 |
|
|
|
(805 |
) |
|
|
73 |
|
|
|
151 |
|
|
|
127 |
|
|
|
156 |
|
Interest expense, net
|
|
|
48 |
|
|
|
105 |
|
|
|
46 |
|
|
|
35 |
|
|
|
81 |
|
|
|
64 |
|
|
|
73 |
|
|
|
53 |
|
|
|
53 |
|
Loss on early extinguishment of debt
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
$ |
(17 |
) |
|
$ |
17 |
|
|
$ |
(926 |
) |
|
$ |
40 |
|
|
$ |
(886 |
) |
|
$ |
9 |
|
|
$ |
78 |
|
|
$ |
74 |
|
|
$ |
89 |
|
Income tax expense (benefit)
|
|
|
21 |
|
|
|
54 |
|
|
|
(34 |
) |
|
|
16 |
|
|
|
(18 |
) |
|
|
4 |
|
|
|
31 |
|
|
|
29 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(38 |
) |
|
$ |
(37 |
) |
|
$ |
(892 |
) |
|
$ |
24 |
|
|
$ |
(868 |
) |
|
$ |
5 |
|
|
$ |
47 |
|
|
$ |
45 |
|
|
$ |
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King | |
|
|
|
|
|
|
Predecessor | |
|
Holdings, Inc. | |
|
|
|
Burger King Holdings, Inc. | |
|
|
| |
|
| |
|
|
|
| |
|
|
For the | |
|
For the | |
|
For the | |
|
Combined | |
|
For the | |
|
For the | |
|
|
Fiscal Year | |
|
Period from | |
|
Period from | |
|
Twelve | |
|
Fiscal Year | |
|
Nine Months | |
|
|
Ended | |
|
July 1, | |
|
December 13, | |
|
Months | |
|
Ended | |
|
Ended | |
|
|
June 30, | |
|
2002 to | |
|
2002 to | |
|
Ended | |
|
June 30, | |
|
March 31, | |
|
|
| |
|
December 12, | |
|
June 30, | |
|
June 30, | |
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2002 | |
|
2003 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except per share data) | |
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income basic
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
$ |
0.23 |
|
|
|
* |
|
|
$ |
0.05 |
|
|
$ |
0.44 |
|
|
$ |
0.42 |
|
|
$ |
0.35 |
|
|
Net income diluted
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
0.23 |
|
|
|
* |
|
|
|
0.05 |
|
|
|
0.44 |
|
|
|
0.42 |
|
|
|
0.33 |
|
|
|
Pro forma net income, basic(3)
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
0.37 |
|
|
|
* |
|
|
|
0.29 |
|
|
Pro forma net income, diluted(3)
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
0.37 |
|
|
|
* |
|
|
|
0.28 |
|
|
|
Adjusted pro forma net income, basic(4)
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
0.22 |
|
|
|
* |
|
|
|
0.11 |
|
|
|
0.45 |
|
|
|
0.41 |
|
|
|
0.35 |
|
|
Adjusted pro forma net income, diluted(4)
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
$ |
0.22 |
|
|
|
* |
|
|
$ |
0.11 |
|
|
$ |
0.44 |
|
|
$ |
0.41 |
|
|
$ |
0.34 |
|
Shares outstanding, basic
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
105 |
|
|
|
* |
|
|
|
106 |
|
|
|
106 |
|
|
|
106 |
|
|
|
107 |
|
Shares outstanding, diluted
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
105 |
|
|
|
* |
|
|
|
106 |
|
|
|
107 |
|
|
|
107 |
|
|
|
111 |
|
* Not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King | |
|
|
|
|
|
|
Predecessor | |
|
Holdings, Inc. | |
|
|
|
Burger King Holdings, Inc. | |
|
|
| |
|
| |
|
|
|
| |
|
|
For the | |
|
For the | |
|
For the | |
|
Combined | |
|
For the | |
|
For the | |
|
|
Fiscal Year | |
|
Period from | |
|
Period from | |
|
Twelve | |
|
Fiscal Year | |
|
Nine Months | |
|
|
Ended | |
|
July 1, | |
|
December 13, | |
|
Months | |
|
Ended | |
|
Ended | |
|
|
June 30, | |
|
2002 to | |
|
2002 to | |
|
Ended | |
|
June 30, | |
|
March 31, | |
|
|
| |
|
December 12, | |
|
June 30, | |
|
June 30, | |
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2002 | |
|
2003 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except per share data) | |
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$ |
324 |
|
|
$ |
212 |
|
|
$ |
1 |
|
|
$ |
81 |
|
|
$ |
82 |
|
|
$ |
199 |
|
|
$ |
218 |
|
|
$ |
151 |
|
|
$ |
21 |
|
Cash provided by (used for) investing activities
|
|
|
(271 |
) |
|
|
(349 |
) |
|
|
(102 |
) |
|
|
(485 |
) |
|
|
(587 |
) |
|
|
(184 |
) |
|
|
(5 |
) |
|
|
(243 |
) |
|
|
(42 |
) |
Cash provided by (used for) financing activities
|
|
|
(52 |
) |
|
|
155 |
|
|
|
112 |
|
|
|
607 |
|
|
|
719 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(214 |
) |
Capital expenditures
|
|
|
199 |
|
|
|
325 |
|
|
|
95 |
|
|
|
47 |
|
|
|
142 |
|
|
|
81 |
|
|
|
93 |
|
|
|
51 |
|
|
|
48 |
|
EBITDA(2)(5)
|
|
$ |
182 |
|
|
$ |
283 |
|
|
$ |
(837 |
) |
|
$ |
118 |
|
|
$ |
(719 |
) |
|
$ |
136 |
|
|
$ |
225 |
|
|
$ |
180 |
|
|
$ |
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
Burger King Holdings, Inc. | |
|
|
| |
|
| |
|
|
As of June 30, | |
|
As of June 30, | |
|
As of March 31, | |
|
|
| |
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
36 |
|
|
$ |
54 |
|
|
$ |
203 |
|
|
$ |
221 |
|
|
$ |
432 |
|
|
$ |
415 |
|
|
$ |
197 |
|
Total assets
|
|
|
3,237 |
|
|
|
3,329 |
|
|
|
2,458 |
|
|
|
2,665 |
|
|
|
2,723 |
|
|
|
2,714 |
|
|
|
2,466 |
|
Total debt and capital lease obligations
|
|
|
1,120 |
|
|
|
1,323 |
|
|
|
1,251 |
|
|
|
1,294 |
|
|
|
1,339 |
|
|
|
1,310 |
|
|
|
1,412 |
|
Total liabilities
|
|
|
2,193 |
|
|
|
2,186 |
|
|
|
2,026 |
|
|
|
2,241 |
|
|
|
2,246 |
|
|
|
2,238 |
|
|
|
2,303 |
|
Total stockholders’ equity
|
|
$ |
1,044 |
|
|
$ |
1,143 |
|
|
$ |
432 |
|
|
$ |
424 |
|
|
$ |
477 |
|
|
$ |
476 |
|
|
$ |
163 |
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King Holdings, Inc. | |
|
|
|
|
| |
|
|
Combined | |
|
For the | |
|
For the | |
|
|
Twelve | |
|
Fiscal Year | |
|
Nine Months | |
|
|
Months | |
|
Ended | |
|
Ended | |
|
|
Ended | |
|
June 30, | |
|
March 31, | |
|
|
June 30, | |
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In constant currencies) | |
Other System-Wide Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable sales growth(6)(7)
|
|
|
(5.9 |
)% |
|
|
1.0 |
% |
|
|
5.6 |
% |
|
|
7.0 |
% |
|
|
2.0 |
% |
Average restaurant sales (in thousands)(6)
|
|
$ |
972 |
|
|
$ |
994 |
|
|
$ |
1,066 |
|
|
$ |
791 |
|
|
$ |
814 |
|
System-wide sales growth(6)
|
|
|
(4.7 |
)% |
|
|
1.2 |
% |
|
|
6.1 |
% |
|
|
7.9 |
% |
|
|
1.9 |
% |
Company restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
735 |
|
|
|
759 |
|
|
|
844 |
|
|
|
818 |
|
|
|
877 |
|
|
EMEA/ APAC(8)
|
|
|
280 |
|
|
|
277 |
|
|
|
283 |
|
|
|
276 |
|
|
|
286 |
|
|
Latin America(9)
|
|
|
46 |
|
|
|
51 |
|
|
|
60 |
|
|
|
54 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurants
|
|
|
1,061 |
|
|
|
1,087 |
|
|
|
1,187 |
|
|
|
1,148 |
|
|
|
1,227 |
|
Franchise restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
7,529 |
|
|
|
7,217 |
|
|
|
6,876 |
|
|
|
6,999 |
|
|
|
6,712 |
|
|
EMEA/ APAC(8)
|
|
|
2,179 |
|
|
|
2,308 |
|
|
|
2,373 |
|
|
|
2,326 |
|
|
|
2,449 |
|
|
Latin America(9)
|
|
|
566 |
|
|
|
615 |
|
|
|
668 |
|
|
|
649 |
|
|
|
721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total franchise restaurants
|
|
|
10,274 |
|
|
|
10,140 |
|
|
|
9,917 |
|
|
|
9,974 |
|
|
|
9,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restaurants
|
|
|
11,335 |
|
|
|
11,227 |
|
|
|
11,104 |
|
|
|
11,122 |
|
|
|
11,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
(551 |
) |
|
$ |
115 |
|
|
$ |
255 |
|
|
$ |
193 |
|
|
$ |
219 |
|
|
EMEA/ APAC(8)
|
|
|
(143 |
) |
|
|
95 |
|
|
|
36 |
|
|
|
36 |
|
|
|
51 |
|
|
Latin America(9)
|
|
|
22 |
|
|
|
26 |
|
|
|
25 |
|
|
|
19 |
|
|
|
22 |
|
|
Unallocated(10)
|
|
|
(133 |
) |
|
|
(163 |
) |
|
|
(165 |
) |
|
|
(121 |
) |
|
|
(136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$ |
(805 |
) |
|
$ |
73 |
|
|
$ |
151 |
|
|
$ |
127 |
|
|
$ |
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Restaurant Revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
768 |
|
|
$ |
802 |
|
|
$ |
923 |
|
|
$ |
678 |
|
|
$ |
761 |
|
|
EMEA/ APAC(8)
|
|
|
363 |
|
|
|
429 |
|
|
|
435 |
|
|
|
329 |
|
|
|
319 |
|
|
Latin America(9)
|
|
|
43 |
|
|
|
45 |
|
|
|
49 |
|
|
|
36 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant revenues
|
|
$ |
1,174 |
|
|
$ |
1,276 |
|
|
$ |
1,407 |
|
|
$ |
1,043 |
|
|
$ |
1,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Restaurant Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
12.1 |
% |
|
|
11.3 |
% |
|
|
14.2 |
% |
|
|
13.9 |
% |
|
|
13.6 |
% |
|
EMEA/ APAC(8)
|
|
|
12.4 |
% |
|
|
18.9 |
% |
|
|
15.2 |
% |
|
|
15.7 |
% |
|
|
14.1 |
% |
|
Latin America(9)
|
|
|
32.6 |
% |
|
|
37.8 |
% |
|
|
30.6 |
% |
|
|
30.5 |
% |
|
|
28.6 |
% |
|
Total company restaurant margin
|
|
|
12.9 |
% |
|
|
14.8 |
% |
|
|
15.1 |
% |
|
|
15.0 |
% |
|
|
14.3 |
% |
Franchise Revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
261 |
|
|
$ |
234 |
|
|
$ |
269 |
|
|
$ |
201 |
|
|
$ |
197 |
|
|
EMEA/ APAC(8)
|
|
|
84 |
|
|
|
102 |
|
|
|
114 |
|
|
|
84 |
|
|
|
87 |
|
|
Latin America(9)
|
|
|
23 |
|
|
|
25 |
|
|
|
30 |
|
|
|
21 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total franchise revenues
|
|
$ |
368 |
|
|
$ |
361 |
|
|
$ |
413 |
|
|
$ |
306 |
|
|
$ |
309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise sales (in millions)(11)
|
|
$ |
9,812 |
|
|
$ |
10,055 |
|
|
$ |
10,817 |
|
|
$ |
9,056 |
|
|
$ |
8,106 |
|
35
|
|
|
|
(1) |
Selling, general and administrative expenses included
$73 million and $72 million of intangible asset
amortization in the fiscal years ended June 30, 2001 and
2002, respectively. Selling, general and administrative expenses
also included $14 million and $7 million of fees paid
to Diageo plc in the fiscal years ended June 30, 2001 and
2002, respectively. |
|
|
(2) |
In connection with our acquisition of BKC, our predecessor
recorded $35 million of intangible asset impairment charges
within other operating expenses (income), net and goodwill
impairment charges of $875 million during the period from
July 1, 2002 to December 12, 2002. |
|
|
|
(3) |
Pro forma net income, basic and diluted, per share for the year
ended June 30, 2005 and nine months ended March 31,
2006 has been computed to give effect to the number of shares to
be sold in this offering that would have been necessary to pay
the portion of the February 2006 dividend of $367 million
in excess of current period earnings. |
|
|
|
|
(4) |
Amounts in calculation as compared to basic and diluted earnings
per share adjusted as follows: (a) net income adjusted for
reduction in interest expense at the weighted average interest
rate during the period multiplied by the net proceeds from this
offering, and (b) weighted average shares during the period
increased by the 25,000,000 shares issued in this offering. |
|
|
|
|
(5) |
EBITDA is defined as net income before interest, taxes,
depreciation and amortization, and is used by management to
measure operating performance of the business. Management
believes that EBITDA incorporates certain operating drivers of
our business such as sales growth, operating costs, general and
administrative expenses and other income and expense. Capital
expenditures, which impact depreciation and amortization,
interest expense and income tax expense are reviewed separately
by management. EBITDA is also one of the measures used by us to
calculate incentive compensation for management and
corporate-level employees. Further, management believes that
EBITDA is a useful measure as it improves comparability of
predecessor and successor results of operations, as purchase
accounting renders depreciation and amortization non-comparable
between predecessor and successor periods. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations— Factors Affecting
Comparability of Results— Purchase Accounting”. |
|
|
|
|
While EBITDA is not a recognized measure under generally
accepted accounting principles, we believe EBITDA is useful to
investors because it is frequently used by security analysts,
investors and other interested parties to evaluate companies in
our industry and us. EBITDA is not intended to be a measure of
liquidity or cash flows from operations nor a measure comparable
to net income as it does not consider certain requirements such
as capital expenditures and related depreciation, principal and
interest payments and tax payments. |
|
|
The following table is a reconciliation of our net income to
EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger King | |
|
|
|
|
|
|
Predecessor | |
|
Holdings, Inc. | |
|
|
|
Burger King Holdings, Inc. | |
|
|
| |
|
| |
|
|
|
| |
|
|
For the | |
|
For the | |
|
For the | |
|
Combined | |
|
For the | |
|
For the | |
|
|
Fiscal Year | |
|
Period from | |
|
Period from | |
|
Twelve | |
|
Fiscal Year | |
|
Nine Months | |
|
|
Ended | |
|
July 1, | |
|
December 13, | |
|
Months | |
|
Ended | |
|
Ended | |
|
|
June 30, | |
|
2002 to | |
|
2002 to | |
|
Ended | |
|
June 30, | |
|
March 31, | |
|
|
| |
|
December 12, | |
|
June 30, | |
|
June 30, | |
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2002 | |
|
2003 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net (loss) income
|
|
$ |
(38 |
) |
|
$ |
(37 |
) |
|
$ |
(892 |
) |
|
$ |
24 |
|
|
$ |
(868 |
) |
|
$ |
5 |
|
|
$ |
47 |
|
|
$ |
45 |
|
|
$ |
37 |
|
Interest expense, net(12)
|
|
|
48 |
|
|
|
105 |
|
|
|
46 |
|
|
|
35 |
|
|
|
81 |
|
|
|
64 |
|
|
|
73 |
|
|
|
53 |
|
|
|
67 |
|
Income tax expense (benefit)
|
|
|
21 |
|
|
|
54 |
|
|
|
(34 |
) |
|
|
16 |
|
|
|
(18 |
) |
|
|
4 |
|
|
|
31 |
|
|
|
29 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$ |
31 |
|
|
$ |
122 |
|
|
$ |
(880 |
) |
|
$ |
75 |
|
|
$ |
(805 |
) |
|
$ |
73 |
|
|
$ |
151 |
|
|
$ |
127 |
|
|
$ |
156 |
|
Depreciation and amortization
|
|
|
151 |
|
|
|
161 |
|
|
|
43 |
|
|
|
43 |
|
|
|
86 |
|
|
|
63 |
|
|
|
74 |
|
|
|
53 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
182 |
|
|
$ |
283 |
|
|
$ |
(837 |
) |
|
$ |
118 |
|
|
$ |
(719 |
) |
|
$ |
136 |
|
|
$ |
225 |
|
|
$ |
180 |
|
|
$ |
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This presentation of EBITDA may not be directly comparable to
similarly titled measures of other companies, since not all
companies use identical calculations. |
|
|
|
|
|
(6) |
These are our key business measures, which are analyzed on a
constant currency basis, which means they are calculated using
the same exchange rate over the periods under comparison, to
remove the effects of currency fluctuations from these trend
analyses. We believe these constant currency measures provide a
more meaningful analysis of our business by identifying the
underlying business trend, without distortion from the effect of
foreign currency movements. System-wide sales growth includes
sales at company restaurants and franchise restaurants. We do
not record franchise restaurant sales as revenues. However, our
royalty revenues are calculated based on a percentage of
franchise restaurant sales. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations— Key Business Measures”. |
|
|
|
|
(7) |
Comparable sales growth refers to the change in restaurant sales
in one period from a comparable period for restaurants that have
been open for thirteen months or longer. Comparable sales growth
includes sales at company restaurants and franchise restaurants.
We do not record franchise restaurant sales as revenues.
However, our royalty revenues are calculated based on a
percentage of franchise restaurant sales. |
|
|
|
|
(8) |
Refers to our operations in Europe, the Middle East, Africa,
Asia, Australia and Guam. |
|
36
|
|
|
|
(9) |
Refers to our operations in Mexico, Central and South America,
the Caribbean and Puerto Rico. |
|
|
|
(10) |
Unallocated includes corporate support costs in areas such as
facilities, finance, human resources, information technology,
legal, marketing and supply chain management. |
|
|
|
(11) |
Franchise sales represent sales at franchise restaurants and
revenue to our franchisees. We do not record franchise
restaurant sales as revenues. However, our royalty revenues are
calculated based on a percentage of franchise restaurant sales. |
|
|
|
(12) |
Includes $14 million recorded as a loss on early
extinguishment of debt in connection with our July 2005 and
February 2006 refinancings. |
|
Burger King Holdings, Inc. and Subsidiaries Restaurant Count
Analysis
The following tables present information relating to the
analysis of our restaurants for the geographic areas and periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company | |
|
Franchise | |
|
Total | |
|
|
| |
|
| |
|
| |
Beginning Balance July 1, 2002
|
|
|
1,014 |
|
|
|
10,441 |
|
|
|
11,455 |
|
|
Openings
|
|
|
31 |
|
|
|
314 |
|
|
|
345 |
|
|
Closings
|
|
|
(13 |
) |
|
|
(452 |
) |
|
|
(465 |
) |
|
Acquisitions, net of refranchisings
|
|
|
29 |
|
|
|
(29 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2003
|
|
|
1,061 |
|
|
|
10,274 |
|
|
|
11,335 |
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
29 |
|
|
|
275 |
|
|
|
304 |
|
|
Closings
|
|
|
(20 |
) |
|
|
(392 |
) |
|
|
(412 |
) |
|
Acquisitions, net of refranchisings
|
|
|
17 |
|
|
|
(17 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2004
|
|
|
1,087 |
|
|
|
10,140 |
|
|
|
11,227 |
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
63 |
|
|
|
251 |
|
|
|
314 |
|
|
Closings
|
|
|
(23 |
) |
|
|
(414 |
) |
|
|
(437 |
) |
|
Acquisitions, net of refranchisings
|
|
|
60 |
|
|
|
(60 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2005
|
|
|
1,187 |
|
|
|
9,917 |
|
|
|
11,104 |
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
14 |
|
|
|
217 |
|
|
|
231 |
|
|
Closings
|
|
|
(13 |
) |
|
|
(213 |
) |
|
|
(226 |
) |
|
Acquisitions, net of refranchisings
|
|
|
39 |
|
|
|
(39 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance March 31, 2006
|
|
|
1,227 |
|
|
|
9,882 |
|
|
|
11,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company | |
|
Franchise | |
|
Total | |
|
|
| |
|
| |
|
| |
Beginning Balance July 1, 2002
|
|
|
706 |
|
|
|
7,810 |
|
|
|
8,516 |
|
|
Openings
|
|
|
11 |
|
|
|
88 |
|
|
|
99 |
|
|
Closings
|
|
|
(11 |
) |
|
|
(340 |
) |
|
|
(351 |
) |
|
Acquisitions, net of refranchisings
|
|
|
29 |
|
|
|
(29 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2003
|
|
|
735 |
|
|
|
7,529 |
|
|
|
8,264 |
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
3 |
|
|
|
43 |
|
|
|
46 |
|
|
Closings
|
|
|
(16 |
) |
|
|
(318 |
) |
|
|
(334 |
) |
|
Acquisitions, net of refranchisings
|
|
|
37 |
|
|
|
(37 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2004
|
|
|
759 |
|
|
|
7,217 |
|
|
|
7,976 |
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
33 |
|
|
|
21 |
|
|
|
54 |
|
|
Closings
|
|
|
(9 |
) |
|
|
(301 |
) |
|
|
(310 |
) |
|
Acquisitions, net of refranchisings
|
|
|
61 |
|
|
|
(61 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2005
|
|
|
844 |
|
|
|
6,876 |
|
|
|
7,720 |
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
2 |
|
|
|
35 |
|
|
|
37 |
|
|
Closings
|
|
|
(9 |
) |
|
|
(159 |
) |
|
|
(168 |
) |
|
Acquisitions, net of refranchisings
|
|
|
40 |
|
|
|
(40 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance March 31, 2006
|
|
|
877 |
|
|
|
6,712 |
|
|
|
7,589 |
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company | |
|
Franchise | |
|
Total | |
|
|
| |
|
| |
|
| |
Beginning Balance July 1, 2002
|
|
|
268 |
|
|
|
2,095 |
|
|
|
2,363 |
|
|
Openings
|
|
|
14 |
|
|
|
177 |
|
|
|
191 |
|
|
Closings
|
|
|
(2 |
) |
|
|
(93 |
) |
|
|
(95 |
) |
|
Acquisitions, net of refranchisings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2003
|
|
|
280 |
|
|
|
2,179 |
|
|
|
2,459 |
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
21 |
|
|
|
177 |
|
|
|
198 |
|
|
Closings
|
|
|
(4 |
) |
|
|
(68 |
) |
|
|
(72 |
) |
|
Acquisitions, net of refranchisings
|
|
|
(20 |
) |
|
|
20 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2004
|
|
|
277 |
|
|
|
2,308 |
|
|
|
2,585 |
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
21 |
|
|
|
165 |
|
|
|
186 |
|
|
Closings
|
|
|
(14 |
) |
|
|
(101 |
) |
|
|
(115 |
) |
|
Acquisitions, net of refranchisings
|
|
|
(1 |
) |
|
|
1 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2005
|
|
|
283 |
|
|
|
2,373 |
|
|
|
2,656 |
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
8 |
|
|
|
125 |
|
|
|
133 |
|
|
Closings
|
|
|
(4 |
) |
|
|
(50 |
) |
|
|
(54 |
) |
|
Acquisitions, net of refranchisings
|
|
|
(1 |
) |
|
|
1 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance March 31, 2006
|
|
|
286 |
|
|
|
2,449 |
|
|
|
2,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company | |
|
Franchise | |
|
Total | |
|
|
| |
|
| |
|
| |
Beginning Balance July 1, 2002
|
|
|
40 |
|
|
|
536 |
|
|
|
576 |
|
|
Openings
|
|
|
6 |
|
|
|
49 |
|
|
|
55 |
|
|
Closings
|
|
|
— |
|
|
|
(19 |
) |
|
|
(19 |
) |
|
Acquisitions, net of refranchisings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2003
|
|
|
46 |
|
|
|
566 |
|
|
|
612 |
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
5 |
|
|
|
55 |
|
|
|
60 |
|
|
Closings
|
|
|
— |
|
|
|
(6 |
) |
|
|
(6 |
) |
|
Acquisitions, net of refranchisings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2004
|
|
|
51 |
|
|
|
615 |
|
|
|
666 |
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
9 |
|
|
|
65 |
|
|
|
74 |
|
|
Closings
|
|
|
— |
|
|
|
(12 |
) |
|
|
(12 |
) |
|
Acquisitions, net of refranchisings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance June 30, 2005
|
|
|
60 |
|
|
|
668 |
|
|
|
728 |
|
|
|
|
|
|
|
|
|
|
|
|
Openings
|
|
|
4 |
|
|
|
57 |
|
|
|
61 |
|
|
Closings
|
|
|
— |
|
|
|
(4 |
) |
|
|
(4 |
) |
|
Acquisitions, net of refranchisings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Ending Balance March 31, 2006
|
|
|
64 |
|
|
|
721 |
|
|
|
785 |
|
|
|
|
|
|
|
|
|
|
|
38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with
“Selected Consolidated Financial and Other Data” and
our audited and unaudited consolidated financial statements and
the notes thereto included elsewhere in this prospectus. In
addition to historical consolidated financial information, this
discussion contains forward-looking statements that reflect our
plans, estimates and beliefs. Actual results could differ from
these expectations as a result of factors including those
described under “Risk Factors”, “Special
Note Regarding Forward-Looking Statements” and
elsewhere in this prospectus.
All references to fiscal 2003 in this section are to the
twelve months ended June 30, 2003, derived by adding the
audited results of operations of our predecessor from
July 1, 2002 through December 12, 2002 to the audited
results of our operations from December 13, 2002 through
June 30, 2003. The combined financial data for fiscal 2003
have not been audited on a combined basis, do not comply with
generally accepted accounting principles and are not intended to
represent what our operating results would have been if the
acquisition of BKC had occurred at the beginning of the period
because the periods being combined are under two different bases
of accounting as a result of our acquisition of BKC on
December 13, 2002. See “Factors Affecting
Comparability of Results— Purchase Accounting.”
References to fiscal 2004, fiscal 2005 and fiscal 2006 in this
section are to the fiscal years ended June 30, 2004, 2005
and 2006, respectively.
Overview
We are the second largest fast food hamburger restaurant, or
FFHR, chain in the world as measured by the number of
restaurants and system-wide sales. As of March 31, 2006, we
owned or franchised a total of 11,109 restaurants in 65
countries and U.S. territories, of which 7,589 were located
in the United States and Canada. At that date, 1,227 restaurants
were company-owned and 9,882 were owned by our franchisees. We
operate in the FFHR category of the quick service restaurant, or
QSR, segment of the restaurant industry. The FFHR category is
highly competitive with respect to price, service, location and
food quality. Our restaurants feature flame-broiled hamburgers,
chicken and other specialty sandwiches, french fries, soft
drinks and other reasonably-priced food items.
Our business operates in three reportable segments: the United
States and Canada; Europe, Middle East, Africa and Asia Pacific,
or EMEA/ APAC; and Latin America. United States and Canada is
our largest segment and comprised 66% of total revenues and 81%
of operating income, excluding unallocated corporate general and
administrative expenses, in fiscal 2005. EMEA/ APAC comprised
30% of total revenues and 11% of operating income, excluding
unallocated corporate general and administrative expenses, and
Latin America comprised the remaining 4% of revenues and 8% of
operating income, excluding unallocated corporate general and
administrative expenses, in fiscal 2005.
We generate revenue from three sources:
|
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|
• |
sales at our company restaurants; |
|
|
• |
royalties and franchise fees paid to us by our
franchisees; and |
|
|
• |
property income from restaurants that we lease or sublease to
franchisees. |
We refer to sales generated at our company restaurants and
franchise restaurants as system-wide sales. In fiscal 2005,
franchise restaurants generated approximately 90% of system-wide
sales. Royalties paid by franchisees are based on a percentage
of franchise restaurant sales and are recorded as franchise
revenues. Franchise fees and franchise renewal fees are recorded
as revenues in the year received. In fiscal 2005, company
restaurant and franchise revenues represented 73% and 21% of
total revenues, respectively. The remaining 6% of total revenues
was derived from property income.
We have a higher percentage of franchise restaurants to company
restaurants than our major competitors in the fast food
hamburger restaurant category. We believe that this restaurant
ownership mix provides us with a strategic advantage because the
capital required to grow and maintain our system is
39
funded primarily by franchisees while giving us a sizable base
of company restaurants to demonstrate credibility with our
franchisees in launching new initiatives. As a result of the
high percentage of franchise restaurants in our system, we have
lower capital requirements compared to our major competitors.
Moreover, due to the steps that we have taken to improve the
health of our franchise system in the United States and Canada,
we expect that this mix will produce more stable earnings and
cash flow in the future. However, our franchisee dominated
business model also presents a number of drawbacks, such as our
limited control over franchisees and limited ability to
facilitate changes in restaurant ownership.
At the time of our December 2002 acquisition of BKC from Diageo
plc, we faced significant challenges, including declining
average restaurant sales, low restaurant profitability,
shrinking U.S. restaurant count, financial distress in our
franchise system in the United States and Canada, menu and
marketing strategies that did not resonate with customers,
relationships with our franchisees that were strained and poor
service in many of our restaurants. We also experienced
significant senior management turnover after the acquisition.
These factors led to disappointing financial performance for the
remainder of fiscal 2003 and fiscal 2004.
Our management team has implemented a number of strategic
initiatives to stabilize and improve overall operations and
financial performance. These strategic initiatives included:
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|
• |
launching an award-winning advertising and promotion program
focused on our core customers (consumers who reported eating at
a fast food hamburger outlet nine or more times in a month); |
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• |
implementing a new product development process aimed at
improving our menu and generating a pipeline of new products; |
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• |
improving restaurant operations, including interior cleanliness,
food temperature and speed of service, through our operational
excellence programs, as measured by third-party vendors and our
employees; |
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• |
improving our communication and relationships with our
franchisees; |
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• |
providing assistance to franchisees in the United States and
Canada that were in financial distress primarily due to
over-leverage through our Franchisee Financial Restructuring
Program, or the FFRP program; |
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• |
integrating our domestic and international operations and
support functions to provide the foundation on which to operate
as a global brand by aligning core business functions such as
marketing, operations, and finance and standardizing menu
design, product development, and standards for customer service; |
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• |
expanding our international presence and entering new
international markets; |
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• |
improving restaurant profitability by introducing cost reduction
and profit improvement programs for our franchisees in the
United States through arrangements with strategic
vendors; and |
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|
• |
developing a new, smaller restaurant design to make Burger King
a more attractive investment to existing and potential
franchisees by reducing the non-real estate costs associated
with building a new restaurant. The current average non-real
estate costs associated with building a new restaurant using
that design have decreased approximately 25% from approximately
$1.2 million using the prior design to approximately
$900,000. These savings are partially due to a smaller
restaurant design, which is primarily driven by a change in
consumer preference from dine-in to drive-thru (60% of
U.S. system-wide sales are currently made at the
drive-thru). |
Our achievements to date include:
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• |
eight consecutive quarters of positive comparable sales growth
in the United States as compared to negative comparable sales
growth in the previous seven consecutive quarters, our best
comparable sales growth in a decade; |
40
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|
• |
an 11% increase in average restaurant sales in the United States
over the past two fiscal years and continued growth in the first
nine months of fiscal 2006; |
|
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|
• |
a significant reduction in the number of franchise restaurants
in the United States and Canada in the FFRP program, which
declined from over 2,540 in August 2003 to approximately 125 as
of March 31, 2006, demonstrating the improved financial
health of our franchise system accomplished primarily through
franchisee financial restructurings, as well as the closing of
approximately 400 restaurants participating in the FFRP program
and our acquisition of approximately 150 franchise restaurants; |
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• |
a significantly improved collection rate of franchisee royalty
and advertising contribution payments (defined as collections
divided by billings on a one-month trailing basis) from 91%
during the six months ended June 30, 2003 and fiscal 2004
to 100% in fiscal 2005 and the first nine months of fiscal
2006; and |
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• |
increasing net income from $5 million in fiscal 2004 to
$47 million in fiscal 2005, with EBITDA increasing 65%,
from $136 million in fiscal 2004 to $225 million in
fiscal 2005. Net income decreased from $45 million in the
first nine months of fiscal 2005 to $37 million (including
a $14 million pre-tax debt extinguishment charge and the
$33 million pre-tax compensatory make-whole payment) in the
first nine months of fiscal 2006. EBITDA increased 22%, from
$180 million to $219 million over the same nine-month
period. See Note 3 to the Selected Consolidated Financial
and Other Data for a definition of EBITDA, its calculation and a
description of its usefulness to management. |
Our Business
System-wide revenues 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
closings, acquisitions by us of franchise restaurants and sales
of company restaurants to franchisees. Royalties are paid to us
based on a percentage of franchise restaurant sales, while
franchise fees are paid upon the opening of a new franchise
restaurant, or the renewal of an existing franchise agreement.
Our property revenues represent income we earn under leasing and
subleasing arrangements with our franchisees. Royalties,
franchise fees and property revenues from franchisees are
affected primarily by sales at franchise restaurants, the timing
of franchise restaurant openings and closings and the financial
strength and stability of the franchise system.
Company restaurants incur three types of operating expenses:
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• |
food, paper and other product costs, which represent the costs
of the food and beverages that we sell to consumers in company
restaurants; |
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• |
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 |
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• |
occupancy and other operating costs, which represent all other
direct costs of operating our company restaurants, including the
cost of rent or real estate depreciation (for restaurant
properties owned by us), depreciation on equipment, repairs and
maintenance, insurance, restaurant supplies, and utilities. |
As average restaurant sales increase, we can leverage payroll
and employee benefits costs and occupancy and other costs,
resulting in a direct improvement in restaurant profitability.
As a result, we believe our continued focus on increasing
average restaurant sales will result in improved profitability
to our system-wide restaurants.
41
Our 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), and
corporate overhead, including corporate salaries and facilities.
We believe that our current staffing and structure will allow us
to expand our business globally without increasing general and
administrative expenses significantly. Our selling expenses are
comprised of advertising and bad debt expenses. Selling, general
and administrative expenses also include amortization of
intangible assets and management fees paid to the sponsors under
our management agreement with them.
Property expenses include costs of depreciation and rent on
properties we lease and sublease to franchisees, respectively.
Items classified as other operating expenses, net include gains
and losses on asset and business disposals, impairment charges,
settlement losses recorded in connection with acquisitions of
franchise operations, gains and losses on foreign currency
transactions and other miscellaneous items.
We promote our brand and products by advertising in all the
countries and territories in which we operate. In countries
where we have company restaurants, such as the United States,
Canada, the United Kingdom and Germany, we manage an advertising
fund for that country by collecting required advertising
contributions from company and franchise restaurants and
purchasing advertising and other marketing initiatives on behalf
of all Burger King restaurants in that country. These
advertising contributions are based on a percentage of sales at
company and franchise restaurants. We do not record advertising
contributions collected from franchisees as revenues or
expenditures of these contributions as expenses. Amounts which
are contributed to the advertising funds by company restaurants
are recorded as selling expenses. In countries where we manage
an advertising fund, we plan the marketing calendar in advance
based on expected contributions for that year into the fund. To
the extent that contributions received exceed advertising and
promotional expenditures, the excess contributions are recorded
as accrued advertising liability on our consolidated balance
sheets. If franchisees fail to make the expected contributions,
we may not be able to continue with our marketing plan for that
year unless we make additional contributions into the fund.
These additional contributions are also recorded as selling
expenses. In fiscal 2005, we made $15 million in additional
contributions and we made no significant payments in the first
nine months of fiscal 2006.
Key Business Measures
We track our results of operations and manage our business by
using three key business measures, comparable sales growth,
average restaurant sales and system-wide sales growth. These
measures 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.
42
Comparable sales growth refers to the change in restaurant sales
in one period from a comparable period for restaurants that have
been open for thirteen months or longer. We believe comparable
sales growth is a key indicator of our performance, as
influenced by our initiatives and those of our competitors.
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For the | |
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|
For the | |
|
Nine Months | |
|
|
Fiscal Year Ended | |
|
Ended | |
|
|
June 30, | |
|
March 31, | |
|
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| |
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| |
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|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
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| |
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| |
|
| |
|
| |
|
| |
|
|
(In constant currencies) | |
Comparable Sales Growth:
|
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|
|
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|
|
|
|
|
|
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|
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|
United States and Canada
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|
(7.0 |
)% |
|
|
(0.5 |
)% |
|
|
6.6 |
% |
|
|
8.5 |
% |
|
|
2.7 |
% |
EMEA/ APAC
|
|
|
(3.4 |
) |
|
|
5.4 |
|
|
|
2.8 |
|
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|
2.9 |
|
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|
0.2 |
|
Latin America
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|
3.6 |
|
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|
4.0 |
|
|
|
5.5 |
|
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|
6.7 |
|
|
|
1.5 |
|
|
Total System-Wide
|
|
|
(5.9 |
)% |
|
|
1.0% |
|
|
|
5.6 |
% |
|
|
7.0 |
% |
|
|
2.0 |
% |
Our fiscal 2003 and early fiscal 2004 results were negatively
affected by competitive discounting, particularly in the United
States and Canada. Comparable sales growth in the United States
and Canada began to improve in the second half of fiscal 2004 as
a result of our strategic initiatives, including new premium
products, our new advertising campaign targeting our core
customers and our operational excellence programs. In the United
States and Canada, our comparable sales performance improved
significantly in fiscal 2005, as we continued to make
improvements to our menu, advertising and operations. The
improved financial health of our franchise system in fiscal 2005
and lower comparable sales in fiscal 2004 also contributed to
our exceptionally strong fiscal 2005 comparable sales
performance.
The comparable sales growth performance in EMEA/ APAC has been
led by positive sales performance in markets such as Spain and
Turkey partially offset by poor sales performance in the United
Kingdom and Germany. Latin America demonstrated strong results
in the three-year period and continues to grow, driven by our
franchise restaurants.
Comparable sales growth continued to improve for the nine months
ended March 31, 2006, driven by new products and marketing
and operational initiatives, but did not increase at the same
rate due to the high growth rate in the first nine months of
fiscal 2005, as described above, to which the first nine months
of fiscal 2006 is compared. We believe that our system-wide
comparable sales growth for the nine months ended March 31,
2006 is more indicative of our future performance than the
higher comparable sales growth that we achieved in fiscal 2005.
Average restaurant sales is an important measure of the
financial performance of our restaurants and changes in the
overall direction and trends of sales. Average restaurant sales
is influenced by comparable sales performance and restaurant
openings and closings.
|
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|
For the | |
|
|
For the | |
|
Nine Months | |
|
|
Fiscal Year Ended | |
|
Ended | |
|
|
June 30, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
(In constant currencies) | |
Average Restaurant Sales
|
|
$ |
972 |
|
|
$ |
994 |
|
|
$ |
1,066 |
|
|
$ |
791 |
|
|
$ |
814 |
|
Our improvement in average restaurant sales in fiscal 2004 and
fiscal 2005 was primarily due to improved comparable sales, the
opening of new restaurants and closure of under-performing
restaurants. Our comparable sales increased by 1% and 5.6% in
fiscal 2004 and 2005, respectively, driven primarily by our
strategic initiatives related to operational excellence,
advertising and our menu. Additionally, we and our franchisees
closed 1,314 restaurants between fiscal 2003 and fiscal 2005.
Approximately 70% of these
43
closures were franchise restaurants in the United States, which
had average restaurant sales of approximately $630,000 in the
12 months prior to closure. We and our franchisees also
opened 93 new restaurants in the United States between fiscal
2004 and 2005, of which 74 were open for at least 12 months
as of March 31, 2006. The average restaurant sales of these
new restaurants was approximately $1.3 million for the
12 months ended March 31, 2006. We expect these
closures of unviable restaurants, combined with continued
improvements to average restaurant sales of existing restaurants
and strong sales at new restaurants, to result in financially
stronger operators throughout our franchise base.
System-wide sales refer to sales at all company and franchise
restaurants. System-wide sales and system-wide sales growth are
important indicators of:
|
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|
• |
the overall direction and trends of sales and operating income
on a system-wide basis; and |
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|
• |
the effectiveness of our advertising and marketing initiatives. |
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|
|
For the | |
|
|
For the | |
|
Nine Months | |
|
|
Fiscal Year Ended | |
|
Ended | |
|
|
June 30, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In constant currencies) | |
System-Wide Sales Growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
|
(8.0 |
)% |
|
|
(2.2 |
)% |
|
|
4.9 |
% |
|
|
7.3 |
% |
|
|
0.6 |
% |
EMEA/ APAC
|
|
|
7.4 |
|
|
|
11.5 |
|
|
|
7.9 |
|
|
|
7.8 |
|
|
|
5.5 |
|
Latin America
|
|
|
1.6 |
|
|
|
8.4 |
|
|
|
14.5 |
|
|
|
15.2 |
|
|
|
12.5 |
|
|
Total System-Wide
|
|
|
(4.7 |
)% |
|
|
1.2% |
|
|
|
6.1 |
% |
|
|
7.9 |
% |
|
|
2.4 |
% |
The increases in system-wide sales growth in fiscal 2004 and
fiscal 2005 primarily reflected improved comparable sales in all
regions and sales at 618 new restaurants opened during that
two-year period, which were partially offset by the closing of
849 under-performing restaurants during the same two-year
period. This improving trend continued during the nine months
ended March 31, 2006, when comparable sales continued to
increase on a system-wide basis although at a slower rate due to
the high growth rate in the first nine months of fiscal 2005, to
which the first nine months of fiscal 2006 is compared.
Additionally, there were 231 restaurant openings during the
period, partially offset by 226 restaurant closings during the
same period. We expect restaurant closures to continue to
decline and that restaurant openings will gradually accelerate.
We believe that our system-wide sales growth for the nine months
ended March 31, 2006 is more indicative of our future
performance than the higher system-wide sales growth that we
achieved in fiscal 2005.
Following a pattern of declining sales in fiscal 2003 and the
first half of fiscal 2004, sales in the United States and Canada
increased 4.9% in fiscal 2005, primarily due to the
implementation of our strategic initiatives related to
advertising, our menu and our operational excellence programs.
Our system-wide sales in the United States and Canada increased
slightly in the first nine months of fiscal 2006, primarily as a
result of positive comparable sales growth partially offset by
restaurant closings. We had 6,712 franchise restaurants in the
United States and Canada at March 31, 2006, compared to
6,999 franchise restaurants at March 31, 2005.
EMEA/ APAC demonstrated strong system-wide sales growth during
the three-year period which reflected growth in several markets,
including Germany, Spain, the Netherlands and smaller markets in
the Mediterranean and Middle East. Partially offsetting this
growth was the United Kingdom, where changes in consumer
preferences away from the FFHR category have adversely affected
sales for us. We opened 71 restaurants (net of closures) in
EMEA/ APAC during fiscal 2005 and 79 (net of closures) during
the first nine months of fiscal 2006, increasing our total
system restaurant count in this segment to 2,735 at
March 31, 2006.
44
Latin America’s system-wide sales growth was driven by new
restaurant openings and strong comparable sales from fiscal 2003
through fiscal 2005. We opened 62 restaurants (net of closures)
in Latin America during fiscal 2005 and 57 (net of closures)
during the first nine months of fiscal 2006, increasing our
total system restaurant count in this segment to 785 at
March 31, 2006.
Factors Affecting Comparability of Results
The acquisition of BKC was accounted for using the purchase
method of accounting, or purchase accounting, in accordance with
Financial Accounting Standards Board (“FASB”)
Statement of Financial Accounting Standards (“SFAS”)
No. 141, Business Combinations. Purchase accounting
required a preliminary allocation of the purchase price to the
assets acquired and liabilities assumed at their estimated fair
market values at the time of our acquisition of BKC in fiscal
2003. In December 2003, we completed our fair market value
calculations and finalized the adjustments to these preliminary
purchase accounting allocations. As part of finalizing our
assessment of fair market values, we reviewed all of our lease
agreements worldwide. Some of our lease payments were at
below-market lease rates while other lease payments were at
above-market lease rates. In cases where we were making
below-market lease payments, we recorded an asset reflecting
this favorable lease. We amortize this intangible asset over the
underlying lease term, which has the effect of increasing our
rent expense on a non-cash basis to the market rate. Conversely,
in cases where we were making above-market lease payments, we
recorded a liability reflecting this unfavorable lease. We
amortize this liability over the underlying lease term, which
has the effect of decreasing our rent expense on a non-cash
basis to the market rate.
During fiscal 2004 and fiscal 2005, we recorded a net benefit
from favorable and unfavorable lease amortization of
$51 million and $29 million, respectively. The fiscal
2004 unfavorable and favorable benefit was higher than fiscal
2005 primarily as a result of final adjustments to our purchase
price allocation which resulted in a higher benefit of
$19 million associated with favorable and unfavorable lease
amortization. The favorable and unfavorable lease benefit and
other miscellaneous adjustments were partially offset by
$18 million of incremental depreciation expense, resulting
in a net benefit of $2 million in fiscal 2004, when we
finalized our purchase accounting allocations.
In addition to the amortization of these favorable and
unfavorable leases, purchase accounting resulted in certain
other items that affect the comparability of the results of
operations between us and our predecessor, including changes in
asset carrying values (and related depreciation and
amortization), expenses related to incurring the debt that
financed the acquisition that were capitalized and amortized as
interest expense, and the recognition of intangible assets (and
related amortization).
|
|
|
Historical Franchisee Financial Distress |
During the second half of fiscal 2003, we began to experience
delinquencies in payments of royalties, advertising fund
contributions and rents from certain franchisees in the United
States and Canada. In February 2003, we initiated the FFRP
program designed to proactively assist franchisees experiencing
financial difficulties due to over-leverage and other factors
including weak sales, the impact of competitive discounting on
operating margins and poor cost management. Under the FFRP
program, we worked with those franchisees with strong operating
track records, their lenders and other creditors to attempt to
strengthen the franchisees’ financial condition. The FFRP
program also resulted in closing unviable franchise restaurants
and our acquisition of certain under-performing franchise
restaurants in order to improve their performance. In addition,
we entered into agreements to defer certain royalty payments,
which we did not recognize as revenue during fiscal 2004, and
acquired a limited amount of franchisee debt, often as part of
broader agreements to acquire franchise restaurants or real
estate. We also contributed funds to cover shortfalls in
franchisee advertising contributions. See “— Other
Commercial Commitments and Off-Balance Sheet Arrangements”
for further information about the support we committed to
provide in connection with the FFRP program, including an
aggregate remaining commitment of $35 million to fund
certain loans to renovate franchise restaurants, to make
renovations to
45
certain restaurants that we lease or sublease to franchisees,
and to provide rent relief and/or contingent cash flow subsidies
to certain franchisees.
Franchise system distress had a significant impact on our
results of operations during these periods:
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|
|
For the | |
|
|
For the | |
|
Nine Months | |
|
|
Fiscal Year Ended | |
|
Ended | |
|
|
June 30, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue not recognized
|
|
$ |
— |
|
|
$ |
22 |
|
|
$ |
(3 |
) (1) |
|
$ |
— |
|
|
$ |
— |
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
53 |
|
|
|
11 |
|
|
|
1 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
Incremental advertising contributions
|
|
|
49 |
|
|
|
41 |
|
|
|
15 |
|
|
|
15 |
|
|
|
2 |
|
|
|
Internal and external costs of FFRP program administration
|
|
|
3 |
|
|
|
11 |
|
|
|
12 |
|
|
|
9 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on selling, general and administrative
|
|
$ |
105 |
|
|
$ |
63 |
|
|
$ |
28 |
|
|
$ |
26 |
|
|
$ |
1 |
|
Other operating expenses (income), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves on acquired debt, net
|
|
|
— |
|
|
|
19 |
|
|
|
4 |
|
|
|
4 |
|
|
|
(2 |
) |
|
|
Other, net
|
|
|
— |
|
|
|
1 |
|
|
|
4 |
|
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on other operating expenses (income), net
|
|
|
— |
|
|
|
20 |
|
|
|
8 |
|
|
|
8 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect on income from operations
|
|
$ |
105 |
|
|
$ |
105 |
|
|
$ |
33 |
|
|
$ |
34 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
This amount reflects the collection and recognition of revenue
that was not recognized in fiscal 2004. |
As a result of the franchisees’ distress, we did not
recognize revenues associated with royalties and rent for
certain franchise restaurants where collection was uncertain in
fiscal 2004, although we retained the legal right pursuant to
the applicable franchise agreement to collect these amounts. In
accordance with SFAS No. 45, we recognize revenue for
the previously unrecognized revenue at the time such amounts are
actually collected. In addition, provisions for bad debt expense
were significantly higher than historical levels during fiscal
2003 and 2004, as a result of a substantial increase in past due
receivables. As brand advertising is a significant element of
our success, we contributed an incremental $49 million,
$41 million and $15 million to the U.S. and Canada
advertising fund for each of fiscal 2003, 2004 and 2005,
respectively, to fund the shortfall in franchisee contributions.
We also incurred significant internal and external costs to
manage the FFRP program. During the first nine months of fiscal
2006, we did not make significant incremental advertising
contributions.
We believe the FFRP program has significantly improved the
financial health and performance of our franchisee base in the
United States and Canada. We believe that restaurant
profitability has increased. Franchise restaurant average
restaurant sales in the United States and Canada has improved
from $973,000 in fiscal 2003 to $1.07 million in fiscal
2005. Our collection rates, which we define as collections
divided by billings on a one-month trailing basis, also improved
during this period. Collection rates in the United States and
Canada have improved from 91% during the six months ended
June 30, 2003 and for fiscal 2004 to 100% in fiscal 2005,
which reflects the improvement of our franchise system’s
financial health. During the first nine months of fiscal 2006,
our collections have remained at 100%, consistent with fiscal
2005.
Our franchisees are independent operators, and their decision to
incur indebtedness is generally outside of our control. Although
franchisees may experience financial distress in the future due
to over-leverage, we believe that there are certain factors that
may reduce the likelihood of such a recurrence. We have
established a compliance program to monitor the financial
condition of restaurants that were formerly in the FFRP program.
We review our collections on a monthly basis to identify
potentially distressed
46
franchisees. Further, we believe that the best way to reduce the
likelihood of another wave of franchisee financial distress in
our system is for us to focus on driving sales growth and
improving restaurant profitability, and that the successful
implementation of our business strategy will help us to achieve
these objectives.
We believe the investments we made historically in the FFRP
program will continue to provide a return to us in the form of a
reinvigorated franchise system in the United States and Canada.
|
|
|
Our Global Reorganization |
After our acquisition of BKC, we retained consultants to assist
us in the review of the management and efficiency of our
business, focusing on our operations, marketing, supply chain
and corporate structure. In connection with these reviews, we
reorganized our corporate structure to allow us to operate as a
global brand, including through the elimination of certain
corporate and international functions. Also in connection with
those reviews, we implemented operational initiatives, which
have helped us improve restaurant operations.
In connection with these reviews and the resulting corporate
restructuring, we incurred costs of $10 million,
$22 million and $17 million in fiscal 2003, fiscal
2004 and fiscal 2005, respectively, consisting primarily of
consulting and severance-related costs, which included severance
payments, outplacement services and relocation costs. The
following table presents, for the periods indicated, such costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the | |
|
Nine Months |
|
|
Fiscal Year Ended | |
|
Ended |
|
|
June 30, | |
|
March 31, |
|
|
| |
|
|
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(In millions) |
Consulting fees
|
|
$ |
1 |
|
|
$ |
14 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
— |
|
Severance-related costs of the global reorganization
|
|
|
9 |
|
|
|
8 |
|
|
|
15 |
|
|
|
8 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
10 |
|
|
$ |
22 |
|
|
$ |
17 |
|
|
$ |
10 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Results of Operations
The following table presents, for the periods indicated, our
results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
|
For the Fiscal Year Ended June 30, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
Increase/ | |
|
|
|
Increase/ | |
|
|
|
|
|
Increase/ | |
|
|
Amount | |
|
Amount | |
|
(Decrease) | |
|
Amount | |
|
(Decrease) | |
|
Amount | |
|
Amount | |
|
(Decrease) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except percentages) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$ |
1,174 |
|
|
$ |
1,276 |
|
|
|
9 |
% |
|
$ |
1,407 |
|
|
|
10 |
% |
|
$ |
1,043 |
|
|
$ |
1,122 |
|
|
|
8 |
% |
|
Franchise revenues
|
|
|
368 |
|
|
|
361 |
|
|
|
(2 |
)% |
|
|
413 |
|
|
|
14 |
% |
|
|
306 |
|
|
|
309 |
|
|
|
1 |
% |
|
Property revenues
|
|
|
115 |
|
|
|
117 |
|
|
|
2 |
% |
|
|
120 |
|
|
|
3 |
% |
|
|
88 |
|
|
|
84 |
|
|
|
(5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
1,657 |
|
|
$ |
1,754 |
|
|
|
6 |
% |
|
$ |
1,940 |
|
|
|
11 |
% |
|
$ |
1,437 |
|
|
$ |
1,515 |
|
|
|
5 |
% |
Company restaurant expenses
|
|
|
1,022 |
|
|
|
1,087 |
|
|
|
6 |
% |
|
|
1,195 |
|
|
|
10 |
% |
|
|
886 |
|
|
|
961 |
|
|
|
8 |
% |
Selling, general and administrative expenses
|
|
|
478 |
|
|
|
482 |
|
|
|
1 |
% |
|
|
496 |
|
|
|
3 |
% |
|
|
363 |
|
|
|
361 |
|
|
|
(1 |
)% |
Property expenses
|
|
|
55 |
|
|
|
58 |
|
|
|
5 |
% |
|
|
64 |
|
|
|
10 |
% |
|
|
43 |
|
|
|
42 |
|
|
|
(2 |
)% |
Impairment of goodwill
|
|
|
875 |
|
|
|
— |
|
|
|
* |
|
|
|
— |
|
|
|
* |
|
|
|
— |
|
|
|
— |
|
|
|
* |
|
Other operating expenses (income), net
|
|
|
32 |
|
|
|
54 |
|
|
|
69 |
% |
|
|
34 |
|
|
|
(37 |
)% |
|
|
18 |
|
|
|
(5 |
) |
|
|
(128 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
$ |
2,462 |
|
|
$ |
1,681 |
|
|
|
(32 |
)% |
|
$ |
1,789 |
|
|
|
6 |
% |
|
$ |
1,310 |
|
|
$ |
1,359 |
|
|
|
4 |
% |
(Loss) income from operations
|
|
|
(805 |
) |
|
|
73 |
|
|
|
* |
|
|
|
151 |
|
|
|
107 |
% |
|
|
127 |
|
|
|
156 |
|
|
|
23 |
% |
Interest expense, net
|
|
|
81 |
|
|
|
64 |
|
|
|
(21 |
)% |
|
|
73 |
|
|
|
14 |
% |
|
|
53 |
|
|
|
53 |
|
|
|
0 |
% |
Loss on early extinguishment of debt
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
$ |
(886 |
) |
|
$ |
9 |
|
|
|
* |
|
|
$ |
78 |
|
|
|
* |
|
|
$ |
74 |
|
|
$ |
89 |
|
|
|
* |
|
Income tax (benefit) expense
|
|
|
(18 |
) |
|
|
4 |
|
|
|
* |
|
|
|
31 |
|
|
|
* |
|
|
|
29 |
|
|
|
52 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(868 |
) |
|
$ |
5 |
|
|
|
* |
|
|
$ |
47 |
|
|
|
* |
|
|
$ |
45 |
|
|
$ |
37 |
|
|
|
(18 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2006 Compared to Nine Months
Ended March 31, 2005
Company restaurant revenues increased 8% to $1,122 million
in the first nine months of fiscal 2006 compared to the same
period in fiscal 2005, primarily as a result of the acquisition
of 79 franchise restaurants since March 31, 2005 and
positive comparable sales in the United States and Canada.
Partially offsetting these factors were negative comparable
sales in EMEA/ APAC and Latin America.
In the United States and Canada, company restaurant revenues
increased 12% to $761 million in the first nine months of
fiscal 2006 compared to the same period in fiscal 2005,
primarily as a result of positive comparable sales and the
acquisition of 78 franchise restaurants, most of which were
located in the United States.
Company restaurant revenues decreased 3% to $319 million in
EMEA/ APAC, primarily as a result of negative comparable sales
in the United Kingdom and Germany, where 77% of our EMEA/ APAC
company restaurants were located at March 31, 2006,
partially offset by strong performance in the Netherlands. In
Latin America, company restaurant revenues increased 17%, as
revenues generated by ten new company restaurants were partially
offset by negative comparable sales.
48
Franchise revenues increased 1% to $309 million in the
first nine months of fiscal 2006 compared to the same period in
fiscal 2005. Comparable sales increased at franchise restaurants
in all segments during the first nine months of fiscal 2006, and
284 new franchise restaurants were opened since the end of the
third quarter of fiscal 2005, including 253 new international
franchise restaurants. Offsetting these factors was the
elimination of royalties from 390 franchise restaurants that
were closed or acquired by us, primarily in the United States
and Canada.
Franchise revenues decreased 1% to $197 million in the
United States and Canada in the first nine months of fiscal 2006
compared to the same period in fiscal 2005, primarily as a
result of the elimination of royalties from 316 franchise
restaurants that were closed or acquired by us, partially offset
by positive comparable sales.
Our EMEA/ APAC franchisees opened 121 new franchise restaurants,
net of closures, since March 31, 2005 resulting in a 4%
increase in franchise revenues to $87 million in the first
nine months of fiscal 2006 compared to the same period in fiscal
2005. Latin America franchise revenues increased 19% to
$25 million during the first nine months of fiscal 2006
compared to the same period in fiscal 2005, primarily as a
result of 72 new franchise restaurants, net of closures, since
March 31, 2005 and positive comparable sales.
Property revenues decreased by 5% to $84 million in the
first nine months of fiscal 2006 compared to the same period in
fiscal 2005, 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. On a
segment basis, property revenues increased 3% in the United
States and Canada to $62 million, primarily as a result of
higher contingent rent payments resulting from increased
franchise restaurant sales, partially offset by the effect of
franchise restaurants that were closed or acquired by us. Our
EMEA/ APAC property revenues decreased 21% to $22 million,
primarily as a result of the closure of certain franchise
restaurants in fiscal 2005 and the first nine months of fiscal
2006.
|
|
|
Operating Costs and Expenses |
|
|
|
Company restaurant expenses |
Food, paper and product costs increased 9% to $351 million,
primarily as a result of an 8% increase in company restaurant
revenues. As a percentage of company restaurant revenues, food,
paper and product costs increased 0.4% to 31.3% during the first
nine months of fiscal 2006 compared to the same period in fiscal
2005, primarily due to increases in beef prices and competitive
discounting in Europe.
On a segment basis, food, paper and product costs increased 12%
to $242 million in the United States and Canada in the
first nine months of fiscal 2006 compared to the same period in
fiscal 2005, primarily as a result of a 12% increase in company
restaurant revenues. Food, paper and product costs decreased
0.2% to 31.8% of company restaurant revenues in the United
States and Canada.
Food, paper and product costs increased 3% to $94 million
in EMEA/ APAC, primarily as a result of increased beef prices in
Europe and competitive discounting in Germany, where 52% of our
EMEA/ APAC company restaurants were located at March 31,
2006, partially offset by a 3% decrease in company restaurant
revenues. Food, paper and product costs increased to 29.4% of
company restaurant revenues in EMEA/ APAC in the first nine
months of fiscal 2006 from 27.8% of company restaurant revenues
in the same period in fiscal 2005.
Food, paper and product costs increased 13% in Latin America in
the first nine months of fiscal 2006 compared to the same period
in fiscal 2005, primarily as a result of a 15% increase in
company restaurant revenues.
During the first nine months of fiscal 2006, payroll and
employee benefits costs increased 7% to $330 million, or
29.4% of company restaurant revenues compared to the first nine
months of fiscal 2005, when payroll and employee benefits costs
were 29.6% of company restaurant revenues. Payroll and employee
benefits costs have continued to increase in fiscal 2006 as a
result of increases in wages and
49
other costs of labor, particularly health insurance, as well as
an increase in the number of company restaurants from the
acquisition of franchise restaurants. Partially offsetting these
increased costs was a reduction in the labor required to operate
our restaurants, due to our operational excellence programs and
operational efficiency programs implemented in Europe.
On a segment basis, payroll and employee benefits costs
increased 14% to $230 million in the United States and
Canada in the first nine months of fiscal 2006 compared to the
same period in fiscal 2005, primarily as a result of the
acquisition of 78 franchise restaurants and increased wages and
health insurance benefit costs. Payroll and employee benefits
costs were 30.3% of company restaurant revenues in the United
States and Canada in the first nine months of fiscal 2006,
compared to 30.0% in the first nine months of fiscal 2005, as
efficiency gains resulting from our operational excellence
initiatives partially offset these higher costs.
In EMEA/ APAC, payroll and employee benefits costs decreased 6%
to $95 million in the first nine months of fiscal 2006
compared to the same period in fiscal 2005, as a result of
operational efficiency programs implemented in Europe in
connection with our global reorganization. Payroll and employee
benefits costs decreased to 29.7% of company restaurant revenues
in EMEA/ APAC in the first nine months of fiscal 2006 compared
to 30.7% in the first nine months of fiscal 2005 as a result of
these programs.
In Latin America, where labor costs are lower than in the United
States and Canada and EMEA/ APAC segments, payroll and employee
benefits costs increased 14% to $5 million in the first
nine months of fiscal 2006 compared to the same period in fiscal
2005, primarily as a result of ten new company restaurant
openings since March 31, 2005. Payroll and employee
benefits costs were 11.6% of company restaurant revenues in
Latin America in the first nine months of fiscal 2006 and 2005.
Occupancy and other operating costs include amortization of
unfavorable and favorable leases from our acquisition of BKC,
which resulted in a reduction in occupancy and other operating
expenses. The net reduction in occupancy and other operating
costs resulting from amortization of unfavorable and favorable
leases was $12 million during the first nine months of
fiscal 2006 compared to $16 million in the same period in
fiscal 2005, primarily as a result of the termination of certain
unfavorable leases. Excluding unfavorable and favorable lease
amortization, occupancy and other operating costs increased 7%
to $292 million in the first nine months of fiscal 2006,
primarily as a result of our acquisition of franchise
restaurants and new company restaurant openings, as well as
increased costs, such as utilities and restaurant supplies.
On a segment basis, occupancy and other operating costs
increased to 24.3% of company restaurant revenues in the United
States and Canada in the first nine months of fiscal 2006
compared to 24.1% in the first nine months of fiscal 2005,
primarily as a result of acquired restaurants and increased
utility and restaurant supply costs.
In EMEA/ APAC, occupancy and other operating costs increased to
26.5% of company restaurant revenues in the first nine months of
fiscal 2006, compared to 25.8% in the same period in fiscal
2005, as a result of decreased restaurant sales and the closure
of certain restaurants with high rents, partially offset by
increased utilities in the segment and increased rents in the
United Kingdom.
Occupancy and other operating costs increased to 23.9% of
company restaurant revenues in Latin America in the first nine
months of fiscal 2006 compared to 20.2% in the first nine months
of fiscal 2005, primarily as a result of a decrease in
comparable sales and increased utility costs.
|
|
|
Worldwide selling, general and administrative expenses |
Selling, general and administrative expenses decreased by
$2 million to $361 million during the first nine
months of fiscal 2006 compared to the same period in fiscal
2005. We recorded the compensatory make-whole payment of
$33 million and related taxes of $2 million as
compensation expense in the third quarter of fiscal 2006. Our
board decided to pay the compensatory make-whole payment because
it recognized that the payment of the February 2006 dividend and
the February 2006 financing would
50
decrease the value of the equity interests of holders of our
options and restricted stock unit awards as these holders were
not otherwise entitled to receive the dividend. Our board also
recognized that the holders of our options and restricted stock
unit awards had significantly contributed to the improvement in
our business performance and equity value over the past two
years. Accordingly, it decided to pay the same amount of the
February 2006 dividend, on a per share basis, to the holders of
our options and restricted stock unit awards to compensate them
for this potential decline in the value of their equity
interests.
Additionally, our acquisition of 78 franchise restaurants
resulted in increased general and administrative expenses
related to the management of our company restaurants. Offsetting
these increased expenses was a $35 million reduction in
expenses related to franchise system distress and our global
reorganization costs in the first nine months of fiscal 2006
compared to the comparable period in fiscal 2005.
Under the management agreement with the sponsors, which we
entered into in connection with our acquisition of BKC, we paid
a management fee to the sponsors equal to 0.5% of our total
current year revenues, which amount was limited to 0.5% of the
prior year’s total revenues. Management fee expense was
$7 million in both nine-month periods. In February 2006, we
entered into an agreement with the sponsors to pay a termination
fee of $30 million to the sponsors to terminate the
management agreement upon completion of an initial public
offering of common stock.
Property expenses decreased by $1 million to
$42 million in the first nine months of fiscal 2006 from
the same period in fiscal 2005, as a result of a decrease in the
number of properties that we lease or sublease to franchisees,
primarily due to restaurant closures and our acquisition of
franchise restaurants. Property expenses were 35% of property
revenues in the United States and Canada in the first nine
months of fiscal 2006 compared to 32% in the first nine months
of fiscal 2005. Our property expenses in EMEA/ APAC approximate
our property revenues because most of the EMEA/ APAC property
operations consist of properties that are subleased to
franchisees on a pass-through basis.
|
|
|
Worldwide other operating expenses (income), net |
Other operating income, net was $5 million in the first
nine months of fiscal 2006 compared to other operating expenses,
net of $18 million in the same period in fiscal 2005. Other
operating income, net was comprised primarily of gains on
property disposals and other miscellaneous items in the nine
months ended March 31, 2006. Other operating expenses, net,
in the first nine months of fiscal 2005 consisted primarily of
(i) $5 million of settlement losses recorded in
connection with the acquisition of franchise operations in the
United States, (ii) $4 million of reserves recorded on
franchisee debt acquired in the United States,
(iii) $4 million of costs associated with the FFRP
program in the United States and Canada and
(iv) $4 million of losses on lease terminations and
property disposals in the United Kingdom.
In the first nine months of fiscal 2006, our operating income
increased by $29 million to $156 million compared to
the same period in fiscal 2005, primarily as a result of
improved restaurant sales and the improved financial health of
our franchise system and reduced costs of our global
reorganization. See Note 19 to our audited consolidated
financial statements contained herein for segment information
disclosed in accordance with SFAS No. 131.
Operating income in the United States and Canada increased by
$26 million to $219 million in the first nine months
of fiscal 2006 compared to the same period in fiscal 2005,
primarily as a result of increased sales and reductions in the
negative effect of franchise system distress, which decreased by
$34 million in the first nine months of fiscal 2006
compared to the same period in fiscal 2005. The decrease in the
negative effect of franchise system distress was comprised
primarily of a $13 million reduction in incremental
advertising contributions and a $9 million reduction in
costs of FFRP administration, both of which resulted from the
improved financial health of our franchise system. These
51
improvements were partially offset by a $3 million
reduction in franchise revenues as a result of franchise
restaurant closures.
Operating income in EMEA/ APAC increased by $15 million to
$51 million in the first nine months of fiscal 2006
compared to the same period in fiscal 2005, as a result of an
$11 million reduction in losses on property disposals and
other income and expense items, a $6 million decrease in
selling, general and administrative expenses attributable to the
effects of our global reorganization and a $3 million
increase in franchise revenues, partially offset by a
$6 million decrease in margins from company restaurants
driven primarily by results in the United Kingdom and Germany,
due to decreased sales, increased beef prices and occupancy
costs, including rents and utilities.
Operating income in Latin America increased by $3 million
to $22 million in the first nine months of fiscal 2006
compared to the same period in fiscal 2005, primarily as a
result of increased revenues.
Our unallocated corporate expenses increased 12% to
$136 million in the first nine months of fiscal 2006
compared to the same period in fiscal 2005, primarily as a
result of the compensation expense recorded in connection with
the compensatory make-whole payment of $33 million and
related taxes of $2 million, partially offset by the
elimination of $7 million of global reorganization costs
and a $5 million decrease in incentive compensation costs,
resulting from changes to certain benefit plans.
Interest expense, net was $53 million in the first nine
months of fiscal 2006 and fiscal 2005. Interest expense was
$59 million in the first nine months of fiscal 2006 and
fiscal 2005, as the effect of increased borrowings was offset by
lower interest rates as a result of our July 2005 and February
2006 refinancings. Interest income was approximately
$6 million in the first nine months of fiscal 2006 and
fiscal 2005, as increased interest rates offset a reduction in
cash invested.
|
|
|
Loss on early extinguishment of debt |
In connection with our July 2005 financing and February 2006
financing, $14 million of deferred financing fees were
recorded as a loss on early extinguishment of debt.
Income tax expense increased $23 million to
$52 million in the first nine months of fiscal 2006 from
the same period in fiscal 2005, partially due to a
$15 million increase in income before income taxes in the
first nine months of fiscal 2006 compared to the first nine
months of fiscal 2005. In addition, our effective tax rate
increased by 19% for the first nine months of fiscal 2006 to
58%. The higher effective tax rate is primarily attributable to
adjustments to deferred tax asset valuation reserves in certain
foreign countries and higher tax expense associated with
adjustments to valuation reserves, established during purchase
accounting, which are required to be applied against intangible
assets recorded in purchase accounting rather than recording a
benefit to tax expense. The adjustments to these valuation
reserves resulted from our ability to utilize net operating
losses as a result of improved operations in certain foreign
countries.
Our net income decreased 18% to $37 million in the first
nine months of fiscal 2006 compared to the same period in fiscal
2005. This reduction resulted primarily from $35 million of
compensation expense recorded in connection with the
compensatory make-whole payment and related taxes, the
$14 million loss recorded on the early extinguishment of
debt in connection with our July 2005 refinancing and February
2006 financing and increased income tax expense, which were
partially offset by increased revenues and reduced costs of
franchise system distress and our global reorganization.
52
Fiscal Year Ended June 30, 2005 Compared to Fiscal Year
Ended June 30, 2004
Company restaurant revenues increased 10% to $1,407 million
in fiscal 2005 as a result of strong comparable sales in the
United States and Canada and Latin America, where approximately
76% of our company restaurants are located.
In the United States and Canada, company restaurant revenues
increased 15% to $923 million, primarily as a result of
strong comparable sales generated from the implementation of
strategic initiatives related to our menu, advertising and
operational excellence programs, as well as the acquisition of
99 franchise restaurants.
In EMEA/ APAC and Latin America, company restaurant revenues
increased 1% and 8%, respectively, to $435 million and
$49 million, respectively, primarily as a result of new
restaurant openings and positive comparable sales.
Franchise revenues increased 14% to $413 million in fiscal
2005 as a result of improved sales at franchise restaurants in
all segments.
Franchise revenues increased 15% to $269 million in the
United States and Canada in fiscal 2005, primarily as a result
of the implementation of our menu, marketing and operational
excellence initiatives and the improved financial condition of
our franchise system. In addition to increased royalties from
improved franchise restaurant sales, we recognized
$3 million of franchise revenues not previously recognized
in the United States and Canada, compared to $17 million of
franchise revenues not recognized in fiscal 2004. Partially
offsetting these factors was the elimination of royalties from
franchise restaurants that were closed or acquired by us in
fiscal 2005.
In EMEA/ APAC, our franchisees opened 165 new franchise
restaurants in fiscal 2005, contributing to a 3% net increase in
the number of EMEA/ APAC franchise restaurants from fiscal 2004.
This increase in franchise restaurants and positive comparable
sales in EMEA/ APAC resulted in a 13% increase in franchise
revenues to $114 million. In Latin America, franchise
revenues increased 17% to $30 million, primarily as a
result of 65 new franchise restaurants and positive comparable
sales.
Property revenues increased 3% to $120 million in fiscal
2005. On a segment basis, property revenues increased 1% and 5%,
respectively, in the United States and Canada and EMEA/ APAC to
$83 million and $37 million, respectively. Our fiscal
2004 property revenues in the United States and Canada excluded
$5 million of property revenues not recognized, partially
offset by $3 million of revenues recognized in connection
with finalizing our purchase accounting allocations.
|
|
|
Operating Costs and Expenses |
|
|
|
Company restaurant expenses |
Food, paper and product costs increased 12% to $437 million
in fiscal 2005, primarily as a result of a 10% increase in
company restaurant revenues. Food, paper and product costs
increased 0.5% to 31.1% of company restaurant revenues in fiscal
2005, primarily as a result of increases in the price of beef in
the United States.
On a segment basis, food, paper and product costs increased 16%
to $297 million in the United States and Canada, primarily
as a result of a 15% increase in company restaurant revenues.
Food, paper and product costs increased 0.3% to 32.1% of company
restaurant revenues in the United States and Canada, primarily
as a result of increases in the price of beef. Food, paper and
product costs increased 2% to $122 million in EMEA/ APAC
and 7% to $18 million in Latin America, primarily as a
result of increased company restaurant revenues in EMEA/ APAC
and Latin America of 1% and 8%, respectively.
Payroll and employee benefits costs increased 9% to
$415 million in fiscal 2005 as a result of increased wages,
health insurance and training expenses, as well as the
acquisition of franchise restaurants in fiscal 2005. Payroll and
employee benefits costs decreased 0.4% to 29.5% of company
restaurant
53
revenues in fiscal 2005 as higher costs of wages and health
insurance benefits were more than offset by increasing
restaurant sales and efficiency gains from our operational
excellence programs to reduce the labor required to operate our
restaurants.
On a segment basis, payroll and employee benefits costs
increased 12% to $276 million in the United States and
Canada in fiscal 2005, primarily as a result of the acquisition
of franchise restaurants and increased wages and health
insurance benefit costs. Payroll and employee benefits costs
were 29.9% of company restaurant revenues in the United States
and Canada in fiscal 2005, compared to 30.8% in fiscal 2004,
primarily as a result of leveraging payroll costs from increased
sales and efficiency gains resulting from our operational
improvement initiatives.
In EMEA/ APAC, payroll and employee benefits costs increased 3%
to $134 million in fiscal 2005, primarily as a result of
new company restaurants in Germany and increased wages and
benefits costs. Payroll and employee benefits costs were 30.8%
of company restaurant revenues in EMEA/ APAC in fiscal 2005,
compared to 30.3% in fiscal 2004.
In Latin America, payroll and employee benefits costs increased
12% to $6 million, primarily as a result of new company
restaurants. Payroll and employee benefits costs were 11.4% of
company restaurant revenues in Latin America in fiscal 2005,
compared to 11.0% in fiscal 2004.
The net reduction to occupancy and other operating costs
resulting from the amortization of unfavorable and favorable
leases was $20 million in fiscal 2005, compared to
$37 million in fiscal 2004. Excluding this net reduction
and depreciation adjustments of $14 million recorded in
fiscal 2004 when we finalized our purchase accounting
allocations, occupancy and other operating costs increased 8% to
$363 million in fiscal 2005. This increase resulted
primarily from the acquisition of franchise restaurants and
increases in certain other operating costs, such as rents and
utilities. Excluding this net reduction and the other
adjustments, occupancy and other operating costs decreased as a
percentage of company restaurant revenues to 25.8% in fiscal
2005 from 26.4% in fiscal 2004.
On a segment basis, occupancy and other operating costs,
excluding the favorable and unfavorable lease amortization and
the fiscal 2004 depreciation adjustments discussed above, were
24.5% of company restaurant revenues in the United States and
Canada in fiscal 2005 compared to 26.5% in fiscal 2004,
primarily as a result of leveraging base rents from increased
sales.
In EMEA/ APAC, occupancy and other operating costs, excluding
the favorable and unfavorable lease amortization and the fiscal
2004 depreciation adjustments discussed above, were 28.6% of
company restaurant revenues in fiscal 2005 compared to 26.9% in
fiscal 2004, primarily as a result of increased rents and
utilities in the United Kingdom.
Occupancy and other operating costs, excluding the favorable and
unfavorable lease amortization and fiscal 2004 depreciation
adjustments discussed above, were 23.4% of company restaurant
revenues in Latin America in fiscal 2005 compared to 20.1% in
fiscal 2004, primarily as a result of increased utility costs.
|
|
|
Worldwide selling, general and administrative expenses |
Selling, general and administrative expenses increased 3% to
$496 million in fiscal 2005. General and administrative
costs increased 10% to $408 million in fiscal 2005, while
our selling expenses decreased 21% to $88 million in fiscal
2005.
General and administrative expenses included $29 million
and $33 million of costs associated with the FFRP
program’s administration and severance and consulting fees
incurred in connection with our global reorganization in fiscal
2005 and fiscal 2004, respectively. Our fiscal 2005 general and
administrative cost increases also included $14 million of
incremental incentive compensation as a result of improved
restaurant operations and our improved financial performance, as
well as $7 million of increased costs associated with
operational excellence initiatives. Our remaining general and
administrative expense increases in fiscal 2005 were
attributable to the acquisition of franchise restaurants and
increases in restaurant operations and business development
teams, particularly in EMEA/ APAC where our general
54
and administrative expenses increased by $18 million in
fiscal 2005. Management fee expense paid to the sponsors totaled
$9 million and $8 million in fiscal 2005 and fiscal
2004, respectively.
The decrease in selling expenses is attributable to a decrease
in advertising expense and bad debt expense. Our bad debt
expense decreased to $1 million in fiscal 2005 from
$11 million in fiscal 2004 and our incremental advertising
expense resulting from franchisee non-payment of advertising
contributions was $15 million in fiscal 2005 compared to
$41 million in fiscal 2004. These improvements resulted
from the strengthening of our franchise system during fiscal
2005. We do not expect to incur significant incremental
marketing expenses as a result of franchisee non-payment of
advertising contributions in fiscal 2006. Partially offsetting
these reductions were incremental advertising expenses for
company restaurants opened or acquired in fiscal 2005.
The net reduction to property expenses resulting from the
amortization of unfavorable and favorable leases was
$9 million in fiscal 2005, compared to $14 million in
fiscal 2004. Excluding the amortization of unfavorable and
favorable leases and other adjustments recorded when we
finalized our purchase accounting allocations in fiscal 2004,
property expenses increased 6% to $73 million in fiscal
2005. Excluding the amortization of unfavorable and favorable
leases and the other adjustments discussed above, property
expenses decreased to 60.8% of property revenues in fiscal 2005
from 61.4% in fiscal 2004. Also excluding the amortization of
unfavorable and favorable leases and the other adjustments
discussed above, property expenses were 42.5% of property
revenues in the United States and Canada in fiscal 2005 compared
to 45.2% in fiscal 2004. This improvement is primarily
attributable to the non-recognition of $5 million in
property revenues in fiscal 2004.
|
|
|
Worldwide other operating expenses (income), net |
|
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
|
Fiscal Year | |
|
|
Ended | |
|
|
June 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In millions) | |
Losses on asset disposals
|
|
$ |
15 |
|
|
$ |
13 |
|
Impairment of long-lived assets
|
|
|
— |
|
|
|
4 |
|
Impairment of investments in franchisee debt
|
|
|
19 |
|
|
|
4 |
|
Impairment of investments in unconsolidated investments
|
|
|
4 |
|
|
|
— |
|
Litigation settlements and reserves
|
|
|
4 |
|
|
|
2 |
|
Other, net
|
|
|
12 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
Total other operating expenses (income), net
|
|
$ |
54 |
|
|
$ |
34 |
|
|
|
|
|
|
|
|
Gains and losses on asset disposals are primarily related to
exit costs associated with restaurant closures and gains and
losses from selling company restaurants to franchisees. In
fiscal 2005, the United States and Canada recorded
$7 million in net losses on asset disposals compared to
$6 million in fiscal 2004. EMEA/ APAC recorded
$6 million in net losses on asset disposals in fiscal 2005,
compared to $8 million in fiscal 2004, including a loss of
$3 million recorded in connection with the refranchising of
company restaurants in Sweden.
All of the fiscal 2005 and $12 million of the fiscal 2004
impairment of investments in franchisee debt related to our
assessments of the net realizable value of certain third-party
debt of franchisees that we acquired, primarily in connection
with the FFRP program in the United States and Canada. The
remaining fiscal 2004 impairment of debt investments was
recorded in connection with the forgiveness of a note receivable
from an unconsolidated affiliate in Australia.
55
Other, net included $5 million of settlement losses
recorded in connection with the acquisition of franchise
restaurants and $5 million of costs associated with the
FFRP program in fiscal 2005 in the United States and Canada. In
fiscal 2004, other, net included $3 million of losses from
unconsolidated investments in EMEA/ APAC and $2 million
each of losses from transactions denominated in foreign
currencies, property valuation reserves, and re-branding costs
related to our operations in Asia.
In fiscal 2005, our operating income increased by
$78 million to $151 million, primarily as a result of
increased revenues and the improved financial health of our
franchise system.
Operating income in the United States and Canada increased by
$140 million to $255 million in fiscal 2005, primarily
as a result of increased revenues and a reduction in the
negative effect of franchise system distress, which decreased by
$72 million in fiscal 2005 in the United States and Canada.
This decrease was comprised primarily of a $25 million
increase in franchise and property revenue recognition, a
$26 million reduction in incremental advertising
contributions and a $15 million reduction in reserves on
acquired debt, all of which resulted from the improved financial
health of our franchise system.
EMEA/ APAC operating income decreased by $59 million to
$36 million in fiscal 2005, as a result a number of
factors, including: (i) a $16 million decrease in
margins from company restaurants, as a result of higher
operating costs, (ii) a $12 million increase in
selling, general and administrative expenses to support growth,
(iii) a $6 million increase in expenses related to our
global reorganization, (iv) $8 million of lease
termination and exit costs, including $5 million in the
United Kingdom, and (v) $2 million of litigation
settlement costs in Asia.
Operating income in Latin America decreased by $1 million
to $25 million in fiscal 2005, primarily as a result of
higher company restaurant expenses. Our unallocated corporate
expenses increased 1% to $165 million in fiscal 2005.
Interest expense, net increased 14% to $73 million in
fiscal 2005 due to higher interest rates related to term debt
and debt payable on our payment-in-kind, or PIK notes to Diageo
plc and the private equity funds controlled by the sponsors
incurred in connection with our acquisition of BKC. Interest
income was $9 million in fiscal 2005, an increase of
$5 million from fiscal 2004, primarily as a result of an
increase in cash and cash equivalents due to improved cash
provided by operating activities and increased interest rates on
investments.
Income tax expense increased $27 million to
$31 million in fiscal 2005 primarily due to the
$69 million increase in income before income taxes in
fiscal 2005. Our effective tax rate declined by 4.7% for fiscal
2005 to 39.7%, partially offsetting the effect of the increase
in income before income taxes. The majority of the change in our
effective tax rate is attributable to adjustments to our
valuation allowances related to deferred tax assets in foreign
countries and certain state income taxes in fiscal 2005. See
Note 12 to our audited consolidated financial statements
for further information regarding our effective tax rate and
valuation allowances.
In fiscal 2005, our net income increased by $42 million to
$47 million. This improvement resulted primarily from
increased revenues as described above, a decrease in expenses
related to franchise system distress, particularly bad debt
expense, incremental advertising fund contributions and reserves
recorded on acquired franchisee debt, and a decrease in global
reorganization costs.
56
Fiscal Year Ended June 30, 2004 Compared to Fiscal Year
Ended June 30, 2003
All references to fiscal 2003 are to the twelve months ended
June 30, 2003, derived by adding the audited results of
operations of our predecessor from July 1, 2002 through
December 12, 2002 to the audited results of our operations
from December 13, 2002 through June 30, 2003. The
combined financial data for fiscal 2003 have not been audited on
a combined basis, do not comply with generally accepted
accounting principles and are not intended to represent what our
operating results would have been if the acquisition of BKC had
occurred at the beginning of the period.
We do not believe that the combined financial data for fiscal
2003 are comparable to our current results of operations as our
predecessor operated under a different ownership, management and
capital structure. In addition, our acquisition of BKC was
accounted for under the purchase method of accounting which also
affects comparability.
Company restaurant revenues increased 9% to $1,276 million
in fiscal 2004 as a result of positive comparable sales due to
the implementation of our menu, advertising and operational
excellence initiatives and the acquisition of 38 franchise
restaurants, most of which were located in the United States.
In the United States and Canada, company restaurant revenues
increased 5% to $802 million, primarily as a result of
positive comparable sales and the acquisition of 37 franchise
restaurants, primarily in the United States.
In EMEA/ APAC and Latin America, company restaurant revenues
increased 18% and 5%, respectively, to $429 million and
$45 million, respectively, primarily as a result of new
restaurant openings.
Franchise revenues declined 2% to $361 million in fiscal
2004 due to the financial distress of our franchise system in
the United States and Canada.
Franchise revenues decreased 10% to $234 million in the
United States and Canada in fiscal 2004, as a result of the
effects of franchise system distress. A total of 318
under-performing franchise restaurants closed in the United
States and Canada in fiscal 2004, compared to 43 new franchise
restaurants that opened. Our franchise revenues were also
affected in fiscal 2004 by the non-recognition of
$17 million of franchise revenues related to franchisees in
the United States and Canada from which collection of royalties
was not reasonably assured due to their deteriorating financial
condition.
In EMEA/ APAC, franchise revenues increased by 20% to
$102 million in fiscal 2004, primarily as a result of 109
franchise restaurant openings, net of closures. In Latin
America, franchise revenues increased 10% to $25 million,
primarily as a result of 49 new franchise restaurants, net of
closures, and positive comparable sales. These increases in
EMEA/ APAC and Latin America franchise revenues partially offset
the impact of franchise system distress on franchise revenues in
the United States and Canada.
Property revenues increased 2% to $117 million in fiscal
2004. On a segment basis, property revenues decreased 6% in the
United States and Canada, primarily as a result of restaurant
closures. Additionally, our fiscal 2004 United States and Canada
property revenues excluded $5 million of revenues not
recognized, partially offset by $3 million of revenue
recognized in connection with finalizing our purchase accounting
allocations. Property revenues increased 14% to $37 million
in EMEA/ APAC in fiscal 2005, primarily as a result of an
increase in the number of properties leased to franchisees.
|
|
|
Operating Costs and Expenses |
|
|
|
Company restaurant expenses |
Food, paper and product costs increased 9% to $391 million
in fiscal 2004, principally as a result of increased sales
volume. Food, paper and product costs remained a consistent
percentage of company restaurant revenues in fiscal 2004 and
fiscal 2003, as an increase in the price of beef was mitigated
by the
57
introduction of premium products and a strategic shift in our
menu strategy to discontinue lower margin products and
Whopper discounting during fiscal 2004.
On a segment basis, food, paper and product costs increased 6%
to $255 million in the United States and Canada in fiscal
2004, primarily as a result of a 5% increase in company
restaurant sales. Food, paper and product costs increased 0.5%
to 31.8% of company restaurant revenues in the United States and
Canada in fiscal 2004 primarily as a result of increases in the
price of beef, partially offset by reductions in discounting and
the introduction of premium products with higher margins. Food,
paper and product costs increased 17% to $119 million in
EMEA/ APAC and 6% to $17 million in Latin America in fiscal
2004, primarily as a result of increased company restaurant
revenues of 18% and 5%, respectively.
Payroll and employee benefits costs increased 9% to
$382 million in fiscal 2004 as a result of increased wages,
health insurance and training expenses, as well as the
acquisition of 38 franchise restaurants in fiscal 2004. Payroll
and employee benefits increased 0.2% to 29.9% of company
restaurant revenues in fiscal 2004 as higher costs of wages and
health insurance benefits were partially offset by increasing
restaurant sales and efficiency gains from our strategic
initiatives to improve restaurant profitability and from our
operational excellence programs to reduce the labor required to
operate our restaurants.
On a segment basis, payroll and employee benefits costs
increased 5% to $247 million in the United States and
Canada in fiscal 2004, primarily as a result of the acquisition
of franchise restaurants and increased wages and health
insurance benefit costs. Payroll and employee benefits costs
were 30.8% of company restaurant revenues in the United States
and Canada in fiscal 2004 compared to 30.7% in fiscal 2003.
In EMEA/ APAC, payroll and employee benefits costs increased 19%
to $130 million in fiscal 2004, primarily as a result of
new company restaurants in Germany and increased wages and
benefits costs. Payroll and employee benefits costs were 30.3%
of company restaurant revenues in EMEA/ APAC in fiscal 2004,
compared to 30.0% in fiscal 2003.
In Latin America, payroll and employee benefits costs increased
2% to $5 million in fiscal 2004, primarily as a result of
new company restaurants. Payroll and employee benefits costs
were 11.0% of company restaurant revenues in Latin America in
fiscal 2004, compared to 11.5% in fiscal 2003.
Occupancy and other operating costs remained flat at
$314 million in each of fiscal 2004 and fiscal 2003 as
increased depreciation expense arising from purchase accounting,
the acquisition of franchise restaurants and increases in
certain other operating costs, such as utilities in the United
States and rent in the United Kingdom, were offset by the
amortization of unfavorable and favorable leases.
On a segment basis, occupancy and other operating costs,
excluding unfavorable and favorable lease amortization and other
adjustments recorded when we finalized our purchase accounting
allocations in fiscal 2004, were 26.5% of company restaurant
revenues in the United States and Canada in fiscal 2004 compared
to 25.6% in fiscal 2003, primarily as a result of increased
depreciation arising from purchase accounting.
In EMEA/ APAC, occupancy and other operating costs, excluding
unfavorable and favorable lease amortization and the
aforementioned fiscal 2004 depreciation adjustment, were 26.9%
of company restaurant revenues in fiscal 2004 compared to 29.5%
in fiscal 2003, primarily as a result of increased sales.
Occupancy and other operating costs, excluding unfavorable and
favorable lease amortization and the aforementioned fiscal 2004
depreciation adjustment, were 20.1% of company restaurant
revenues in Latin America in fiscal 2004 compared to 20.3% in
fiscal 2003.
58
|
|
|
Worldwide selling, general and administrative expenses |
Selling, general and administrative expenses increased 1% to
$482 million in fiscal 2004. General and administrative
costs increased 17% to $371 million in fiscal 2004, while
our selling expenses decreased 31% to $111 million in
fiscal 2004.
General and administrative expenses included $33 million
and $13 million of costs associated with FFRP program
administration and severance and consulting fees incurred in
connection with our global reorganization in fiscal 2004 and
fiscal 2003, respectively. Our fiscal 2004 general and
administrative cost increases also included $14 million of
incremental incentive compensation as a result of improved
restaurant operations and our improved financial performance,
$3 million of incremental depreciation expense, as a result
of finalizing purchase accounting, and $3 million of
increased costs associated with our operational excellence
programs. Our remaining general and administrative expense
increases in fiscal 2004 were attributable to increases in
restaurant operations and business development teams in EMEA/
APAC where our general and administrative expenses increased by
$14 million in fiscal 2004. Partially offsetting these
increases was the elimination of $14 million in corporate
expenses, primarily due to savings from our global
reorganization. Management fee expense paid to the sponsors
totaled $5 million for the period December 13, 2002 to
June 30, 2003. Prior to our acquisition of BKC,
$1 million in management fees were paid to Diageo plc for
the period July 1, 2002 to December 12, 2002.
Selling expenses decreased in fiscal 2004 as a result of a
decrease in bad debt expenses and advertising expenses. Our bad
debt expense decreased to $11 million in fiscal 2004 from
$53 million in fiscal 2003, partially as a result of our
non-recognition of $22 million in franchise and property
revenues in fiscal 2004, and partially as a result of
improvements in our collection rates in the second half of
fiscal 2004. Our incremental advertising expense resulting from
franchisee non-payment of advertising contributions was
$41 million in fiscal 2004 compared to $49 million in
fiscal 2003. Additional factors affecting our selling expenses
were incremental advertising expenses for company restaurants
opened or acquired in fiscal 2004.
Property expenses increased 5% to $58 million in fiscal
2004 primarily due to increased depreciation expense arising
from a net increase in asset carrying values in connection with
the purchase accounting allocations we finalized in fiscal 2004,
offset in large part by the amortization of unfavorable and
favorable leases. Excluding the amortization of unfavorable and
favorable leases and other fiscal 2004 purchase accounting
adjustments, property expenses were 45.2% of property revenues
in the United States and Canada, where we recorded the fair
value adjustments to certain properties we lease to franchisees
under direct financing-type capital leases, in fiscal 2004
compared to 28.7% in fiscal 2003.
Our predecessor recorded a goodwill impairment charge of
$875 million in fiscal 2003 in connection with a reduction
to the purchase price paid in our acquisition of BKC,
$709 million of which was recorded in the United States and
Canada and $166 million of which was recorded in EMEA/
APAC. The purchase price was reduced prior to the completion of
the acquisition as a result of BKC’s deteriorating
financial performance and franchise system financial distress.
59
|
|
|
Worldwide other operating expenses (income), net |
|
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
|
Fiscal Year | |
|
|
Ended | |
|
|
June 30, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Losses on asset disposals
|
|
$ |
(3 |
) |
|
$ |
15 |
|
Impairment of long-lived assets
|
|
|
52 |
|
|
|
— |
|
Impairment of investments in franchisee debt
|
|
|
— |
|
|
|
19 |
|
Impairment of investments in unconsolidated investments
|
|
|
— |
|
|
|
4 |
|
Litigation settlements and reserves
|
|
|
(5 |
) |
|
|
4 |
|
Other, net
|
|
|
(12 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
|
Total other operating expenses (income), net
|
|
$ |
32 |
|
|
$ |
54 |
|
|
|
|
|
|
|
|
Of the impairment of long-lived assets in fiscal 2003,
$35 million pertained to the Burger King brand,
which was impaired in the United States and Canada in connection
with the reduction in the purchase price paid for our
acquisition of BKC. The remaining long-lived asset impairment
charges in fiscal 2003 pertained to long-lived assets in Europe,
which were impaired as a result of deteriorating financial
performance in that region.
Other, net includes a gain of $7 million in fiscal 2003,
recorded in connection with the final settlement of the
bankruptcy of a former supplier in the United States, prior to
our acquisition of BKC. The remaining components of fiscal 2003
other, net are comprised primarily of $10 million in net
gains from foreign exchange forward contracts and transactions
denominated in foreign currency. During fiscal 2003, we carried
large intercompany balances with our international subsidiaries,
which were subject to gains and losses from foreign currency
translation. During fiscal 2004, we reduced this exposure to
foreign currency translation by substantially settling these
intercompany balances.
In fiscal 2004, our operating income increased by
$878 million to $73 million, primarily as a result of
the elimination of the $875 million goodwill and
$35 million brand impairment charges recorded in fiscal
2003.
In the United States and Canada, where $709 million of the
goodwill and all of the brand impairment charges were recorded,
operating income increased by $666 million to
$115 million. Increased general and administrative expenses
and losses on asset disposals partially offset the elimination
of the goodwill and brand impairment charges in fiscal 2004.
EMEA/ APAC operating income increased by $238 million to
$95 million in fiscal 2005, primarily as a result of the
elimination of $166 million in goodwill impairment charges
and $17 million in long-lived asset impairment charges in
fiscal 2004, as well from increased revenues.
Operating income in Latin America increased by $4 million
to $26 million in fiscal 2004, primarily as a result of
increased revenues.
Our unallocated corporate expenses increased $30 million to
$163 million in fiscal 2004, primarily as a result of
increased incentive compensation due to improved financial and
operational performance.
Interest expense, net was $64 million in fiscal 2004,
compared to $81 million in fiscal 2003. Included in the
$81 million for fiscal 2003 was $43 million of
interest paid to Diageo plc by our predecessor, and
$33 million of interest related to the debt financing used
to complete our acquisition of BKC. Interest income increased to
$4 million in fiscal 2004 from $3 million in fiscal
2003.
60
We recorded an income tax benefit of $18 million in fiscal
2003 related to our loss before income taxes.
Our net income was $5 million in fiscal 2004 compared to a
net loss of $868 million in fiscal 2003. The comparability
of our net income and income from operations is affected by
purchase accounting subsequent to our acquisition of BKC in
December 2002 and goodwill and brand impairment of
$875 million and $35 million, respectively, in fiscal
2003.
Quarterly Financial Data
The following table presents unaudited consolidated income
statement data for each of the eleven fiscal quarters in the
period ended March 31, 2006. The operating results for any
quarter are not necessarily indicative of the results for any
future period. These quarterly results were prepared in
accordance with generally accepted accounting principles and
reflect all adjustments that are, in the opinion of management,
necessary for a fair statement of the results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
September 30, | |
|
December 31, | |
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
March 31, | |
|
|
2003 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Company restaurant revenues
|
|
$ |
309 |
|
|
$ |
315 |
|
|
$ |
310 |
|
|
$ |
342 |
|
|
$ |
350 |
|
|
$ |
354 |
|
|
$ |
339 |
|
|
$ |
364 |
|
|
$ |
375 |
|
|
$ |
379 |
|
|
$ |
368 |
|
Franchise revenues
|
|
|
95 |
|
|
|
79 |
|
|
|
83 |
|
|
|
104 |
|
|
|
102 |
|
|
|
104 |
|
|
|
100 |
|
|
|
107 |
|
|
|
105 |
|
|
|
104 |
|
|
|
100 |
|
Property revenues
|
|
|
30 |
|
|
|
24 |
|
|
|
33 |
|
|
|
30 |
|
|
|
29 |
|
|
|
30 |
|
|
|
29 |
|
|
|
32 |
|
|
|
28 |
|
|
|
29 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
434 |
|
|
$ |
418 |
|
|
$ |
426 |
|
|
$ |
476 |
|
|
$ |
481 |
|
|
$ |
488 |
|
|
$ |
468 |
|
|
$ |
503 |
|
|
$ |
508 |
|
|
$ |
512 |
|
|
$ |
495 |
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
94 |
|
|
|
97 |
|
|
|
93 |
|
|
|
107 |
|
|
|
108 |
|
|
|
110 |
|
|
|
104 |
|
|
|
115 |
|
|
|
118 |
|
|
|
119 |
|
|
|
114 |
|
|
Payroll and employee benefits
|
|
|
92 |
|
|
|
95 |
|
|
|
95 |
|
|
|
100 |
|
|
|
103 |
|
|
|
101 |
|
|
|
104 |
|
|
|
107 |
|
|
|
110 |
|
|
|
109 |
|
|
|
111 |
|
|
Occupancy and other operating costs
|
|
|
80 |
|
|
|
73 |
|
|
|
80 |
|
|
|
81 |
|
|
|
87 |
|
|
|
81 |
|
|
|
88 |
|
|
|
87 |
|
|
|
91 |
|
|
|
93 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant expenses
|
|
|
266 |
|
|
|
265 |
|
|
|
268 |
|
|
|
288 |
|
|
|
298 |
|
|
|
292 |
|
|
|
296 |
|
|
|
309 |
|
|
|
319 |
|
|
|
321 |
|
|
|
321 |
|
Selling, general and administrative expenses
|
|
|
125 |
|
|
|
110 |
|
|
|
108 |
|
|
|
139 |
|
|
|
112 |
|
|
|
125 |
|
|
|
126 |
|
|
|
133 |
|
|
|
101 |
|
|
|
112 |
|
|
|
148 |
|
Property expenses
|
|
|
16 |
|
|
|
6 |
|
|
|
20 |
|
|
|
16 |
|
|
|
14 |
|
|
|
15 |
|
|
|
14 |
|
|
|
21 |
|
|
|
14 |
|
|
|
14 |
|
|
|
14 |
|
Other operating expenses (income), net
|
|
|
3 |
|
|
|
8 |
|
|
|
20 |
|
|
|
23 |
|
|
|
1 |
|
|
|
2 |
|
|
|
15 |
|
|
|
16 |
|
|
|
2 |
|
|
|
(5 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
410 |
|
|
|
389 |
|
|
|
416 |
|
|
|
466 |
|
|
|
425 |
|
|
|
434 |
|
|
|
451 |
|
|
|
479 |
|
|
|
436 |
|
|
|
442 |
|
|
|
481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
24 |
|
|
|
29 |
|
|
|
10 |
|
|
|
10 |
|
|
|
56 |
|
|
|
54 |
|
|
|
17 |
|
|
|
24 |
|
|
|
72 |
|
|
|
70 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
4 |
|
|
$ |
9 |
|
|
$ |
(5 |
) |
|
$ |
(3 |
) |
|
$ |
21 |
|
|
$ |
23 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
22 |
|
|
$ |
27 |
|
|
$ |
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant sales are affected by the timing and effectiveness of
our advertising, new products and promotional programs. Our
results of operations also fluctuate from quarter to quarter as
a result of seasonal trends and other factors, such as the
timing of restaurant openings and closings and our acquisition
of franchise restaurants as well as variability of the weather.
Restaurant sales are typically higher in our fourth and first
fiscal quarters, which are the spring and summer months when
weather is warmer, than in our second and third fiscal quarters,
which are the fall and winter months. Restaurant sales during
the winter are typically highest in December, during the holiday
shopping season. Our restaurant sales and company restaurant
margins are typically lowest during our third fiscal quarter,
which occurs during the winter months and includes February, the
shortest month of the year.
61
New restaurants typically have lower operating margins for three
months after opening, as a result of
start-up expenses.
Similarly, many franchise restaurants that we acquire are
under-performing and continue to have lower margins before we
make operational improvements. The timing of new restaurant
openings has not caused a material fluctuation in our quarterly
results of operations. However, we acquired 80 franchise
restaurants in the fourth quarter of fiscal 2005 and the first
nine months of fiscal 2006, which resulted in increased revenues
and operating expenses in the first three quarters of fiscal
2006 compared to fiscal 2005.
Our quarterly results also fluctuate due to the timing of
expenses and charges associated with franchisee distress, our
global reorganization, gains and losses on asset and business
disposals, impairment charges, and settlement losses recorded in
connection with acquisitions of franchise restaurants. Our
results of operations for the quarter ended September 30,
2005 also reflect a $14 million loss on the early
extinguishment of debt, recorded in connection with our July
2005 refinancing, and our results of operations for the quarter
ended March 31, 2006 reflect the $33 million
compensatory make-whole payment and $2 million of related
taxes as compensation expense.
Liquidity and Capital Resources
Historically, our cash flow from operations has been positive.
Our cash flow from operations for the second half of fiscal 2006
will be adversely affected by our payment of the compensatory
make-whole payment and the sponsor management termination fee.
As a result of our proposed realignment of our European and
Asian businesses, we expect to incur approximately $125 to
$143 million in tax liability, which is expected to be
partially offset by the utilization of approximately
$25 million of net operating loss carryforwards and other
foreign tax credits and be paid in the first quarter of fiscal
2007. We also expect to incur $10 million in other related
costs during calendar 2006.
We had cash and cash equivalents of $197 and $432 million
at March 31, 2006 and June 30, 2005, respectively. In
addition, we currently have a borrowing capacity of
$108 million under our $150 million revolving credit
facility (net of $42 million in letters of credit issued
under the revolving credit facility). We do not expect to borrow
funds to meet our expected capital expenditures or other
expenses for the foreseeable future unless we incur higher than
expected costs in connection with our proposed realignment of
our European and Asian businesses.
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 and debt service payments, in the short-term and
for the foreseeable future.
If additional funds are needed for strategic initiatives or
other corporate purposes, we believe we could borrow additional
funds or raise funds through the issuance of our securities or
asset sales.
|
|
|
July 2005 Refinancing, February 2006 Financing and
Dividend, the Compensatory Make-Whole Payment and the Sponsor
Management Termination Fee |
On July 13, 2005, BKC entered into a $1.15 billion
senior secured credit facility guaranteed by us, which we refer
to as the July 2005 refinancing and which consisted of a
$150 million revolving credit facility, a $250 million
term loan, which we refer to as term loan A, and a
$750 million term loan, which we refer to as term
loan B. We used $1 billion in proceeds from the term
loans A and B, $47 million of the revolving credit
facility, and cash on hand to repay in full the existing senior
secured credit facility and
payment-in-kind notes
payable to Diageo plc, the private equity funds controlled by
the sponsors and certain directors that we incurred in
connection with our acquisition of BKC and to pay
$16 million in financing costs.
On February 15, 2006, we and BKC amended and restated the
senior secured credit facility in order to declare and pay the
February 2006 dividend and pay the compensatory make-whole
payment and the sponsor management termination fee. At that
time, we also borrowed an additional $350 million under our
62
senior secured credit facility, all the proceeds of which were
used to pay, along with $55 million of cash on hand, the
February 2006 dividend, the compensatory make-whole payment and
financing costs and expenses. The amendments replaced the
$746 million then outstanding under term loan B with a
new term loan B, which we refer to as term loan B-1,
in an amount of $1.096 billion.
The interest rate under the senior secured credit facility for
term loan A and the revolving credit facility is at our
option either (a) the greater of the federal funds
effective rate plus 0.50% and the prime rate, which we refer to
as ABR, plus a rate not to exceed 0.75%, which varies according
to our leverage ratio or (b) LIBOR plus a rate not to
exceed 1.75%, which varies according to our leverage ratio. The
interest rate for term loan B-1 is at our option either
(a) ABR, plus a rate of 0.50% or (b) LIBOR plus 1.50%,
in each case so long as our leverage ratio remains at or below
certain levels (but in any event not to exceed 0.75%, in the
case of ABR loans, and 1.75% in the case of LIBOR loans).
The quarterly principal payments will begin on
September 30, 2006 for term loan A and began on
March 31, 2006 for term loan B-1 and the level of
required principal repayments will increase over time. The
maturity dates of term loan A, term loan B-1, and
amounts drawn under the revolving credit facility are June 2011,
June 2012, and June 2011, respectively.
The senior secured credit facility contains customary financial
and other covenants and restrictions. For more information on
our senior secured credit facility, see “Description of Our
Credit Facility.”
We used the $350 million in additional borrowings under the
February 2006 financing and $55 million in cash on hand to
pay the $367 million February 2006 dividend and the
$33 million compensatory make-whole payment on
February 21, 2006 and $5 million in financing costs
and expenses. We expect to use almost all of the net proceeds
from this offering to repay $350 million of the amounts
outstanding under our senior secured credit facility with the
balance used for general corporate purposes. We also expect to
pay the one-time $30 million sponsor management termination
fee upon completion of this offering.
As of March 31, 2006, we had agreements with foreign banks
to provide lines of credit in an aggregate amount of
$4 million. We had no outstanding borrowings under these
lines of credit at March 31, 2006.
Operating Activities. Cash flows from operating
activities were $21 million and $151 million in the
first nine months of fiscal 2006 and fiscal 2005, respectively.
The $130 million decrease was due primarily to the payment
of interest on the PIK notes in connection with our July 2005
refinancing, partially offset by improved collections from
franchisees and increases in net income. Our cash flow from
operations will be negatively affected by our payment of the
compensatory make-whole payment and the sponsor management
termination fee in the second half of fiscal 2006.
Cash flows from operating activities increased to
$218 million in fiscal 2005, compared to $199 million
and $81 million for fiscal 2004 and fiscal 2003,
respectively, primarily as a result of improved operating
results.
Investing Activities. Cash used in investing activities
was $42 million in the first nine months of fiscal 2006 and
cash used by investing activities was $243 million in the
first nine months of fiscal 2005. The $201 million decrease
was due primarily to the net purchase of securities available
for sale in the first nine months of fiscal 2005, and by reduced
spending on acquisitions of franchisee operations and debt in
the first nine months of fiscal 2005.
Cash used in investing activities was $5 million in fiscal
2005 compared to $184 million in fiscal 2004 and
$587 million in fiscal 2003. In fiscal 2005,
$122 million of securities purchased as short-term
investments in fiscal 2004 were sold for $122 million. In
fiscal 2003, we used $439 million to partially fund the
acquisition of our predecessor and pay costs incurred in
connection with the acquisition. In fiscal 2005,
63
we acquired franchise restaurants for $28 million compared
to $6 million in fiscal 2004 and $14 million in fiscal
2003. We also acquired third party debt and loaned an aggregate
of $24 million to franchisees in fiscal 2005 compared to
$19 million in fiscal 2004.
Historically, the most significant ongoing component of our
investing activities was for capital expenditures to open new
company restaurants, remodel and maintain restaurant properties
to our standards and to develop our corporate infrastructure in
connection with our acquisition of BKC, particularly investment
in information technology. The following table presents capital
expenditures, by type of expenditure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
|
For the | |
|
Nine Months | |
|
|
Fiscal Year Ended | |
|
Ended | |
|
|
June 30, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
New restaurants
|
|
$ |
23 |
|
|
$ |
22 |
|
|
$ |
26 |
|
|
$ |
12 |
|
|
$ |
12 |
|
Real estate purchases
|
|
|
4 |
|
|
|
5 |
|
|
|
5 |
|
|
|
4 |
|
|
|
5 |
|
Maintenance capital
|
|
|
81 |
|
|
|
43 |
|
|
|
44 |
|
|
|
25 |
|
|
|
26 |
|
Other, including corporate
|
|
|
34 |
|
|
|
11 |
|
|
|
18 |
|
|
|
10 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
142 |
|
|
$ |
81 |
|
|
$ |
93 |
|
|
$ |
51 |
|
|
$ |
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance capital includes renovations to company restaurants,
including restaurants acquired from franchisees, investments in
new equipment and normal annual capital investments for each
company restaurant to maintain its appearance in accordance with
our standards, which typically range from $10,000 to
$15,000 per restaurant per year. Maintenance capital also
includes investments in improvements to properties we lease and
sublease to franchisees, including contributions we make towards
improvements completed by franchisees.
Other capital expenditures include significant investments in
information technology systems, as well as investments in
technologies for deployment in restaurants, such as
point-of-sale software.
Capital expenditures increased $12 million to
$93 million in fiscal 2005, primarily as a result of
increased development of new restaurants, improvements to
acquired restaurants, and funding of corporate projects,
partially offset by decreased spending on new equipment for
company restaurants. Our fiscal 2003 capital expenditures
reflect investments to remodel company restaurants and
properties leased or subleased to franchisees, as well as
substantial investments in corporate projects, primarily related
to information technology as we continued to invest in a new
corporate infrastructure, which our predecessor initiated in
fiscal 2003.
We expect capital expenditures of approximately $98 million
in fiscal 2006, of which $48 million was spent and
$11 million was contractually committed as of
March 31, 2006. In addition, we expect cash requirements
for acquiring restaurants in fiscal 2006 to range from
$10 million to $15 million, of which $7 million
was spent as of March 31, 2006.
Financing Activities. Financing activities used cash of
$214 million and $1 million in the first nine months
of fiscal 2006 and fiscal 2005, respectively. The
$213 million increase was due primarily to cash used in our
July 2005 refinancing.
Financing activities used cash of $2 million and provided
cash of $3 million and $719 million in fiscal 2005,
fiscal 2004 and fiscal 2003, respectively. Cash provided by
financing activities in fiscal 2003 related primarily to the
financing of our acquisition of BKC.
|
|
|
Realignment of our European and Asian businesses |
During fiscal 2005, we realigned our business to operate as a
global brand by moving to common systems and platforms,
standardizing our marketing efforts, and introducing a uniform
product offering
64
supplemented by offerings targeting local consumer preferences.
We also reorganized our international management structure by
instituting a regional structure for the United States and
Canada, EMEA/ APAC and Latin America.
To further this initiative, we currently plan to regionalize the
activities associated with managing our European and Asian
businesses, including our intellectual property in EMEA/ APAC,
in a new European and a new Asian holding company. Each of these
new holding companies is expected to be responsible in its
region for (a) management, development and expansion of the
Burger King trade names and trademarks,
(b) management of existing and future franchises and
licenses for both franchise and company-owned restaurants, and
(c) collections and redeployment of funds. Currently, all
of our foreign intellectual property assets are owned by a
U.S. company, with the result that all cash flows currently
return to the United States and then are transferred back to
these regions to fund their growing capital requirements. We
believe this change will more closely align the intellectual
property to the respective regions, provide funding in the
proper regions and lower our effective tax rate going forward.
According to our current plans, the new holding companies
anticipate acquiring the intellectual property rights from BKC,
a U.S. company, in a transaction that would generate a
taxable gain for BKC in the United States. As a result of this
transfer, we expect to incur approximately $125 to
$143 million in tax liability in the first quarter of 2007.
We expect to partially offset this tax payment by the
utilization of approximately $25 million of net operating
loss carryforwards and other foreign tax credits and fund the
payment from cash on hand or borrowings under our revolving
credit facility. Approximately $100 million of existing
deferred tax liability associated with this intellectual
property would be eliminated in connection with this transaction
and any difference between the deferred tax liability and the
cash tax payment would be recognized as a prepaid tax asset and
amortized over a period of approximately 10 years. We are
currently in the process of finalizing our plans to execute this
realignment. The final amount of taxes required to be paid and
the impact to the consolidated financial statements will depend
on the final structure, timing and implementation steps.
In addition to tax costs, we expect to incur consulting, legal,
information technology, finance and relocation costs of
approximately $10 million during calendar 2006 to implement
this realignment. The relocation costs would be incurred and
paid in connection with the relocation of certain key officers,
finance, accounting and legal staff of the EMEA/ APAC businesses
to locations within Europe and Asia.
Contractual Obligations and Commitments
The following table presents information relating to our
contractual obligations as of June 30, 2005, except for
long-term debt, which reflects our debt balance as of
February 28, 2006, after giving effect to the February 2006
financing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period | |
|
|
| |
|
|
|
|
Less Than | |
|
|
|
More Than | |
Contractual Obligations |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Capital lease obligations
|
|
$ |
112 |
|
|
$ |
11 |
|
|
$ |
20 |
|
|
$ |
19 |
|
|
$ |
62 |
|
Operating lease
obligations(1)
|
|
|
1,359 |
|
|
|
143 |
|
|
|
266 |
|
|
|
220 |
|
|
|
730 |
|
Long-term debt, including current portion and
interest(2)(3)
|
|
|
1,867 |
|
|
|
77 |
|
|
|
244 |
|
|
|
294 |
|
|
|
1,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,338 |
|
|
$ |
231 |
|
|
$ |
530 |
|
|
$ |
533 |
|
|
$ |
2,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Operating lease obligations include lease payments for company
restaurants and franchise restaurants that sublease the property
from us. Rental income from these franchisees was
$88 million and $91 million for fiscal 2004 and fiscal
2005, respectively. |
|
(2) |
We have estimated our interest payments based on
(i) projected LIBOR rates, (ii) the portion of our
debt we converted to fixed rates through interest rate swaps and
(iii) the amortization schedule of the debt. |
|
(3) |
We intend to use the net proceeds of this offering to repay
certain long term debt. See “Use of Proceeds.” |
65
As of June 30, 2005, we leased 1,132 restaurant properties
to franchisees. At June 30, 2005, we also leased land,
buildings, office space and warehousing under operating leases,
and leased or subleased land and buildings that we own or lease,
respectively, to franchisees under operating leases. In addition
to the minimum obligations included in the table above,
contingent rentals may be payable under certain leases on the
basis of a percentage of sales in excess of stipulated amounts.
See Note 14 to our audited consolidated financial
statements for further information about our leasing
arrangements.
As of June 30, 2005, the projected benefit obligation of
our defined benefit pension plans exceeded pension assets by
$88 million. We have historically used 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. The
Moody’s Aa rate as of the March 31, 2005 measurement
date for fiscal 2006 was 5.61%, resulting in a discount rate of
5.86%. We made contributions totaling $17 million into our
pension plans during fiscal year 2005. Estimates of reasonably
likely future pension contributions are dependent on future
events outside our control, such as future pension asset
performance, future interest rates, future tax law changes, and
future changes in regulatory funding requirements. We estimate
contributions to our pension plans in fiscal year 2006 will be
$1 million and estimated benefit payments will be
$4 million.
In November 2005, we announced the curtailment of our pension
plans in the United States and we froze future pension benefit
accruals, effective December 31, 2005. These plans will
continue to pay benefits and invest plan assets. We recognized a
one-time pension curtailment gain of approximately
$6 million in December 2005. In conjunction with this
curtailment gain, we accrued a contribution totaling
$6 million as of December 31, 2005, on behalf of those
pension participants who were affected by the curtailment. The
curtailment gain and contribution offset each other to result in
no net effect on our results of operation.
We commit to purchase advertising and other marketing services
from third parties in advance on behalf of the Burger King
system in the United States and Canada. These commitments
are typically made in September of each year for the upcoming
twelve-month period. If our franchisees fail to pay required
advertising contributions we could be contractually committed to
fund any shortfall to the degree we are unable to cancel or
reschedule the timing of such committed amounts. We have similar
arrangements in other international markets where we operate
company restaurants. At September 30, 2005, the time of the
year when our advertising commitments are typically highest and
at March 31, 2006, our advertising commitments totaled
$135 million and $81 million, respectively.
In May 2005, we entered into an agreement to lease a building to
serve as our global headquarters, which will allow us to move
out of two facilities that currently serve in such capacity. The
estimated annual rent for the
15-year initial lease
term is expected to approximate the $6 million in annual
rent for the two facilities to be replaced, and will be
finalized upon completion of the building’s construction.
We will also incur moving and tenant improvement costs in
connection with our move to the building, to be partially offset
by a tenant improvement allowance under the building’s
lease, estimated at approximately $8 million, to be
finalized upon completion of the building’s construction.
We have not reflected the rent for this building in the table
above, because it will not be finalized until construction is
complete, which is expected in 2008. Similarly, we have not
projected the costs of moving and making tenant improvements to
the building for inclusion in the table above. One of our
directors has an ownership interest in this building. See
“Certain Relationships and Related Transactions— New
Global Headquarters”.
Other Commercial Commitments and Off-Balance Sheet
Arrangements
We guarantee certain lease payments of franchisees, arising from
leases assigned in connection with sales of company restaurants
to franchisees, by remaining secondarily liable under the
assigned leases of varying terms, for base and contingent rents.
The maximum contingent rent amount payable is not determinable
as the amount is based on future revenues. In the event of
default by the franchisees, we have typically retained the right
to acquire possession of the related restaurants, subject to
landlord
66
consent. The aggregate contingent obligation arising from these
assigned lease guarantees was $119 million at
March 31, 2006, expiring over an average period of seven
years.
Other commitments, arising out of normal business operations,
were $8 million as of March 31, 2006. These
commitments consist primarily of guarantees covering foreign
franchisees’ obligations, obligations to suppliers, and
acquisition-related guarantees.
At March 31, 2006, we had $42 million in irrevocable
standby letters of credit outstanding, of which $41 million
were issued to certain insurance carriers to guarantee payment
for various insurance programs such as health and commercial
liability insurance and were issued under our $150 million
revolving credit facility and $1 million was posted by
Diageo plc on behalf of us and which relate to open casualty
claim matters. Additionally, $1 million in letters of
credit were issued relating to our headquarters. As of
March 31, 2006, none of these irrevocable standby letters
of credit had been drawn.
As of March 31, 2006, we had posted bonds totaling
$2 million, which related to certain marketing activities.
|
|
|
Commitments Related to the FFRP Program |
In connection with the FFRP program we have made commitments:
|
|
|
|
• |
to fund loans to certain franchisees for the purpose of
remodeling restaurants; |
|
|
• |
to remodel certain properties we lease or sublease to
franchisees; |
|
|
• |
to provide temporary rent reductions to certain
franchisees; and |
|
|
• |
to fund shortfalls in certain franchisee cash flow beyond
specified levels (to annual and aggregate maximums). |
As of March 31, 2006 our remaining commitments under the
FFRP program totaled $35 million, the majority of which are
scheduled to expire over the next five years.
In fiscal 2000, we entered into long-term, exclusive contracts
with The Coca-Cola Company and with Dr Pepper/ Seven Up,
Inc. to supply company and franchise restaurants with their
products and obligating Burger King restaurants in the
United States to purchase a specified number of gallons of soft
drink syrup. These volume commitments are not subject to any
time limit. As of June 30, 2005, we estimate that it will
take approximately 17 years and 19 years to complete
the Coca-Cola and Dr Pepper purchase commitments,
respectively.
We expect to pay the $30 million sponsor management
termination fee upon the completion of this offering.
We are self-insured for most workers’ compensation, health
care claims, and general liability losses. These self-insurance
programs are supported by third-party insurance policies to
cover losses above our self-insured amounts. If we determine
that the liability exceeds the recorded obligation, the cost of
self-insurance programs will increase in the future, as
insurance reserves are increased to revised expectations,
resulting in an increase in self-insurance program expenses.
Impact of Inflation
We believe that our results of operations are not materially
impacted by moderate changes in the inflation rate. Inflation
and changing prices did not have a material impact on our
operations in fiscal
67
2003, fiscal 2004, fiscal 2005 or the nine months ended
March 31, 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.
Based on the high degree of judgment or complexity in their
application, we consider our critical accounting policies and
estimates to be:
|
|
|
Business Combinations and Intangible Assets |
The December 2002 acquisition of our predecessor required the
application of the purchase method of accounting in accordance
with SFAS No. 141, Business Combinations. The
purchase method of accounting involves the allocation of the
purchase price to the estimated fair values of the assets
acquired and liabilities assumed. This allocation process
involves the use of estimates and assumptions to derive fair
values and to complete the allocation. Due to the high degree of
judgment and complexity involved with the valuation process, we
hired a third party valuation firm to assist with the
determination of the fair value of the net assets acquired.
In the event that actual results vary from any of the estimates
or assumptions used in any valuation or allocation process under
SFAS No. 141, we may be required to record an
impairment charge or an increase in depreciation or amortization
in future periods, or both. See Note 1 and Note 7 to
our audited consolidated financial statements included elsewhere
in this prospectus for further information about purchase
accounting allocations, related adjustments and intangible
assets recorded in connection with our acquisition of BKC.
Long-lived assets (including definite-lived intangible assets)
are reviewed for impairment at least annually or more frequently
if events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Assets are grouped
for recognition and measurement of impairment at the lowest
level for which identifiable cash flows are largely independent
of the cash flows of other assets. Assets are grouped together
for impairment testing at the operating market level (based on
geographic areas) in the case of the United States, Canada, the
United Kingdom and Germany. The operating market asset groupings
within the United States and Canada are predominantly based on
major metropolitan areas within the United States and Canada.
Similarly, operating markets within the other foreign countries
with larger asset concentrations (the United Kingdom and
Germany) are comprised of geographic regions within those
countries (three in the United Kingdom and four in Germany).
These operating market definitions are based upon the following
primary factors:
|
|
|
|
• |
we do not evaluate individual restaurants to build, acquire or
close independent of an analysis of other restaurants in these
operating markets; and |
|
|
• |
management views profitability of the restaurants within the
operating markets as a whole, based on cash flows generated by a
portfolio of restaurants, rather than by individual restaurants
and area managers receive incentives on this basis. |
68
In the smaller countries in which we have long-lived assets (the
Netherlands, Spain, Mexico and China) most operating functions
and advertising are performed at the country level, and shared
by all restaurants in the country. As a result, we have defined
operating markets as the entire country in the case of the
Netherlands, Spain, Mexico and China.
Some of the events or changes in circumstances that would
trigger an impairment review include, but are not limited to:
|
|
|
|
• |
significant under-performance relative to expected and/or
historical results (negative comparable sales or cash flows for
two years); |
|
|
• |
significant negative industry or economic trends; or |
|
|
• |
knowledge of transactions involving the sale of similar property
at amounts below our carrying value. |
When assessing the recoverability of our long-lived assets, we
make assumptions regarding estimated future cash flows and other
factors. Some of these assumptions involve a high degree of
judgment and also bear a significant impact on the assessment
conclusions. Included among these assumptions are estimating
future cash flows, including the projection of comparable sales,
restaurant operating expenses, and capital requirements for
property and equipment. We formulate estimates from historical
experience and assumptions of future performance, based on
business plans and forecasts, recent economic and business
trends, and competitive conditions. In the event that our
estimates or related assumptions change in the future, we may be
required to record an impairment charge in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
|
|
|
Impairment of Indefinite-Lived Intangible Assets |
Indefinite-lived intangible assets consist of values assigned to
brands which we own and goodwill recorded upon acquisitions. The
most significant indefinite lived asset we have is our brand
asset with a carrying book value of $900 million at
March 31, 2006. We test our indefinite-lived intangible
assets for impairment on an annual basis or more often if an
event occurs or circumstances change that indicates impairment
might exist. Our impairment test for indefinite-lived intangible
assets consists of a comparison of the fair value of the asset
with its carrying amount in each segment, as defined by
SFAS No. 131, which are the United States and Canada,
EMEA/ APAC, and Latin America. When assessing the recoverability
of these assets, we make assumptions regarding estimated future
cash flow similar to those when testing long-lived assets, as
described above. In the event that our estimates or related
assumptions change in the future, we may be required to record
an impairment charge in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets.
|
|
|
Reserves for Uncollectible Accounts and Revenue
Recognition |
We collect from franchisees royalties, advertising fund
contributions and, in the case of approximately 11% of our
franchise restaurants, rents. We recognize revenue that is
estimated to be reasonably assured of collection, and also
record reserves for estimated uncollectible revenues and
advertising contributions, based on monthly reviews of
franchisee accounts, average sales trends, and overall economic
conditions. In the event that franchise restaurant sales
declined, or the financial health of franchisees otherwise
deteriorated, we may be required to increase our reserves for
uncollectible accounts and/or defer or not recognize revenues,
the collection of which we deem to be less than reasonably
assured.
|
|
|
Accounting for Income Taxes |
We record income tax liabilities utilizing known obligations and
estimates of potential obligations. A deferred tax asset or
liability is recognized whenever there are future tax effects
from existing temporary differences and operating loss and tax
credit carry-forwards. When considered necessary, we record a
valuation allowance to reduce deferred tax assets to the balance
that is more likely than not to be realized. We must make
estimates and judgments on future taxable income, considering
feasible tax planning
69
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 reflects the change in the period such
determination is made. Due to changes in facts and circumstances
and the estimates and judgments that are involved in determining
the proper valuation allowance, differences between actual
future events and prior estimates and judgments could result in
adjustments to this valuation allowance.
We use an estimate of the annual effective tax rate at each
interim period based on the facts and circumstances available at
that time, while the actual effective tax rate is calculated at
fiscal year-end.
We are self-insured for most workers’ compensation, health
care claims, and general liability losses. These self-insurance
programs are supported by third-party insurance policies to
cover losses above our self-insured amounts. We record estimates
of insurance liabilities based on independent actuarial studies
and assumptions based on historical and recent claim cost trends
and changes in benefit plans that could affect self-insurance
liabilities. We review all self-insurance reserves at least
quarterly, and review our estimation methodology and assumptions
at least annually. If we determine that the liability exceeds
the recorded obligation, the cost of self-insurance programs
will increase in the future, as insurance reserves are increased
to revised expectations, resulting in an increase in
self-insurance program expenses.
Newly Issued Accounting Standards
In December 2004, the FASB issued Statement No. 123
(revised 2004), Share-Based Payment
(“SFAS No. 123(R)”), which is a revision
of FASB Statement No. 123, Accounting for Stock-Based
Compensation (“SFAS No. 123”).
SFAS No. 123(R) supersedes Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees
(“APB No. 25”). SFAS No. 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no
longer an alternative. Under SFAS No. 123(R) the
effective date for a nonpublic entity that becomes a public
entity after June 15, 2005 is the first interim or annual
reporting period beginning after becoming a public company.
Further, SFAS No. 123(R) states that an entity that
makes a filing with a regulatory agency in preparation for the
sale of any class of equity securities in a public market is
considered a public entity for purposes of
SFAS No. 123(R). We expect to implement
SFAS No. 123(R) effective July 1, 2006, the
beginning of our next fiscal year.
As permitted by SFAS No. 123, we currently account for
share-based payments to employees using APB No. 25’s
intrinsic value method and, as such, generally recognize no
compensation expense for employee stock options. As we currently
apply SFAS No. 123 pro forma disclosure using the
minimum value method of accounting, we are required to adopt
SFAS No. 123(R) using the prospective transition
method. Under the prospective transition method, non-public
entities that previously applied SFAS No. 123 using
the minimum value method continue to account for non-vested
awards outstanding at the date of adoption of
SFAS No. 123(R) in the same manner as they had been
accounted to prior to adoption. For us, since we currently
account for our equity awards using the minimal value method
under APB No. 25, we will continue to apply APB No. 25
in future periods to equity awards outstanding at the date we
adopt SFAS No. 123(R), and as a result not recognize
compensation expense for awards issued prior to the date of this
filing. The fair value of awards granted under APB No. 25
for the twelve months ended March 24, 2006 was based on
contemporaneous valuations performed by an independent valuation
services provider and by feedback received from potential
underwriters for the purpose of discussing a potential initial
public offering, utilizing the income approach and supported by
the market comparable approach. The significant assumptions used
in the income approach include historical and projected
discounted net cash flows, and the assumptions used for the
market comparable approach include a multiple of a financial
performance measure of ours as compared to our industry peers.
See “Dilution” for a discussion of the fair value and
number of vested and unvested options outstanding as of
March 31, 2006.
70
After the filing date of this registration statement, we will be
required to apply the modified prospective transition method to
any share-based payments issued subsequent to the filing of this
registration statement but prior to the effective date of our
adoption of SFAS No. 123(R). Under the modified
prospective transition method, compensation expense is
recognized for any unvested portion of the awards granted
between filing date and adoption date of
SFAS No. 123(R) over the remaining vesting period of
the awards beginning on the adoption date, for us July 1,
2006.
For any awards granted subsequent to the adoption of
SFAS No. 123(R), compensation expense will be
recognized generally over the vesting period of the award. As a
result of the transition method described above, we do not
expect to recognize any compensation expense under
SFAS No. 123(R) for awards outstanding at the date of
this filing, unless the awards are modified after the date of
this filing.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks associated with foreign
currency exchange rates, interest rates and commodity prices. In
the normal course of business and in accordance with our
policies, we manage these risks through a variety of strategies,
which may include the use of derivative financial instruments to
hedge our underlying exposures. Our policies prohibit the use of
derivative instruments for trading purposes, and we have
procedures in place to monitor and control their use.
|
|
|
Foreign Currency Exchange Risk |
Movements in foreign currency exchange rates may affect the
translated value of our earnings and cash flow associated with
our foreign operations, as well as the translation of net asset
or liability positions that are denominated in foreign
countries. 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 fiscal 2005,
operating income in these countries would have decreased or
increased $1 million if all foreign currencies uniformly
weakened or strengthened 10% relative to the U.S. dollar.
In countries where we do not have company restaurants, our
franchise agreements require franchisees to pay us in
U.S. dollars. Royalty payments received from the
franchisees are based upon a percentage of sales that are
denominated in the local currency and are converted to
U.S. dollars during the month of sales. As a result we bear
the foreign currency exposure associated with revenues and
expenses in these countries. In fiscal 2005, operating income in
these countries would have decreased or increased
$3 million if all foreign currencies uniformly weakened or
strengthened 10% relative to the U.S. dollar.
We have a market risk exposure to changes in interest rates,
principally in the United States. We attempt to minimize this
risk and lower our overall borrowing costs through the
utilization of derivative financial instruments, primarily
interest rate swaps. These swaps are entered into with financial
institutions and have reset dates and critical terms that match
those of 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.
During the fiscal quarter ended September 30, 2005, we
entered into interest rate swaps with a notional value of
$750 million that qualify as cash flow hedges under
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. The interest rate swap helps us
manage exposure to interest rate risk by converting the floating
interest-rate component of approximately 75% of our total debt
obligations outstanding at December 31, 2005 to fixed
rates. A 1% change in interest rates on our existing debt of
$1.35 billion would result in an increase or decrease in
interest expense of approximately $6 million in a given
year, as we have hedged $750 million of our debt.
71
We purchase certain products, particularly beef, which are
subject to price volatility that is caused by weather, market
conditions and other factors that are not considered predictable
or within our control. Additionally, our ability to recover
increased costs is typically limited by the competitive
environment in which we operate. We do not utilize commodity
option or future contracts to hedge commodity prices and do not
have long-term pricing arrangements. As a result, we purchase
beef and other commodities at market prices, which fluctuate on
a daily basis.
The estimated change in company restaurant food, paper and
product costs from a hypothetical 10% change in average beef
prices would have been approximately $8 million and
$7 million in fiscal 2005 and the first nine months fiscal
2006, respectively. The hypothetical change in food, paper and
product costs could be positively or negatively affected by
changes in prices or product sales mix.
72
BUSINESS
Overview
We are the world’s second largest fast food hamburger
restaurant, or FFHR, chain as measured by the number of
restaurants and system-wide sales. As of March 31, 2006, we
owned or franchised a total of 11,109 restaurants in 65
countries and U.S. territories, of which 1,227 restaurants
were company-owned and 9,882 were owned by our franchisees. Of
these restaurants, 7,262 or 65% were located in the United
States and 3,847 or 35% 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 believe that the Burger King and Whopper brands
are two of the world’s most widely-recognized consumer
brands. These brands, together with our signature flame-broiled
products and the Have It Your Way brand promise, are
among the strategic assets that we believe set Burger King
restaurants apart from other regional and national FFHR
chains. Have It Your Way is increasingly relevant as
consumers continue to demand personalization and choice over
mass production. In a competitive industry, we believe we have
differentiated ourselves through our attention to individual
customers’ preferences, by offering great tasting fresh
food served fast and in a friendly manner and by conducting
recent advertising campaigns aimed at becoming a part of the
popular culture.
We generate revenues from three sources: sales at our company
restaurants; royalties and franchise fees paid to us by our
franchisees; and property income from certain franchise
restaurants that lease or sublease property from us.
Approximately 90% of our restaurants are franchised and we have
a higher percentage of franchise restaurants to company
restaurants than our major competitors in the fast food
hamburger category. We believe that this restaurant ownership
mix provides us with a strategic advantage because the capital
required to grow and maintain our system is funded primarily by
franchisees, while giving us a sizeable base of company
restaurants to demonstrate credibility with our franchisees in
launching new initiatives. As a result of the high percentage of
franchise restaurants in our system, we have lower capital
requirements compared to our major competitors. Moreover, due to
the steps that we have taken to improve the health of our
franchise system in the United States and Canada, we expect that
this mix will produce more stable earnings and cash flow in the
future. Although we believe that this restaurant ownership mix
is beneficial to us, it also presents a number of drawbacks,
such as our limited control over franchisees and limited ability
to facilitate changes in restaurant ownership.
Our History
Burger King Corporation, which we refer to as BKC, was founded
in 1954 when James McLamore and David Edgerton opened the first
Burger King restaurant in Miami, Florida. The Whopper
sandwich was introduced in 1957. BKC opened its first
international restaurant in the Bahamas in 1966. BKC opened the
first Burger King restaurant in Canada in 1969, in APAC in
Australia in 1971 and in EMEA in Madrid, Spain in 1975. BKC also
established its brand identity with the introduction of the
“bun halves” logo in 1969 and the launch of the first
Have It Your Way campaign in 1974. BKC introduced
drive-thru service, designed to satisfy customers
“on-the-go”
in 1975. In 1985, BKC rounded out its menu offerings by adding
breakfast on a national basis.
In 1967, Mr. McLamore and Mr. Edgerton sold BKC to
Minneapolis-based The Pillsbury Company. BKC became a subsidiary
of Grand Metropolitan plc in 1989 when it acquired Pillsbury.
Grand Metropolitan plc merged with Guinness plc to
form Diageo plc in 2000. These conglomerates were focused
more on their core operations than on BKC. On December 13,
2002, Diageo plc sold BKC to private equity funds controlled by
the sponsors, and for the first time since 1967 BKC became an
independent company, which has allowed us to focus exclusively
on our restaurant business. We are a holding company formed in
connection with the December 2002 acquisition in order to own
100% of BKC.
73
Our Industry
We operate in the FFHR category of the quick service restaurant,
or QSR, segment of the restaurant industry. In the United
States, the QSR segment is the largest segment of the restaurant
industry and has demonstrated steady growth over a long period
of time. According to NPD Group, Inc., which prepares and
disseminates the Consumer Report of Eating Share Trends (CREST),
QSR sales have grown at an average annual rate of 4.8% over the
past 10 years, totaling approximately $206 billion for
the year ended October 31, 2005 and up 4.5% over the same
period last year. According to NPD Group, Inc., QSR sales are
projected to increase at an annual rate of 4% between 2006 and
2011. We believe this attractive historical and projected growth
is the result of a number of favorable trends:
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• |
an increasing percentage of meals being eaten out of the home; |
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• |
growing disposable incomes; |
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• |
favorable demographic trends in the Echo Boomer generation
(those born between the late 1970s and early 1990s), who are
typically inclined toward QSR dining; |
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• |
new marketing vehicles such as the internet and video games,
which lend themselves to marketing QSR concepts; and |
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• |
the continued expansion of QSR menu offerings into more varied
and premium products. |
Furthermore, we believe the QSR sector is generally resistant to
economic downturns, due to the value that QSRs deliver to
consumers, as well as some “trading down” by customers
from other restaurant industry segments during adverse economic
conditions, as they seek to preserve the “away from
home” dining experience on tighter budgets.
According to NPD Group, Inc., the FFHR category is the largest
category in the QSR segment, generating sales of over
$50 billion in the United States for the year ended
October 31, 2005, representing 27% of total QSR sales. The
FFHR category grew 3.6% in terms of sales during the same period
and, according to NPD Group, Inc., is expected to increase at an
average rate of 4.2% per year over the next five years. For
the year ended October 31, 2005, the top three FFHR chains
(McDonald’s, Burger King and Wendy’s) accounted for
73% of the category’s total sales, with 15% attributable to
Burger King.
The FFHR category is highly competitive with respect to price,
service, location and food quality. During the past year, the
FFHR category has experienced flat or declining customer
traffic, although sales are up due to the sale of premium
products. In order to increase sales, we believe that FFHR
chains have focused on improving menu offerings and drive-thru
efficiency, growing breakfast and late-night sales and accepting
credit/debit cards.
Our Competitive Strengths
We believe that we are well-positioned to capitalize on the
following competitive strengths to achieve future growth:
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• |
Distinctive brand with global platform. We believe that
our Burger King and Whopper brands are two of the
most widely-recognized consumer brands in the world. In 2005,
Brandweek magazine ranked Burger King number 15
among the top 2,000 brands in the United States. We also believe
that consumers associate our brands with our signature
flame-broiled products and Have It Your Way brand
promise. According to National Adult Tracking data, our
flame-broiled preparation method is preferred over frying, and
our flagship product, the Whopper sandwich, is the number
one large branded burger in the United States. We believe the
ability of our major competitors to duplicate our flame-broiled
method is limited by the substantial cost necessary to convert
their existing systems and retrain their staff. |
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• |
Attractive business model. Approximately 90% of our
restaurants are franchised, which is a higher percentage than
our major competitors in the fast food hamburger restaurant
category. We believe that our franchise restaurants will
generate a consistent, profitable royalty stream to us, with
minimal |
74
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associated capital expenditures or incremental expense by us. We
also believe this will provide us with significant cash flow to
reinvest in strengthening our brand and enhancing shareholder
value. |
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Established and scalable international business. We have
one of the largest restaurant networks in the world, with more
than 3,800 franchise and company-owned restaurants outside the
United States. We believe that the demand for new international
franchise restaurants is growing and our established
infrastructure is capable of supporting substantial restaurant
expansion in the years ahead. |
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Experienced management team with significant ownership.
We have assembled a seasoned management team with significant
experience. John Chidsey, our Chief Executive Officer, has
extensive experience in managing franchised and branded
businesses, including the Avis
Rent-A-Car and Budget
Rent-A-Car systems,
Jackson Hewitt Tax Services and PepsiCo. Russ Klein, our Chief
Marketing Officer, has 26 years of retail and consumer
marketing experience, including at
7-Eleven Inc. Ben
Wells, our Chief Financial Officer and Treasurer, has
25 years of finance experience, including at Compaq
Computer Corporation and British Petroleum. Jim Hyatt, our
Global Operations Officer, has more than 30 years of brand
experience as both a franchisee and senior executive of Burger
King. In addition, other members of our management team have
worked at McDonald’s, Taco Bell, The
Coca-Cola Company and
KFC. Ten out of 14 members of our management team are new
to BKC in the last three years. Following this offering,
our executive officers will own approximately 1.2% of our
outstanding common stock, on a fully diluted basis, which we
believe aligns their interests with those of our other
shareholders. |
|
Our Business Strategy
We intend to achieve further growth and strengthen our
competitive position through the continued implementation of the
following key elements of our business strategy:
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• |
Drive sales growth and profitability of our
U.S. business. Although we have achieved eight
consecutive quarters of comparable sales growth and increased
average restaurant sales by 11% since fiscal 2003 in our
U.S. business, we believe that we have a long way to go to
reach our comparable sales and average restaurant sales growth
potential in the United States. We also believe that our
purchasing scale, coupled with our initiatives to promote
restaurant efficiency, will further improve restaurant-level
profitability. We have reduced the capital costs to build a
restaurant which, together with the improved financial health of
our franchise system in the United States, is leading to
increased restaurant development in our U.S. business. |
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We intend to continue to meet our customers’ needs and
drive sales growth and profitability by implementing the
following strategic initiatives: |
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• |
Promote innovative advertising campaigns. We believe that
our innovative and award-winning advertising campaigns have
helped drive improvements in comparable sales and average
restaurant sales. Our advertising campaigns have outperformed
our main competitors in terms of message recall, brand recall
and likeability. Our marketing strategy is focused on our core
customer, who we refer to as the SuperFan. SuperFans are
consumers who reported eating at a fast food hamburger outlet
nine or more times in the past month. We plan to concentrate our
marketing on television advertising, which we believe is the
most effective way to reach the SuperFan. |
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Launch new products to fill gaps in our menu. The
strength of our menu has been built on the core assets of
allowing consumers to customize their hamburgers “their
way” and using our distinct flame-broiled cooking platform
to make better tasting hamburgers. Our menu strategy seeks to
optimize our menu by further leveraging these core assets while
improving menu variety. To fill product gaps in our breakfast,
late night and snack offerings, we expect to launch a variety of
new products over the next year, such as breakfast sandwiches,
cheesy hash browns and a new line of soft serve ice cream
products. In addition, work is underway to launch over 15 other
products and product improvements in the second half of fiscal
2006 and 2007. |
75
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Enhance the price/value proposition of our products. We
will continue to use a variety of strategies to enhance the
price/value proposition offered to our customers, including
value meals, limited time offers, free samples and coupon
mailings. We have also developed a national BK Value Menu
which was launched in February 2006. The BK Value Menu
includes six core items priced at no more than $1 and local
options to sell other products at varying maximum prices. |
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Improve restaurant operations. We will continue our
efforts to improve restaurant operations by making our
restaurants clean and safe, serving hot and fresh food,
providing fast and friendly service to our customers and
implementing systems to measure our performance. We believe that
these initiatives have significantly improved the customer
experience and resulted in increased comparable sales and
average restaurant sales growth. As a result of these efforts,
our key customer satisfaction and operations metrics were at
all-time highs in March 2006, and we were rated ahead of
McDonald’s and Wendy’s in the overall rankings of the
annual drive-thru study published by QSR Magazine, a
leading industry publication. |
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• |
Extend hours of operations. For the convenience of our
customers and to more effectively compete with other quick
service restaurant chains, we have implemented a program to
encourage U.S. franchisees to keep extended hours,
particularly at the drive-thru window. As an incentive to
franchisees, we will provide free merchandising materials and a
one-time cash payment of $400 for each restaurant that stays
open until 2:00 a.m. on Thursdays, Fridays and Saturdays
for five consecutive months. Additional cash incentives will be
provided to franchisees that agree to operate restaurants on a
24-hour basis for one
full year. We believe that reducing the gap between our
operating hours and those of our competitors will be a key
component in improving customer traffic and driving future
growth in comparable sales and average restaurant sales. |
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Improve restaurant profitability. We believe that
significant opportunities exist to enhance restaurant
profitability by better utilizing our fixed cost base and
continuing to explore ways to reduce variable costs. For
example, we have negotiated arrangements with strategic vendors
which we believe will deliver cost reductions and profit
improvement for our franchisees. In addition, we have developed
a labor scheduling system which we believe will reduce labor
costs. We have started to implement this system in our
U.S. company restaurants and expect to begin introducing it
to U.S. franchisees in fiscal 2007. We have also developed
a new flexible broiler that we expect will reduce utility costs
when introduced, which is expected in fiscal 2007. |
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Improve return on investment. We are focused on making
Burger King a more attractive investment by improving the
return on invested capital for ourselves and our franchisees. We
have designed a new, smaller restaurant model that allows us and
our franchisees to reduce the current average non-real estate
costs to build a new restaurant from approximately
$1.2 million to approximately $900,000. We have opened
seven new restaurants in this format to date, with an additional
five to eight scheduled to open in calendar 2006. The cost
reductions achieved from this new restaurant model are now being
reviewed to understand which potential reductions can be applied
to the remodeling of existing restaurants. As a result of this
ongoing effort and other cost saving initiatives, we have
identified and recommended over $115,000 worth of savings for
standard remodels. |
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Expand our large international platform. We will
continue to build upon our substantial international
infrastructure, franchise network and restaurant base, focusing
mainly on under-penetrated markets where we already have a
presence. Internationally we are about one-fourth of the size of
our largest competitor, which we believe demonstrates
significant growth opportunities for us. We have developed a
detailed global development plan to seed worldwide growth over
the next five years. We expect that most of this growth will
come from franchisees in our established markets, particularly
in Germany, Spain and Mexico, although we also intend to
aggressively pursue market expansion opportunities in Brazil. In
addition, we will focus on expanding our presence in many of our
under-penetrated European and Asian markets. |
76
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We believe that our established infrastructure is capable of
supporting substantial restaurant expansion in the years ahead
with a limited increase in general and administrative costs
because we believe we have already made the necessary
investments in personnel and systems to support our projected
growth. For example, we have increased the number of management,
development and operations personnel in EMEA and hired a new
president for APAC. We have also made significant investments in
our global information technology infrastructure that are
scalable for future growth, such as deploying common platforms
for SAP software across all regions, implementing an
internet-based communication system for international
franchisees and developing an internet-based system for the
collection of key franchisee operational and financial metrics. |
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Continue to build relationships with franchisees.
We succeed when our franchisees succeed, and we will continue
building our relationships with our franchisees. In the past two
years, we have held regional conferences with franchisees to
promote our operations and marketing initiatives and share best
practices, and we intend to continue holding these conferences
in the future. We have established quarterly officer and
director visits to franchisees, which have more closely aligned
the people in our company to our franchise base. We have
implemented advisory committees for marketing, operations,
finance and people, which we believe will ensure that franchisee
expertise and best practices are incorporated into all
U.S. system initiatives prior to rollout. We held our first
global franchisee convention in Las Vegas in May 2005, and the
second global franchisee convention was held in Orlando, Florida
in April 2006. We will continue to dedicate resources toward the
creation of a cohesive organization that is focused on
supporting the Burger King brand globally. |
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Become a world-class global company. Since 2004,
we have integrated our domestic and international operations
into one global company. For fiscal 2006, we have developed a
global marketing calendar to create more consistent advertising
and brand positioning strategies across our markets. We have
also established a global product development team to reduce
complexity and increase consistency in our worldwide menu. We
expect to leverage our global purchasing power to negotiate
lower product costs and savings for our restaurants outside of
the United States and Canada. We believe that the organizational
realignments that we have implemented will position us to
execute our global growth strategy, while remaining responsive
to national differences in consumer preferences and local
requirements. |
Global Operations
We operate in three reportable business segments: United States
and Canada; Europe, Middle East and Africa and Asia Pacific, or
EMEA/ APAC; and Latin America.
Our restaurants are limited-service restaurants of distinctive
design and are generally located in high-traffic areas
throughout the United States and Canada. At March 31, 2006,
877 company restaurants and 6,712 franchise restaurants
were operating in the United States and Canada. For fiscal 2005,
total system sales in the United States and Canada were
approximately $8.4 billion. We believe our restaurants
appeal to a broad spectrum of consumers, with multiple meal
segments appealing to different customer groups.
Operating Procedures. All of our restaurants must adhere
to strict standardized operating procedures and requirements
which we believe are critical to the image and success of the
Burger King brand. Each restaurant is required to follow
the Manual of Operating Data, an extensive operations manual
containing mandatory restaurant operating standards,
specifications and procedures prescribed from time to time to
assure uniformity of operations and consistent high quality of
products at Burger King restaurants. Among the
requirements contained in the Manual of Operating Data are
standard design, equipment system, color scheme and signage,
uniform operating procedures and standards of quality for
products and services. Our restaurants are typically open seven
days per week with minimum operating hours from 7:00 a.m. to
77
11:00 p.m. Currently, 50% of Burger King restaurants
are open later than 11:00 p.m., with 7% open 24 hours.
Approximately 70-80% of
the restaurants of our major competitors are open later than
11:00 p.m., with approximately 42% of McDonald’s
restaurants open 24 hours. We have recently implemented a
program to encourage franchisees to be open for extended hours,
particularly at the drive-thru. See “—Our Business
Strategy” for further discussion of this program. We
believe that reducing the gap between our operating hours and
those of our competitors will be a key component in capturing a
greater share of FFHR sales in the United States and Canada.
Management. Substantially all of our executive
management, finance, marketing, legal and operations support
functions are conducted from our global headquarters in Miami,
Florida. There is also a field staff consisting of operations,
training, real estate and marketing personnel who support
company restaurant and franchise operations in the United States
and Canada. Our franchise operations are organized into two
“zones”, each headed by a senior vice president. There
are nine divisions across the two zones, 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. The basic menu of all of our restaurants
consists of hamburgers, cheeseburgers, chicken and fish
sandwiches, breakfast items, french fries, onion rings, salads,
desserts, soft drinks, shakes, milk and coffee. In addition,
promotional menu items are introduced periodically for limited
periods. We continually seek to develop new products as we
endeavor to enhance the menu and service of all of our
restaurants. In the last three years, we have launched new menu
items such as the Angus Steak Burger, the Tendercrisp
chicken sandwich, BK Chicken Fries, the BK Big
Fish sandwich and the Enormous Omelet Sandwich breakfast item.
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
customers, drive-thru facilities and adjacent parking areas.
Some restaurants are located in institutional locations, such as
airports, shopping malls, toll road rest areas and educational
and sports facilities. In fiscal 2005, we developed a new,
smaller restaurant model that reduces the current average
non-real estate costs associated with building a new restaurant
using that design by approximately 25% from approximately
$1.2 million using the prior design to approximately
$900,000. The seating capacity for this smaller restaurant model
is between 40 and 80 customers. We believe this seating capacity
is adequate since approximately 60% of our U.S. system-wide
sales are made at the drive-thru. We have opened seven new
restaurants in this format to date, with an additional five to
eight scheduled to open in calendar 2006.
We are currently engaged in a program to improve the appearance
of our restaurants. This program, known as
“softscape”, includes repainting the dining rooms and
removing old wallpaper and outdated artwork and replacing it
with décor elements that will highlight our core message of
Have It Your Way. Our goal is to roll out this program to
70% of U.S. restaurants by the end of fiscal 2006. We have
also begun implementing softscape in international locations,
beginning with the United Kingdom in December 2005.
New Restaurant Development and Renewals. We employ a
sophisticated and disciplined market planning and site selection
process through which we identify trade areas and approve
restaurant sites throughout the United States and Canada that
will provide for quality expansion. We have established a
development committee to oversee all new restaurant development
within the United States and Canada. The development
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
78
relation to building type and certain demographic factors. Our
model for evaluating sites accounts for potential changes to the
site, such as road reconfiguration and traffic pattern
alterations.
Each franchisee wishing to develop a new restaurant is
responsible for selecting a new site location. However, we work
closely with our franchisees to assist them in selecting sites.
They must agree to search for a potential site within an
identified trade area and to have the final site location
approved by the development committee.
Our franchisees closed 925 restaurants in the United States
between fiscal 2003 and fiscal 2005. Many of these closures
involved franchisees in bankruptcy and the FFRP program. The
franchise restaurants that closed had average restaurant sales
of approximately $630,000 in the 12 months prior to
closure. We and our franchisees opened 93 new restaurants in the
United States between fiscal 2004 and fiscal 2005, of which 74
were open for at least 12 months as of March 31, 2006.
The average restaurant sales of these new restaurants was
approximately $1.3 million for the 12 months ended
March 31, 2006. We expect between 50 and
60 restaurants will be opened and approximately 220
restaurants will be closed in the United States in fiscal 2006.
We believe that the number of closures will significantly
decline in fiscal 2007 and beyond. We have instituted a program
to encourage U.S. franchisees to open new restaurants by
offering them reduced upfront franchise fees.
In recent years, we have experienced lower levels of franchisees
in the United States renewing their expiring franchise
agreements for a standard additional
20-year term than we
have historically experienced. In many cases, however, we agreed
to extend the existing agreements to avoid the closing of the
restaurants by giving franchisees additional time to comply with
our renewal requirements. To encourage franchisees to renew, we
have instituted a program in the United States to allow them to
pay the $50,000 franchise fee in installments and to delay the
required restaurant remodel for up to two years, while providing
an incentive to accelerate the completion of the remodel by
offering reduced royalties for a limited period. We believe that
this program is important to maintaining our base of restaurants
since we have approximately 450 restaurants in the United States
with franchise agreements expiring in fiscal 2006. This number
will gradually decrease over the next few years. As a result of
this program and our other initiatives, we have seen an increase
in the number of restaurants with renewed franchise agreements.
As of March 31, 2006, we owned and operated
877 restaurants in the United States and Canada,
representing 12% of total U.S. and Canada system restaurants.
Included in this number are 30 restaurants that we operate but
are owned by a joint venture between us and an independent third
party. Our company restaurants in the United States and Canada
generated $923 million in revenues in fiscal 2005, or 72%
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. Over the past two fiscal years
and the nine months ended March 31, 2006 we have acquired
217 franchise restaurants, principally from distressed
franchisees. We do not expect to acquire a significant number of
franchise restaurants in the future.
79
The following table details the locations of our company
restaurants in the United States and Canada at March 31,
2006:
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Company | |
|
% of Total U.S. and Canada | |
Rank | |
|
State/Province |
|
Restaurant Count | |
|
Company Restaurants | |
| |
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| |
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| |
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1 |
|
|
Florida |
|
|
227 |
|
|
|
25.9% |
|
|
2 |
|
|
Ontario |
|
|
68 |
|
|
|
7.7% |
|
|
3 |
|
|
Indiana |
|
|
60 |
|
|
|
6.8% |
|
|
4 |
|
|
North Carolina |
|
|
58 |
|
|
|
6.6% |
|
|
5 |
|
|
Georgia |
|
|
47 |
|
|
|
5.3% |
|
|
6 |
|
|
Virginia |
|
|
44 |
|
|
|
5.0% |
|
|
7 |
|
|
Massachusetts |
|
|
42 |
|
|
|
4.7% |
|
|
8 |
|
|
Ohio |
|
|
38 |
|
|
|
4.3% |
|
|
9 |
|
|
South Carolina |
|
|
38 |
|
|
|
4.3% |
|
|
10 |
|
|
Connecticut |
|
|
33 |
|
|
|
3.8% |
|
|
11 |
|
|
New York |
|
|
33 |
|
|
|
3.8% |
|
|
12 |
|
|
New Hampshire |
|
|
27 |
|
|
|
3.1% |
|
|
13 |
|
|
Quebec |
|
|
26 |
|
|
|
3.0% |
|
|
14 |
|
|
New Jersey |
|
|
25 |
|
|
|
2.8% |
|
|
15 |
|
|
Pennsylvania |
|
|
19 |
|
|
|
2.2% |
|
|
16 |
|
|
Tennessee |
|
|
18 |
|
|
|
2.1% |
|
|
17 |
|
|
Texas |
|
|
14 |
|
|
|
1.6% |
|
|
18 |
|
|
Alberta |
|
|
12 |
|
|
|
1.4% |
|
|
19 |
|
|
Manitoba |
|
|
12 |
|
|
|
1.4% |
|
|
20 |
|
|
Kentucky |
|
|
11 |
|
|
|
1.3% |
|
|
21 |
|
|
Alabama |
|
|
11 |
|
|
|
1.3% |
|
|
22 |
|
|
Saskatchewan |
|
|
7 |
|
|
|
0.8% |
|
|
23 |
|
|
Illinois |
|
|
6 |
|
|
|
0.7% |
|
|
24 |
|
|
British Columbia |
|
|
1 |
|
|
|
0.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
877 |
|
|
|
100.0% |
|
|
|
|
|
|
|
|
|
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|
Of these 877 company restaurants, we own the properties for
338 restaurants and we lease the remaining 539 properties
from third-party landlords.
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 March 31, 2006 there were
approximately 6,712 franchise restaurants, owned by
approximately 863 independent franchisees, 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
$269 million in fiscal 2005, or 21% of our total U.S. and
Canada revenues and 14% of our total worldwide revenues. The
five largest franchisees in the United States and Canada in
terms of restaurant count represented in the aggregate
approximately 16% of U.S. and Canadian Burger King restaurants
at March 31, 2006.
80
The following is a list of the five largest franchisees in terms
of restaurant count in the United States and Canada at
March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Rank | |
|
Name |
|
Restaurant Count | |
|
Location |
| |
|
|
|
| |
|
|
|
1 |
|
|
Carrols Corporation
|
|
|
335 |
|
|
Northeast and Midwest |
|
2 |
|
|
Heartland Food Corp.
|
|
|
259 |
|
|
Mid South and Northwest |
|
3 |
|
|
Strategic Restaurants Corp.
|
|
|
227 |
|
|
Midwest and Southeast |
|
4 |
|
|
Bravokilo Corporation
|
|
|
124 |
|
|
Midwest |
|
5 |
|
|
Army Air Force Exchange Services
|
|
|
123 |
|
|
Across the United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,068 |
|
|
|
Franchise Agreement Terms. For each franchise restaurant,
we enter into a franchise agreement covering a standard set of
terms and conditions. The typical franchise agreement in the
United States and Canada has a
20-year term (for both
initial grants and renewals of franchises) and contemplates a
one-time franchise fee of $50,000, which must be paid in full
before the restaurant opens for business, or in the case of
renewal, before expiration of the current franchise term.
Recurring fees consist of monthly royalty and advertising
payments. Franchisees in the United States and Canada are
generally required to pay us an advertising contribution equal
to a percentage of gross sales, typically 4%, on a monthly
basis. In addition, most existing franchise restaurants in the
United States and Canada pay a royalty of 3.5% and 4% of gross
sales, respectively, on a monthly basis. As of July 1,
2000, a new royalty rate structure became effective in the
United States for most new franchise agreements, including both
new restaurants and renewals of franchises, but limited
exceptions were made for agreements that were grandfathered
under the old fee structure or entered into pursuant to certain
early renewal incentive programs. In general, new franchise
restaurants opened and franchise agreement renewals after
June 30, 2003 will generate royalties at the rate of 4.5%
of gross sales for the full franchise term.
Franchise agreements are not assignable without our consent, and
we have a right of first refusal if a franchisee proposes to
sell a restaurant. Defaults (including non-payment of royalties
or advertising contributions, or failure to operate in
compliance with the terms of the Manual of Operating Data) can
lead to termination of the franchise agreement. We can control
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
$83 million of our revenues in fiscal 2005, or 4.3% of
total worldwide revenue.
For properties that we lease from third-party landlords and
sublease to franchisees, leases generally provide for fixed
rental payments and may provide for contingent rental payments
based on a 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. Of the 870 properties that we lease or sublease
to franchisees in the United States and Canada, we own 467
properties and lease either the land or the land and building
from third-party landlords on the remaining 403 properties.
|
|
|
Europe, Middle East and Africa/ Asia Pacific (EMEA/ APAC)
Regions |
These regions, and the markets within these regions, differ
substantially in many respects, including customer taste
preferences, consumer disposable income, occupancy costs, food
costs, operating margins
81
and the level of competitive activity. The following discussion
is intended as a summary of our EMEA/ APAC business as a whole.
However, some of the information discussed below may not be
applicable to individual countries within our EMEA/ APAC
operations.
EMEA. EMEA is the second largest geographic area in the
Burger King system behind the United States. At March 31,
2006, EMEA had 2,116 restaurants in 26 countries and
territories, including 284 company restaurants located in
the United Kingdom, Germany, Spain and the Netherlands. For
fiscal 2005, total system sales in EMEA were approximately
$2.4 billion. The United Kingdom is the largest market in
EMEA with 631 restaurants at March 31, 2006. Between fiscal
1999 and fiscal 2005, the number of restaurants in EMEA grew 57%
from 1,304 to 2,041. In the first nine months of fiscal 2006, 75
restaurants were opened (net of closures).
We are focused on improving our sales performance in targeted
markets in EMEA. Although our restaurants in Germany have
generally performed well, we experienced declining comparable
sales in this country during fiscal 2005 after several years of
high comparable sales growth. We believe this challenge was due
in part to high unemployment and other adverse economic
conditions which negatively impacted consumer confidence to
which our largest competitor, McDonald’s, responded with
aggressive discounting. We developed a comprehensive business
strategy to reverse this trend, including new product
introductions, coupon mailings and value focused marketing,
which improved our average restaurant sales and took market
share from McDonald’s. In the United Kingdom, our business
faces challenges due to franchisee financial distress, a
negative brand image resulting from concerns about obesity and
food-borne illness, high labor and real estate costs and
increased competition from bakeries and other new entrants that
are diversifying into healthier options in response to
nutritional concerns. We plan to address these challenges in the
United Kingdom by improving operations and the image of our
restaurants, filling menu gaps to more closely match consumer
tastes and focusing on value offerings to drive traffic. We are
also working with a number of our franchisees in the United
Kingdom to assist them with their financial difficulties.
APAC. At March 31, 2006, APAC had 619 restaurants in
11 countries and territories, including China, Malaysia,
Thailand, Australia, Philippines, Taiwan, Singapore, New
Zealand, and South Korea. For fiscal 2005 total system sales in
APAC were approximately $650 million. All of the
restaurants in the region other than our two restaurants in
China are franchised. Australia is the largest market in APAC,
with 292 restaurants at March 31, 2006, 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. Between fiscal 1999 and fiscal 2005, the number of
restaurants in APAC increased by 31% from 469 to 615. We believe
there is significant potential for growth in APAC, particularly
in our existing markets of Korea, Taiwan, Hong Kong, Singapore,
Malaysia and the Philippines. We have recently created the
position of President of Asia Pacific and hired a senior
executive who is assembling an experienced team to manage the
region.
Our restaurants located in EMEA/ APAC generally adhere to the
standardized operating procedures and requirements followed by
U.S. restaurants. However, regional and country-specific
market conditions often require some variation in our standards
and procedures. Some of the major differences between U.S. and
EMEA/ APAC operations are discussed below.
Management Structure. Our EMEA/ APAC operations are
managed from restaurant support centers located in Madrid,
London, Munich and Rotterdam (for EMEA) and Singapore and
Shanghai (for APAC). These centers are staffed by teams who
support both franchised operations and company restaurants.
Menu and Restaurant Design. Restaurants must offer
certain global Burger King menu items. In many countries,
special products developed to satisfy local tastes and respond
to competitive conditions are also offered. Many restaurants are
in-line facilities in smaller, attached buildings without a
drive-thru or in food courts rather than free-standing
buildings. In addition, the design, facility size and color
scheme of the restaurant building may vary from country to
country due to local requirements and preferences.
82
New Restaurant Development. Unlike the United States and
Canada, where all new development must be approved by the
development committee, our market planning and site selection
process in EMEA/ APAC is managed by our regional teams, who are
knowledgeable about the local market. In several of our markets,
there is typically a single franchisee that owns and operates
all of the restaurants within a country. We have identified
particular opportunities for extending the reach of the
Burger King brand in many countries, including Spain,
Germany, Austria, Switzerland and Italy in EMEA, and Singapore,
Taiwan, Malaysia, the Philippines, China and Hong Kong in APAC.
We are currently negotiating with our franchisee in the Middle
East to develop restaurants in Egypt, Libya and Morocco. We are
also considering the possibility of entering into other European
markets, such as Poland, Russia and France, and we are in the
process of identifying prospective new franchisees for these
markets.
Over the past several years, we have concentrated on developing
company restaurants, primarily in Germany and Spain. We have
invested approximately $24 million in new restaurant
development in these countries over the last three years, and a
total of approximately $34 million across EMEA. At
March 31, 2006, 284 (or 13%) of the restaurants in EMEA
were company restaurants. There are two company restaurants in
APAC, both of which are located in China, and we are planning to
open one or two additional company restaurants in China by the
end of fiscal 2006.
The following table details company restaurant locations in EMEA
at March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total | |
|
|
|
|
|
|
EMEA | |
|
|
|
|
Company | |
|
Company | |
Rank |
|
Country |
|
Restaurant Count | |
|
Restaurants | |
|
|
|
|
| |
|
| |
1
|
|
Germany |
|
|
149 |
|
|
|
52 |
% |
2
|
|
United Kingdom |
|
|
70 |
|
|
|
25 |
% |
3
|
|
Spain |
|
|
42 |
|
|
|
15 |
% |
4
|
|
The Netherlands |
|
|
23 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
284 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
At March 31, 2006, 2,449 or 90% of our restaurants in
EMEA/APAC were franchised. Some of our international markets are
operated by a single franchisee. Other markets, such as the
United Kingdom, Germany, Spain and Australia, have multiple
franchisees. In general, we enter into a franchise agreement for
each restaurant. International franchise agreements generally
contemplate a one-time franchise fee of $50,000, with monthly
royalties and advertising contributions each of up to 5% of
gross sales.
We have granted master franchises in Australia and Turkey, where
the franchisees are allowed to sub-franchise restaurants within
their particular territory. Additionally, in New Zealand and
certain Middle East and Persian Gulf countries, we have entered
into arrangements with franchisees under which they have agreed
to nominate third parties to develop and operate restaurants
within their respective territories under franchise agreements
with us. As part of these arrangements, the franchisees have
agreed to provide certain support services to third party
franchisees on our behalf, and we have agreed to share the
franchise fees and royalties paid by such third party
franchisees. Our franchisee in the Middle East and Persian Gulf
is also allowed to grant development rights to a single
franchisee with respect to each country within its territory. We
have also entered into exclusive development agreements with
franchisees in a number of countries throughout EMEA and APAC.
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.
83
The following is a list of the five largest franchisees in terms
of restaurant count in EMEA/APAC at March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Rank |
|
Name | |
|
Restaurant Count | |
|
Location |
|
|
| |
|
| |
|
|
1
|
|
Hungry Jack’s Pty Ltd. |
|
|
241 |
|
|
Australia |
2
|
|
Granada Hospitality Limited (Compass Group) |
|
|
105 |
|
|
United Kingdom |
3
|
|
Tab Gida Sanayl Ve Ticaret AS |
|
|
102 |
|
|
Turkey |
4
|
|
Doosan Corporation |
|
|
90 |
|
|
South Korea |
5
|
|
Army Air Force Exchange Services |
|
|
83 |
|
|
Various |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
621 |
|
|
|
|
|
|
|
|
|
|
|
|
Our property operations in EMEA primarily consist of franchise
restaurants located in the United Kingdom, Germany and Spain,
which we lease or sublease to franchisees. We have no property
operations in APAC. Of the 141 properties that we lease or
sublease to franchisees, we own 4 properties and lease the
land and building from third party landlords on the remaining
137 properties. Our EMEA property operations generated
$37 million of our revenues in fiscal 2005, or 2% of our
total worldwide revenues.
Lease terms on properties that we lease or sublease to our EMEA
franchisees vary from country to country. These leases generally
provide for 20-year
terms, depending on the term of the related franchise agreement.
We lease most of our properties from third party landlords and
sublease them to franchisees. These leases generally provide for
fixed rental payments based on our underlying rent plus a small
markup. In general, franchisees are obligated to pay for all
costs and expenses associated with the restaurant property,
including property taxes, repairs and maintenance and insurance.
At March 31, 2006, we had 785 restaurants in 26 countries
and territories in Latin America. For fiscal 2005 total system
sales in Latin America were approximately $669 million.
There were 64 company restaurants in Latin America, all
located in Mexico, and 721 franchise restaurants in the region
at March 31, 2006. Between fiscal 1999 and fiscal 2005, the
number of restaurants in Latin America grew by 67% from 437 to
728. In the first nine months of fiscal 2006, 57 restaurants
(net of closures) were opened in Latin America. We are the
market leader in 13 of our 26 markets in Latin America,
including Puerto Rico, in terms of number of restaurants.
The Mexican market is the largest in the region, with a total of
289 restaurants at March 31, 2006, or 37% of the region. In
fiscal 2005, we opened 45 new restaurants in Mexico, of which
nine were company restaurants and 36 were franchise restaurants.
We have recently opened 12 restaurants in Brazil and have
entered into agreements with franchisees for the development of
over 100 new restaurants during the next five years.
The following is a list of the five largest franchisees in terms
of restaurant count in Latin America at March 31, 2006:
|
|
|
|
|
|
|
|
|
Rank |
|
Name |
|
Restaurant Count | |
|
Location |
|
|
|
|
| |
|
|
1
|
|
Caribbean Restaurants |
|
|
170 |
|
|
Puerto Rico |
2
|
|
ALSEA |
|
|
81 |
|
|
Mexico |
3
|
|
Geboy de Tijuana, S.A. de C.V. |
|
|
40 |
|
|
Mexico |
4
|
|
Salvador Safie, Fernando Safie and Ricardo Safie |
|
|
35 |
|
|
Guatemala |
5
|
|
Operadora Exe S.A. de C.V. |
|
|
35 |
|
|
Mexico |
|
|
|
|
|
|
|
|
|
|
|
|
|
361 |
|
|
|
|
|
|
|
|
|
|
|
84
Advertising and Promotion
We believe sales in the QSR segment can be significantly
affected by the frequency and quality of advertising and
promotional programs. We believe that two of our major
competitive advantages are our strong brand equity and market
position and our global franchise network which allows us to
drive sales through extensive advertising and promotional
programs.
Franchisees must make monthly contributions, generally 4% to 5%
of gross sales, to our advertising funds, and we contribute on
the same basis for company restaurants. Advertising
contributions are used to pay for all expenses relating to
marketing, advertising and promotion, including market research,
production, advertising costs, public relations and sales
promotions. In international markets where there is no company
restaurant presence, franchisees typically manage their own
advertising expenditures, and these amounts are not included in
the advertising fund. However, as part of our global marketing
strategy, we intend to provide these franchisees with assistance
in order to deliver a consistent global brand message.
In the United States and in those other countries where we have
company restaurants, we have full discretion as to the
development, budgeting and expenditures for all marketing
programs, as well as the allocation of advertising and media
contributions among national, regional and local markets,
subject in the United States to minimum expenditure requirements
for media costs and certain restrictions as to new media
channels. We are required, however, under our
U.S. franchise agreements to discuss the types of media in
our advertising campaigns and the percentage of the advertising
fund to be spent on media with the recognized franchisee
association, currently the National Franchise Association, Inc.
Our current global marketing strategy is based upon customer
choice. We believe that quality, innovation and differentiation
drive profitable customer traffic and pricing power over the
long term. Our global strategy is focused on our core customer,
the SuperFan, our Have It Your Way brand promise, our
core menu items, such as burgers, fries and soft drinks, the
development of innovative products (such as the Whopper
sandwich, Angus Steak Burger, Tendercrisp chicken
sandwich, breakfast, desserts and kids meals) and the consistent
communication of our brand. We concentrate our marketing on
television advertising, which we believe is the most effective
way to reach the SuperFan. We also use radio and Internet
advertising and other marketing tools on a more limited basis.
We have engaged the advertising agency of Crispin Porter +
Bogusky to create compelling advertising that will resonate with
the SuperFan. During fiscal 2005, the “Subservient
Chicken” and “Office Lunch Break” advertising
campaigns garnered numerous awards, including the 2005 Grand
Clio and 2004 Cannes Lion. Appearances and mentions in various
pop culture media outlets such as The Apprentice, The Simple
Life, The Late Show with David Letterman and The Tonight Show,
as well as multi-media campaigns such as the Subservient
Chicken, Dr. Angus and Star Wars “Sith Sense”
websites have allowed us to reach a broader audience.
Promotional tie-ins with major motion pictures and the NFL,
including television advertising during Superbowl XL, have
also helped to create a pop culture “buzz” around
Burger King. For fiscal 2006, we have developed a
global marketing calendar that leverages the talent of our
advertising agency and creates more consistent advertising and
brand positioning strategies across all of our markets.
85
Property
The following table presents information regarding our
properties as of March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned(1) | |
|
Leased | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
Land & | |
|
Total | |
|
|
|
|
|
|
Land | |
|
Building | |
|
Leases | |
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
United States and Canada:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurants
|
|
|
338 |
|
|
|
188 |
|
|
|
351 |
|
|
|
539 |
|
|
|
877 |
|
|
Franchisee-operated properties
|
|
|
467 |
|
|
|
241 |
|
|
|
162 |
|
|
|
403 |
|
|
|
870 |
|
|
Non-operating restaurant locations
|
|
|
35 |
|
|
|
27 |
|
|
|
12 |
|
|
|
39 |
|
|
|
74 |
|
|
Offices
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
840 |
|
|
|
456 |
|
|
|
532 |
|
|
|
988 |
|
|
|
1,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurants
|
|
|
17 |
|
|
|
35 |
|
|
|
298 |
|
|
|
333 |
|
|
|
350 |
|
|
Franchisee-operated properties
|
|
|
4 |
|
|
|
— |
|
|
|
137 |
|
|
|
137 |
|
|
|
141 |
|
|
Non-operating restaurant locations
|
|
|
1 |
|
|
|
— |
|
|
|
31 |
|
|
|
31 |
|
|
|
32 |
|
|
Offices
|
|
|
— |
|
|
|
3 |
|
|
|
9 |
|
|
|
12 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22 |
|
|
|
38 |
|
|
|
475 |
|
|
|
513 |
|
|
|
535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Owned refers to properties where we own the land and the
building. |
Our global headquarters is located in Miami, Florida and
consists of approximately 213,000 square feet which we
lease, as well as another 42,950 square foot building in
Dadeland, Florida, which we also lease. We have recently signed
a 15-year lease to move
our global headquarters into a building to be constructed in
Coral Gables, Florida. We currently plan to occupy a space of
224,638 square feet in the new building beginning in 2008.
Our regional headquarters are currently located in London for
EMEA and Singapore for APAC. The lease for our London office is
currently scheduled to expire in March 2006, and we have the
right to renew at market rates. As part of our proposed
realignment of our European business, we are considering
relocating our regional headquarters from London to a city in
Switzerland. We also lease properties for our regional offices
in Germany and Spain. We lease an office space of
46,864 square feet in Munich, Germany under a lease that
expires in August 2015. In Madrid, Spain, we lease an office
space of 16,210 square feet under a lease that expires in
March 2009. We believe that our existing headquarters and other
leased and owned facilities are adequate to meet our current
requirements.
Our Employees
As of March 31, 2006, we had approximately
36,400 employees in our company restaurants, field
management offices and our global headquarters. As franchisees
are independent business owners, they and their employees are
not included in our employee count. We consider our relationship
with our employees and franchisees to be good.
None of our employees are represented by a labor union or
covered by a collective bargaining agreement, other than our
employees in Germany and Mexico.
Supply and Distribution
We establish the standards and specifications for most of the
goods used in the development, improvement and operation of our
restaurants and for the direct and indirect sources of supply of
most of those items. These requirements help us assure the
quality and consistency of the food products sold at our
restaurants and protect and enhance the image of the Burger
King system and the Burger King brand.
86
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 1991 to leverage
the purchasing power of the Burger King system. RSI is
the purchasing agent for the Burger King system in the
United States and negotiates the purchase terms for most
equipment, food, beverages (other than branded soft drinks),
other products such as promotional toys and paper products used
in 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.
At March 31, 2006, RSI has been appointed the distribution
manager for approximately 92% of the restaurants in the United
States. A subsidiary of RSI is also purchasing food and paper
products for our company and franchise restaurants in Canada
under a contract with us. Five distributors service 84% of the
U.S. system and the loss of any one of these distributors
would likely adversely affect our business.
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, 2005, we estimate that it will take
approximately 17 years and 19 years to complete the
Coca-Cola and
Dr Pepper purchase commitments, respectively. If these
agreements were terminated, we would be obligated to pay
significant termination fees and certain other costs, including
in the case of the contract with The
Coca-Cola Company, the
unamortized portion of the cost of installation and the entire
cost of refurbishing and removing the equipment owned by The
Coca-Cola Company and
installed in company restaurants in the three years prior to the
termination.
There is currently no purchasing agent that represents
franchisees in our international regions. However, we are
considering an initiative to leverage our global purchasing
power and 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. In countries where we operate company restaurants, we
negotiate the purchase terms with suppliers, and those terms are
made available to company restaurants and franchise restaurants.
In non-company
restaurant markets, franchisees typically negotiate the purchase
terms directly with Burger King approved suppliers for
food and packaging products used in their restaurants.
Research and Development
Company restaurants play a key role in the development of new
products and initiatives because we can use them to test and
perfect new products, equipment and programs before introducing
them to franchisees, which we believe gives us credibility with
our franchisees in launching new initiatives. This strategy
allows us to keep research and development costs down and
simultaneously facilitates the ability to sell new products and
to launch initiatives both internally to franchisees and
externally to customers.
We operate a research and development facility or “test
kitchen” at our headquarters in Miami. In addition, certain
vendors have granted us access to their facilities in the United
Kingdom and China to test new products. While research and
development activities are important to our business, these
expenditures are not material. Independent suppliers also
conduct research and development activities for the benefit of
the Burger King system. We believe new product
development is critical to our long-term success and is a
significant factor behind our comparable sales growth. Product
innovation begins with an
87
intensive research and development process that analyzes each
potential new menu item, including market tests to gauge
consumer taste preferences, and includes an ongoing analysis of
the economics of food cost, margin and final price point.
We have developed a new flexible batch broiler that is
significantly smaller, less expensive and easier to maintain
than the current broiler used in our restaurants. We expect that
the new broiler will reduce operating costs (principally through
reduced utility costs), without sacrificing speed, quality or
efficiency, although we have not yet verified how the broiler
will perform under restaurant conditions. We currently are
testing the new broiler in certain company restaurants and hope
to make it available for widespread use in our restaurants
during fiscal 2007. We have filed a patent application with
respect to the broiler technology and design. We have licensed
one of our equipment vendors on an exclusive basis to
manufacture and supply the new broiler to the Burger King
system throughout the world.
Management Information Systems
Franchisees typically use a point of sale (POS) cash
register system to record all sales transactions at the
restaurant. We have not historically required franchisees to use
a particular brand or model of hardware or software components
for their restaurant system. However, we have recently
established specifications to reduce cost, improve service and
allow better data analysis and have approved three global POS
vendors and one regional vendor for each of our three key
regions to sell these systems to our franchisees. Currently,
franchisees report sales manually, and we do not have the
ability to verify sales data electronically by accessing their
POS cash register systems. The new POS system will make it
possible for franchisees to submit their sales and transaction
level details to us in near-real-time in a common format,
allowing us to maintain one common database of sales
information. We expect that it will be three to five years
before the majority of franchisees have the new
POS systems. We provide proprietary software to our
U.S. franchisees for labor and product management.
We replaced all of our POS hardware systems in our U.S., Canada,
Mexico and United Kingdom company restaurants in 2002 and will
complete the related POS software upgrades in calendar 2006.
These upgraded systems facilitate financial and management
control of restaurant operations and provide management with the
ability to analyze sales and product data, to minimize shrinkage
using inventory control and centralized standard cost systems
and to manage and control labor costs.
Over the past two years, we have made significant improvements
to our technology infrastructure, such as deploying a common
platform for our SAP software across all regions as well as
improving our intranet for internal and franchisee
communications. We expect to continue to make infrastructure
investments in fiscal 2006, including the completion of several
technology enhancing projects at the restaurant and global
headquarters level.
Quality Assurance
We are focused on achieving a high level of customer
satisfaction through the close monitoring of restaurants for
compliance with our key operations platforms: Clean &
Safe, Hot & Fresh and Friendly & Fast. We have
uniform operating standards and specifications relating to the
quality, preparation and selection of menu items, maintenance
and cleanliness of the premises and employee conduct.
The Clean & Safe certification is administered by an
independent outside vendor whose purpose is to bring heightened
awareness of food safety, and includes immediate
follow-up procedures to
take any action needed to protect the safety of our customers.
We measure our Hot & Fresh and Friendly & Fast
operations platforms principally through Guest Trac, a rating
system based on survey data submitted by our customers.
We measure the overall performance of our operations platforms
through an Operations Excellence Review, or OER, which focuses
on evaluating and improving restaurant operations and customer
satisfaction.
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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, customer service and
cleanliness of the restaurants are maintained. Detailed reports
from management information systems are tabulated and
distributed to management on a regular basis to help maintain
compliance. In addition, we conduct scheduled and unscheduled
inspections of company and franchise restaurants throughout the
Burger King system.
Intellectual Property
We and our wholly-owned subsidiary, Burger King Brands, Inc.,
own approximately 2,520 trademark and service mark registrations
and applications and approximately 293 domain name registrations
around the world. We plan to license certain trademarks, service
marks and other intellectual property rights associated with the
EMEA/ APAC regions to a new European and a new Asian holding
company. We also have established the standards and
specifications for most of the goods and services used in the
development, improvement and operation of Burger King
restaurants. These proprietary standards, specifications and
restaurant operating procedures are trade secrets owned by us.
Additionally, we own certain patents relating to equipment used
in our restaurants and provide proprietary product and labor
management software to our franchisees.
Competition
We operate in the FFHR category of the QSR segment within the
broader restaurant industry. Our two main domestic competitors
in the FFHR category are McDonald’s and Wendy’s.
According to public data, McDonald’s and Wendy’s had
worldwide system restaurants of approximately 32,000 and 6,700,
respectively, and total worldwide system sales of approximately
$54.3 billion and $8.7 billion, respectively, for
fiscal 2005.
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. During the past year, the FFHR
category has experienced flat or declining traffic which we
believe is due in part to competition from these competitors. In
the United States, the Subway sandwich chain has grown
significantly in recent years and positions itself directly as
an alternative to our products. In one of our major European
markets, the United Kingdom, much of the growth in the quick
service restaurant segment is expected to come from bakeries and
new entrants that are diversifying into healthier options to
respond to nutritional concerns. We believe that the large
hamburger chains in the United Kingdom have experienced
declining sales as they face increased competition from not only
the bakeries, but also from pubs that are repositioning
themselves as family venues and offering inexpensive food.
Our largest U.S. competitor, McDonald’s, has
significant international operations. For fiscal 2005,
McDonald’s had approximately 18,200 international
restaurants, representing 57% of worldwide restaurants. Other
U.S.-based FFHR chains,
however, such as Wendy’s, Hardee’s and Jack in the
Box, are not currently significant competitors of Burger King
internationally. However, Wendy’s has 728 international
units, representing 5% of worldwide restaurants. 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 and
single-store locations.
89
Government Regulation
We are subject to various federal, state and local laws
affecting the operation of our business, as are our franchisees.
Each Burger King restaurant is subject to licensing and
regulation by a number of governmental authorities, which
include zoning, health, safety, sanitation, building and fire
agencies in the jurisdiction in which the restaurant is located.
Difficulties in obtaining, or the failure to obtain, required
licenses or approvals can delay or prevent the opening of a new
restaurant in a particular area.
In the United States, we are subject to the rules and
regulations of the Federal Trade Commission, or the FTC, and
various state laws regulating the offer and sale of franchises.
The FTC and various state laws require that we furnish to
prospective franchisees a franchise offering circular containing
proscribed information. A number of states, in which we are
currently franchising, regulate the sale of franchises and
require registration of the franchise offering circular with
state authorities and the delivery of a franchise offering
circular to prospective franchisees. We are currently operating
under exemptions from registration in several of these states
based upon our net worth and experience. Substantive state laws
that regulate the franchisor/franchisee relationship presently
exist in a substantial number of states, and bills have been
introduced in Congress from time to time that would provide for
federal regulation of the franchisor/franchisee relationship in
certain respects. The state laws often limit, among other
things, the duration and scope of non-competition provisions,
the ability of a franchisor to terminate or refuse to renew a
franchise and the ability of a franchisor to designate sources
of supply.
We may have to make appropriate amendments to our franchise
offering circular used to comply with our disclosure obligations
under federal and state law and the laws of certain foreign
jurisdictions to reflect this offering and other relevant
information.
Company restaurant operations and our relationships with
franchisees are subject to federal and state antitrust laws.
Company restaurant operations are also subject to federal and
state laws governing such matters as wages, working conditions,
citizenship requirements and overtime. Some states have set
minimum wage requirements higher than the federal level.
In addition, we may become subject to legislation or regulation
seeking to tax and/or regulate high-fat and high-sodium foods,
particularly in the United States and the United Kingdom. For
example, a bill was recently introduced in the United States
Congress that would compel the listing of all nutritional
information on fast food menu boards and the Center for Science
in the Public Interest, a non-profit advocacy organization, has
sued the U.S. Food and Drug Administration to reduce the
permitted sodium levels in processed foods. The Attorney General
of the State of California is currently suing us and our major
competitors under Proposition 65 to force the disclosure of
warnings that carbohydrate-rich foods cooked at high
temperatures, such as french fries, contain the potentially
cancer-causing chemical acrylamide. In addition, public interest
groups have also focused attention on the marketing of these
foods to children in a stated effort to combat childhood obesity
and legislators in the United States have proposed replacing the
self-regulatory Children’s Advertising Review Board with
formal governmental regulation under the Federal Trade
Commission.
Internationally, our company and franchise restaurants are
subject to national and local laws and regulations, which are
generally similar to those affecting our U.S. restaurants,
including laws and regulations concerning franchises, labor,
health, sanitation and safety. Our international restaurants are
also subject to tariffs and regulations on imported commodities
and equipment and laws regulating foreign investment.
Tax Matters
We are in the process of being audited by the Internal Revenue
Service. The audit relates to both executive compensation and
income taxes for our 2003 and 2004 fiscal years. At this time,
we do not know when this audit will be completed or what its
impact, if any, will be.
90
Legal Proceedings
On September 5, 2002, the Council for Education and
Research on Toxics, or CERT, sued McDonald’s and us in
California, alleging that the defendants violated
Proposition 65 and the California Unfair Competition Act by
failing to warn about the presence of acrylamide, a
Proposition 65 regulated chemical, in french fries. The
case had been stayed pending the outcome of a proposed
regulatory action by California’s Office of Environmental
Health Hazard Assessment, the lead agency with primary
jurisdiction for implementing Proposition 65. The court
agreed to stay the case until the agency proposed updated
regulations for acrylamide in foods. In April 2005, the agency
proposed new regulations, including safe harbor warning language
and a format for warnings to be provided on signs at retail
grocery stores or restaurants.
In a related case, the Attorney General for California filed a
lawsuit against us and others in the food industry, seeking an
order providing for an unspecified warning to be provided to
consumers regarding the presence of acrylamides in french fries.
These cases were consolidated in January 2006. On March 31,
2006, the court lifted the stay in the consolidated cases,
allowing the matters to proceed.
In the event that there is a finding of liability in theses
cases, we would be exposed to a potential obligation for payment
of damages, plaintiff’s attorneys’ fees, penalties (in
an amount to be set by the court) and injunctive relief. It is
not possible to ascertain with any degree of confidence the
amount of our financial exposure, if any.
In February 2006 and May 2006, we received
60-day notices of
violation from residents of California under Proposition 65
asserting that beef and chicken products, in the case of the
February notice, and chicken products, in the case of the May
notice, served at Burger King restaurants in California
violate Proposition 65 because there are no warnings to
customers that the products may expose customers to chemicals
that the State of California has deemed potentially harmful and
has listed as requiring warnings to consumers. The notice is a
pre-condition to filing
a lawsuit similar to the CERT case filed against us with respect
to acrylamides in french fries. The
60-day period for the
February notice expired on April 20, 2006 and the 60-day
period for the May notice will expire on July 1, 2006,
after which time the plaintiffs may file suit against us.
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 and disputes over our
intellectual property.
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MANAGEMENT
Executive Officers and Directors
Set forth below is information concerning our executive officers
and directors. Our directors are generally elected for
one-year terms. We
expect following the offering to appoint additional directors
over time who are not our employees or otherwise affiliated with
management.
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
John W. Chidsey
|
|
|
43 |
|
|
Chief Executive Officer and Director |
Russell B. Klein
|
|
|
48 |
|
|
Chief Marketing Officer |
Ben K. Wells
|
|
|
52 |
|
|
Chief Financial Officer and Treasurer |
James F. Hyatt
|
|
|
49 |
|
|
Chief Operations Officer |
Peter C. Smith
|
|
|
49 |
|
|
Chief Human Resources Officer |
Martin Brok
|
|
|
40 |
|
|
Senior Vice President, Franchise Operations and Marketing, EMEA |
Anne Chwat
|
|
|
47 |
|
|
General Counsel and Corporate Secretary |
Steve DeSutter
|
|
|
52 |
|
|
President, EMEA |
David Gagnon
|
|
|
58 |
|
|
Senior Vice President, Company Operations |
Denny Marie Post
|
|
|
49 |
|
|
Chief Concept Officer |
Julio Ramirez
|
|
|
52 |
|
|
President, Latin America |
Clyde Rucker
|
|
|
43 |
|
|
Senior Vice President, Global Communications and External Affairs |
Peter Tan
|
|
|
50 |
|
|
President, Asia Pacific |
Amy Wagner
|
|
|
40 |
|
|
Senior Vice President, Investor Relations |
Brian Thomas Swette
|
|
|
52 |
|
|
Non-Executive Chairman of the Board |
Andrew B. Balson
|
|
|
39 |
|
|
Director |
David Bonderman
|
|
|
63 |
|
|
Director |
Richard W. Boyce
|
|
|
52 |
|
|
Director |
David A. Brandon
|
|
|
54 |
|
|
Director |
Armando Codina
|
|
|
59 |
|
|
Director |
Peter Raemin Formanek
|
|
|
62 |
|
|
Director |
Manny Garcia
|
|
|
62 |
|
|
Director |
Adrian Jones
|
|
|
41 |
|
|
Director |
Sanjeev K. Mehra
|
|
|
47 |
|
|
Director |
Stephen G. Pagliuca
|
|
|
51 |
|
|
Director |
Kneeland C. Youngblood
|
|
|
50 |
|
|
Director |
John W. Chidsey has served as our Chief Executive Officer
and a member of our board since April 2006. From September 2005
until April 2006, he was our President and Chief Financial
Officer and from June 2004 until September 2005, he was our
President of North America. Mr. Chidsey joined us as
Executive Vice President, Chief Administrative and Financial
Officer in March 2004 and held that position until June 2004.
From January 1996 to March 2003, Mr. Chidsey served in
numerous positions at Cendant Corporation, most recently as
Chief Executive Officer of the Vehicle Services Division and the
Financial Services Division.
Russell B. Klein has served as our Chief Marketing
Officer since June 2003. From August 2002 to May 2003,
Mr. Klein served as Chief Marketing Officer at
7-Eleven Inc. From
January 1999 to July 2002, Mr. Klein served as a Principal
at Whisper Capital.
Ben K. Wells has served as our Chief Financial Officer
and Treasurer since April 2006. From May 2005 to April 2006,
Mr. Wells served as our Senior Vice President, Treasurer.
From June 2002 to May
92
2005 he was a Principal and Managing Director at BK
Wells & Co., a corporate treasury advisory firm in
Houston, Texas. From June 1987 to June 2002, he was at Compaq
Computer Corporation, most recently as Vice President, Corporate
Treasurer. Before joining Compaq, Mr. Wells held various
finance and treasury responsibilities over a
10-year period at
British Petroleum.
James F. Hyatt has served as our Chief Operations Officer
since August 2005. Mr. Hyatt had previously served as
Executive Vice President, U.S. Franchise Operations from
July 2004 to August 2005 and Senior Vice President,
U.S. Franchise Operations from February 2004 to July 2004.
Mr. Hyatt joined us as Senior Vice President, Operations
Services and Programs in May 2002. From 1995 to May 2002,
Mr. Hyatt was a Burger King franchisee in Atlanta,
Georgia.
Peter C. Smith has served as our Chief Human Resources
Officer since December 2003. From September 1998 to November
2003, Mr. Smith served as Senior Vice President of Human
Resources at AutoNation.
Martin Brok has served as our Senior Vice President
Franchise Operations and Marketing, EMEA since September 2005.
From December 2004 to August 2005, Mr. Brok served as our
Senior Vice President, European Franchise Markets & the
UK. From July 2004 to December 2004, Mr. Brok served as our
Vice President, European Franchise Markets. From February 2004
to June 2004, Mr. Brok served as our Vice President,
Central Europe and Middle East. Prior to that Mr. Brok
served as our General Manager, Central and Eastern European
Franchise Markets from August 2003 to February 2004 and as
General Manager, Franchise Markets South from November 2001 to
August 2003. Prior to joining us, Mr. Brok spent
13 years at the
Coca-Cola Company, most
recently as the director of the Burger King Account
Team— Europe, Middle East and Africa, based in London.
Anne Chwat has served as our General Counsel and
Corporate Secretary since September 2004. From September 2000 to
September 2004, Ms. Chwat served in various positions at
BMG Music (now SonyBMG Music Entertainment) including as Senior
Vice President, General Counsel and Chief Ethics and Compliance
Officer.
Steve C. DeSutter has served as our President, EMEA since
November 2005. Previously Mr. DeSutter had served as our
President, EMEA and Asia Pacific from December 2004 to November
2005. From August 2004 to November 2004, Mr. DeSutter
served as our Senior Vice President, Corporate Communications.
Prior to joining us, Mr. DeSutter served as Senior Vice
President of TurnWorks, Inc. from July 2001 to June 2002. From
June 2002 to October 2002, Mr. DeSutter joined the senior
team at PricewaterhouseCoopers Consulting as Senior Vice
President, Corporate Communication and then returned to
TurnWorks, Inc. as Senior Vice President until July 2004.
Dave Gagnon has served as Senior Vice President, Company
Operations since April 2005. Since June 2004, Mr. Gagnon
has also served as President of BK Magic Holdings, LLC, a joint
venture between us and an independent third party that operates
approximately 30 of our franchise restaurants in the United
States. From November 2004 to April 2005, Mr. Gagnon served
as our Senior Vice President of North American Company
Operations. From May 2003 to November 2004, Mr. Gagnon
served as Senior Vice President, U.S. Company Operations.
Prior to joining us, Mr. Gagnon had been at Taco Bell since
1984. From December 1999 to January 2002, Mr. Gagnon served
as National Vice President, U.S. Company Operations and
from January 2002 to May 2003 Mr. Gagnon served as Head
Coach/ East.
Denny Marie Post has served as our Chief Concept Officer
since April 2004. From 1995 to March 2004, Ms. Post served
in various positions for Yum! Brands, Inc. including Chief
Innovation Officer at KFC, Chief Marketing Officer for KFC, Taco
Bell and Pizza Hut in Canada and VP Concept Innovation for KFC.
Julio Ramirez has served as our President, Latin America
since January 2002. Mr. Ramirez has worked for Burger King
Corporation for more than 20 years. During his tenure,
Mr. Ramirez has held several positions within the United
States and the Latin America region. From February 2000 to
December 2001, Mr. Ramirez served as Senior Vice President
of U.S. Franchise Operations & Development. Prior
to that, Mr. Ramirez served as President, Latin America
from 1997 until 2000.
93
Clyde Rucker has served as our Senior Vice President,
Global Communications & External Affairs since June
2005. He had previously served as Senior Vice President, Chief
Support Officer since December 2004 and Senior Vice President,
Diversity Capability and Business Development and Chief of Staff
since March 2004. From September 2003 to March 2004,
Mr. Rucker served as Senior Vice President, Diversity
Capability and Business Development. Prior to that,
Mr. Rucker was our Vice President, U.S. Franchise
Operations, Mountain and Southwest region since January 2000.
Peter Tan has served as our President, Asia Pacific since
November 2005. From 2002 to 2005, Mr. Tan served as
Corporate Senior Vice President and President of Greater China
for McDonald’s Corporation. Prior to that, from 1999 to
2003, Mr. Tan served as President, McDonald’s China
Development Company.
Amy Wagner has served as our Senior Vice President,
Investor Relations since April 2006. From February 1990 to April
2006, Ms. Wagner served in various corporate finance positions
at Ryder System, Inc., including as Vice President, Risk
Management and Insurance Operations from January 2003 to April
2006 and Group Director, Investor Relations from June 2001 to
January 2003.
Brian Thomas Swette has served on our board since April
2003 and became Non-Executive Chairman of our board in April
2006. Mr. Swette served as Chief Operating Officer of eBay
in San Jose, California from 1998 to 2002.
Andrew B. Balson has served on our board since December
2002. Mr. Balson is a Managing Director of Bain Capital
Partners, where he has worked since 1996. Mr. Balson is a
director of Domino’s Pizza, UGS and Dunkin Brands.
David Bonderman has served on our board since December
2002. Mr. Bonderman is a Founding Partner of Texas Pacific
Group and has served in that role since 1992. Mr. Bonderman
is a director of the following public companies: CoStar Group,
Inc., RyanAir Holdings, plc and Gemplus International S.A.
Richard W. Boyce has served on our board since December
2002. Mr. Boyce has been a Partner of Texas Pacific Group
based in San Francisco, California since January 1999.
Mr. Boyce is a director of ON Semiconductor, a
supplier of power management and distribution products.
David A. Brandon has served on our board since September
2003. Mr. Brandon is Chairman and CEO of Domino’s
Pizza in Ann Arbor, Michigan and has served in that role since
March 1999. From 1989 to 1998, Mr. Brandon served as
President and CEO of Valassis Communication, Inc. and he was
Chairman of Valassis from 1997 to 1998. Mr. Brandon is a
director of The TJX Companies, Domino’s Pizza and Kaydon
Corporation.
Armando Codina has served on our board since November
2005. Mr. Codina is founder and Chairman of Codina Group, a
real estate development company, established in 1979.
Mr. Codina is a director of American Airlines, General
Motors, Merrill Lynch and Bell South.
Peter Raemin Formanek has served on our board since
September 2003. Mr. Formanek has been a private investor in
Memphis, Tennessee since May 1994. Mr. Formanek is a
director of The Sports Authority and was a
co-founder of AutoZone,
Inc., a retailer of automotive parts and accessories.
Manny Garcia has served on our board since September
2003. Mr. Garcia has served as President and Chief
Executive Officer of Atlantic Coast Management, an operator of
various restaurants in the Orlando, Florida area, since 1996.
Adrian Jones has served on our board since December 2002.
Mr. Jones has been with Goldman, Sachs & Co. in
New York, New York and London, UK since 1994, and has been a
Managing Director since November 2002. Mr. Jones is a
director of Autocam Corporation and Signature Hospital Holding,
LLC.
Sanjeev K. Mehra has served on our board since December
2002. Mr. Mehra has been with Goldman, Sachs & Co.
in New York, New York since 1986, and has been a Managing
Director since 1996.
94
Mr. Mehra is a director of Nalco Company, Madison River
Telephone Company, LLC and SunGard Data Systems, Inc.
Stephen G. Pagliuca has served on our board since
December 2002. Mr. Pagliuca has served as a Managing
Director of Bain Capital Partners since 1989. Mr. Pagliuca
is a director of Gartner Group and ProSeiben.
Kneeland C. Youngblood has served on our board since
October 2004. Mr. Youngblood has served as Managing Partner
of Pharos Capital Group in Dallas, Texas since 1998.
Mr. Youngblood is a director of Starwood Hotels and Resorts.
Board Structure and Composition
Our board of directors currently has twelve non-management
members. Messrs. Balson, Bonderman, Boyce, Jones, Mehra and
Pagliuca were appointed to our board of directors by the
sponsors pursuant to a shareholders’ agreement under which
each of the sponsors currently has the right to appoint two
members of our board of directors. For more information on this
shareholders’ agreement, see “Certain Relationships
and Related Transactions—Shareholders’ Agreement”.
We will be deemed to be a “controlled company” under
the rules of the New York Stock Exchange, and we will qualify
for, and intend to rely on, the “controlled company”
exception to the board of directors and committee composition
requirements under the rules of the New York Stock Exchange.
Pursuant to this exception, we will be exempt from the rule that
requires our board of directors to be comprised of a majority of
“independent directors;” our compensation committee be
comprised solely of “independent directors;” and our
executive and corporate governance committee be comprised solely
of “independent directors” as defined under the rules
of the New York Stock Exchange. The “controlled
company” exception does not modify the independence
requirements for the audit committee, and we intend to comply
with the requirements of the Sarbanes-Oxley Act and the New York
Stock Exchange rules, which require that our audit committee be
composed of three independent directors within one year from the
date of this prospectus.
Director Compensation
Directors who are employees of the company or the sponsors
currently do not receive any fees for their services as
directors. The other directors currently receive an annual
retainer of $50,000 for service on our board payable at their
option either 100% in cash or 100% in stock options. They also
receive $1,000 for each board meeting attended. Effective
July 1, 2006, we intend to amend our existing director
compensation program and to offer the following director
compensation. The Non-Executive Chairman of our board will
receive an annual retainer of $80,000 and the other
non-management directors, including those directors who are
employed by the sponsors, will receive an annual retainer of
$50,000. The annual retainers will be payable at the
directors’ option either 100% in cash or 100% in shares of
our common stock. In addition, our Non-Executive Chairman will
be granted on an annual basis shares of our common stock having
a fair market value on the grant date of $120,000 and each other
non-management member of our board will receive a share award
with a grant date fair market value of $85,000. The
non-management chair of the audit committee will receive an
additional $20,000 fee and each other non-management committee
chair will receive an additional $10,000 fee, payable at his or
her option either 100% in cash or 100% in shares of our common
stock. All shares awarded to the non-management directors will
be settled upon termination of board service. No separate
committee meeting fees will be paid.
All directors are reimbursed for reasonable travel and lodging
expenses incurred by them in connection with attending board and
committee meetings.
95
Board Committees
Our board of directors has established an audit committee, a
compensation committee and an executive and corporate governance
committee. The members of each committee are appointed by our
board of directors and serve one-year terms.
Our audit committee selects the independent auditors to be
submitted for approval by the stockholders and reviews the
independence of such auditors, approves the audit fee payable to
the independent auditors and reviews audit results with the
independent auditors. The audit committee is currently composed
of Messrs. Boyce, Garcia and Formanek (chair).
Messrs. Formanek and Garcia are independent directors
within the requirements of the Sarbanes-Oxley Act and the New
York Stock Exchange rules. We expect to replace Mr. Boyce
with a director who is independent under the Sarbanes-Oxley Act
and the New York Stock Exchange rules, within the time period
specified in the New York Stock Exchange’s transition rules
applicable to companies completing an initial public offering.
KPMG LLP currently serves as our independent registered public
accounting firm.
Our compensation committee oversees our compensation and
benefits policies, oversees and sets the compensation and
benefits arrangements of our Chief Executive Officer and certain
other executive officers, provides a general review of, and
makes recommendations to our board of directors and/or to the
Company’s shareholders with respect to our equity-based
compensation plans; reviews and approves all of our equity-based
compensation plans that are not otherwise subject to the
approval of our shareholders; implements, administers, operates
and interprets all equity-based and similar compensation plans
to the extent provided under the terms of such plans, including
the power to amend such plans; and reviews and approves awards
of shares or options to officers and employees pursuant to our
equity-based plans. The compensation committee is currently
composed of Messrs. Boyce, Mehra and Pagliuca (chair).
|
|
|
Executive and Corporate Governance Committee |
Our executive and corporate governance committee acts for our
board of directors with respect to any matters delegated to it
by our board. Our board has delegated to this committee the
authority to identify and recommend potential candidates
qualified to become board members and recommend directors for
appointment to board committees. It also exercises general
oversight with respect to the governance and performance of our
board, as well as corporate governance matters applicable to us
and our employees and directors. This committee also has
authority to take actions on behalf of the company (except if
prohibited by applicable law or regulation) if the amounts
associated with such actions do not individually exceed
$25 million. The executive and corporate governance
committee is currently composed of Messrs. Boyce, Pagliuca,
Chidsey and Mehra (chair).
96
The following table sets forth information regarding the
compensation paid to John W. Chidsey, our Chief Executive
Officer, Gregory D. Brenneman, our former Chairman of the
Board and Chief Executive Officer, Bradley Blum, our former
Chief Executive Officer, and our three other most highly
compensated executive officers (measured by base salary and
annual bonus) during the fiscal year ended June 30, 2005,
collectively referred to as our “named executive
officers” in this prospectus.
Summary Compensation Table
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Long Term Compensation | |
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Annual | |
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| |
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Compensation | |
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Securities | |
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| |
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Other Annual | |
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Restricted | |
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Underlying | |
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All Other | |
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|
Salary | |
|
Bonus | |
|
Compensation | |
|
Stock Awards | |
|
Options/ | |
|
Compensation | |
Name and Principal Position |
|
($) | |
|
($)(4) | |
|
($)(6) | |
|
($)(7) | |
|
SARs (#) | |
|
($)(8) | |
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| |
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| |
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| |
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| |
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| |
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| |
John W. Chidsey
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744,231 |
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1,625,000 |
|
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55,827 |
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— |
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236,746 |
|
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193,162 |
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Chief Executive
Officer(1) |
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|
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|
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Russell B. Klein
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400,000 |
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309,164 |
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74,874 |
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307,800 |
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— |
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77,603 |
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Chief Marketing Officer |
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James F. Hyatt
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400,000 |
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588,000 |
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4,008 |
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— |
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131,730 |
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49,618 |
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Chief Operations Officer |
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Peter C. Smith
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400,000 |
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294,240 |
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5,751 |
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293,760 |
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52,692 |
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50,127 |
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Chief Human Resources Officer |
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Gregory D. Brenneman
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900,000 |
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2,250,000 |
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187,207 |
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— |
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3,025,742 |
(2) |
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569,384 |
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Former Chairman of the Board and Chief Executive
Officer(2) |
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Bradley Blum
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188,462 |
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166,667 |
(5) |
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25,213 |
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— |
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— |
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880,512 |
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Former Chief Executive Officer
(3) |
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(1) |
Mr. Chidsey had served as our President and Chief Financial
Officer until April 7, 2006, when he became our Chief
Executive Officer. |
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(2) |
Mr. Brenneman served as our Chairman of the Board and Chief
Executive Officer until April 7, 2006. Mr. Brenneman
forfeited 1,815,508 of his 3,025,742 options upon his separation
from employment. |
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(3) |
Mr. Blum had served as our Chief Executive Officer. His
employment terminated September 1, 2004. |
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(4) |
Bonuses include amounts paid under our Restaurant Support
Incentive Plan and other individual bonuses. We generally pay
bonuses in the year following the year in which they were
earned. Fiscal year 2005 bonus payments were made on
September 1, 2005. The bonuses for Messrs. Klein and
Smith do not include their partial deferrals into restricted
stock units (see footnote (7) below). |
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(5) |
Mr. Blum received a pro-rated bonus for the year of
termination in accordance with the terms of his separation
agreement. |
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(6) |
This column includes: (a) the dollar value of interest
earned on compensation deferred under our Executive Retirement
Plan and/or our Investment Deferred Compensation Plan in excess
of 120% of the long-term applicable federal rate
(Mr. Chidsey, $5,987; Mr. Klein, $4,774;
Mr. Hyatt, $1,247; Mr. Smith, $5,258;
Mr. Brenneman, $6,437; and Mr. Blum, $841);
(b) amounts on account of personal use of company-leased
aircraft (calculated using the actual invoice cost associated
with such airplane use) (Mr. Klein, $30,876 and
Mr. Brenneman, $84,522), (c) car allowance amounts
(Mr. Klein, $20,040), (d) tax
gross-up payments
(Mr. Chidsey, $49,841; Mr. Klein, $17,083;
Mr. Hyatt, $2,761; Mr. Smith, $493;
Mr. Brenneman, $77,290; and Mr. Blum, $24,372) and
(e) amounts with respect to other personal benefits. Each
of Messrs. Chidsey, Hyatt, Smith and Blum received personal
benefits having an aggregate value of less than the minimum
amount required for disclosure under the rules of the Securities
Exchange Commission. Amounts on account of personal airplane use
are primarily related to company-mandated hurricane evacuation
as well as spousal travel in connection with business functions.
Messrs. Chidsey’s and Brenneman’s tax
gross-up payments are
primarily related to their relocation expenses (see
footnote (8) below). |
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(7) |
Each of Messrs. Klein and Smith elected to receive one-half
of his 2005 fiscal year bonus in the form of restricted stock
units (which were granted after the end of our fiscal year at
the same time as the bonus amounts were paid to our named
executive officers). Mr. Klein was granted restricted stock
units with respect to 30,035 shares of our common stock on
September 1, 2005 and Mr. Smith was granted restricted
stock units with respect to 28,665 shares of our common
stock on September 1, 2005. The restricted stock units vest
one-half on each anniversary of the grant date. The fair market
value of a share of our common stock on the date of grant was
$10.25. |
|
97
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The aggregate number of shares and value with respect to
restricted stock unit holdings of our named executive officers
on June 30, 2005 (including restricted stock units granted
after our fiscal year 2005 but with respect to fiscal year 2005)
were: Mr. Chidsey, 105,384 shares ($1,080,000);
Mr. Klein, 54,115 shares ($554,580); and
Mr. Smith, 70,924 shares ($726,840). The fair market
value of a share of our common stock for purposes of determining
these values was $10.25. |
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(8) |
This column includes: (a) company match and profit sharing
contributions to our Executive Retirement Plan
(Mr. Chidsey, $89,654; Mr. Klein, $48,000;
Mr. Hyatt, $48,000; Mr. Smith, $48,000; and
Mr. Brenneman, $114,000) (b) the value of executive
life insurance benefits (Mr. Chidsey, $1,438;
Mr. Klein, $1,903; Mr. Hyatt, $1,618; Mr. Smith,
$2,127; Mr. Brenneman, $1,450; and Mr. Blum, $878);
(c) reimbursement of premiums for medical insurance
coverage under a prior employer’s health plan in lieu of
participation in the company’s plan (Mr. Brenneman,
$5,670); (d) reimbursement of tuition fees (Mr. Klein,
$27,700; and Mr. Brenneman, $28,750); (e) relocation
expense amounts (Mr. Chidsey, $102,070; Mr. Brenneman,
$419,514; and Mr. Blum, $66,331) and (f) severance
amounts paid to Mr. Blum in connection with his termination
of employment under the terms of the separation agreement we
entered into with him ($811,538) and other termination payments
($1,765). |
Stock Option/ SAR Grants in Last Fiscal Year
The following table sets forth information concerning grants of
stock options made to our named executive officers during our
fiscal year ended June 30, 2005. No stock appreciation
rights were granted to our named executive officers during our
most recent fiscal year.
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Individual Grant | |
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Number of | |
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Potential Realizable Value | |
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|
Securities | |
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Percent of Total | |
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|
at Assumed Annual Rates | |
|
|
Underlying | |
|
Options/SARs | |
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|
|
of Stock Price Appreciation | |
|
|
Options/SARs | |
|
Granted to | |
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|
|
for Option Term(3) | |
|
|
Granted | |
|
Employees in | |
|
Exercise or Base | |
|
Expiration | |
|
| |
Name |
|
(#)(1) | |
|
Fiscal Year | |
|
Price ($/Sh) | |
|
Date | |
|
5% ($) | |
|
10% ($) | |
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|
| |
|
| |
|
| |
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| |
|
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|
| |
John W. Chidsey
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236,746 |
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4.67 |
% |
|
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3.80 |
|
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08/01/2014 |
|
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565,125 |
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1,432,137 |
|
Russell B. Klein
|
|
|
— |
|
|
|
— |
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|
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— |
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|
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— |
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|
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— |
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— |
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James F. Hyatt
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79,038 |
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1.56 |
% |
|
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3.80 |
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08/01/2014 |
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188,668 |
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478,123 |
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52,692 |
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1.04 |
% |
|
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3.80 |
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01/01/2015 |
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125,779 |
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318,748 |
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Peter C. Smith
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52,692 |
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1.04 |
% |
|
|
3.80 |
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08/01/2014 |
|
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125,779 |
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|
318,748 |
|
Gregory D. Brenneman
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|
|
658,178 |
(2) |
|
|
12.98 |
% |
|
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7.59 |
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|
|
08/01/2014 |
|
|
|
— |
|
|
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1,483,287 |
|
|
|
|
2,367,564 |
(2) |
|
|
46.71 |
% |
|
|
3.80 |
|
|
|
08/01/2014 |
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5,651,499 |
|
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|
14,322,007 |
|
Bradley Blum
|
|
|
— |
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|
|
— |
|
|
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— |
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|
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— |
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|
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— |
|
|
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— |
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(1) |
Options to purchase shares of our common stock were granted by
our board under the Burger King Holdings Equity Incentive Plan.
Except for an option grant to Mr. Hyatt on January 1,
2005, all options granted to our named executive officers were
granted on August 1, 2004. Options granted vest
20% per year on each anniversary of grant date and expire
ten years from the grant date. The exercise price of each of the
options granted was equal to the fair market value of a share of
our common stock on the grant date ($3.80), except that
Mr. Brenneman also was granted an option to purchase shares
with an exercise price greater than the fair market value of a
share of our common stock on the grant date. See footnote
(2) below. |
|
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(2) |
Options were granted to Mr. Brenneman in August 2004 in
connection with his commencement of employment as our Chief
Executive Officer. The option to
purchase 658,178 shares was granted at an exercise
price that was greater than the fair market value of a share of
our common stock on the date of grant. Mr. Brenneman
forfeited 1,815,508 of his options upon his separation from
employment. |
|
|
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(3) |
The potential realizable values represent hypothetical gains
that could be achieved for the respective options if exercised
at the end of the option term. The potential gains shown are net
of option exercise price and do not include deductions for taxes
associated with the exercise. These gains are based on assumed
rates of stock appreciation of 5% and 10% compounded annually
from the date the respective options were granted (using the
fair market value of $3.80 per share of our common stock on
the date of grant) to their expiration date. Actual gains, if
any, will depend upon the future market prices of our common
stock. The 5% and 10% annual rates of appreciation are mandated
by the rules of the Securities and Exchange Commission and are
not intended to forecast future appreciation, if any, of our
common stock. |
|
98
Aggregated Option and SAR Exercises in Last Fiscal Year and
Fiscal Year End Option Values
The following table sets forth information concerning option
exercises by our named executive officers during our most recent
fiscal year ended June 30, 2005.
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|
Number of Securities | |
|
Value of Unexercised | |
|
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|
|
|
|
Underlying Unexercised | |
|
In-the-Money | |
|
|
|
|
|
|
Options/SARs | |
|
Options/SARs | |
|
|
Shares Acquired | |
|
Value | |
|
At Fiscal Year End (#) | |
|
At Fiscal Year End ($)(1) | |
|
|
on Exercise | |
|
Realized | |
|
| |
|
| |
Name |
|
(#) | |
|
($) | |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
John W. Chidsey
|
|
|
— |
|
|
|
— |
|
|
|
217,803 |
|
|
|
1,107,958 |
|
|
$ |
909,160 |
|
|
$ |
5,164,260 |
|
Russell B. Klein
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|
|
— |
|
|
|
— |
|
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|
59,200 |
|
|
|
305,246 |
|
|
|
381,922 |
|
|
|
1,969,688 |
|
James F. Hyatt
|
|
|
— |
|
|
|
— |
|
|
|
26,346 |
|
|
|
237,115 |
|
|
|
170,000 |
|
|
|
1,530,000 |
|
Peter C. Smith
|
|
|
— |
|
|
|
— |
|
|
|
47,344 |
|
|
|
242,094 |
|
|
|
305,524 |
|
|
|
1,562,096 |
|
Gregory D.
Brenneman(2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,025,742 |
|
|
|
— |
|
|
|
17,025,620 |
|
Bradley Blum
|
|
|
— |
|
|
|
— |
|
|
|
816,755 |
|
|
|
— |
|
|
|
4,124,370 |
|
|
|
— |
|
|
|
|
(1) |
Values are based on the fair market value of a share of our
common stock of $10.25 on June 30, 2005. |
|
|
|
(2) |
Mr. Brenneman forfeited 1,815,508 of these options upon his
separation from employment. |
|
Agreements with Our Named Executive Officers
|
|
|
Employment Agreement with Mr. Chidsey |
On April 7, 2006, we entered into an employment agreement
with Mr. John Chidsey, our Chief Executive Officer. The
term of the agreement ends on April 6, 2009. At the end of
the term, the agreement automatically extends for additional
three-year periods, unless either party gives notice of
non-renewal to the other at least six months prior to the
expiration of the relevant period. Mr. Chidsey receives an
annual base salary of $1 million and is eligible to receive
a performance-based annual cash bonus with a target payment
equal to 100% of his annual base salary if we achieve the target
performance goals set by our compensation committee for a
particular fiscal year. If we exceed the targets set for a
particular fiscal year, Mr. Chidsey is able to earn a cash
bonus of up to 200% of his annual base salary and if we achieve
at least the threshold performance targets, he will be entitled
to a bonus equal to 50% of his annual base salary. In fiscal
2006, the amount of the annual cash bonus will be determined in
accordance with the RSIP (as defined below), and for periods
after this, performance-based cash bonus awards for
Mr. Chidsey will be determined in accordance with the
Omnibus Plan (as defined below). Mr. Chidsey may elect to
receive up to 50% of his annual bonus in such non-cash form as
our compensation committee makes available to members of our
senior management team. Mr. Chidsey is also entitled to
receive an annual perquisite allowance of $50,000 and is
entitled to private charter jet usage for business travel (and
up to $100,000 per year for personal use).
On an annual basis, Mr. Chidsey is entitled to receive a
target annual performance-based restricted stock and stock
option grant with a grant date value equal to 400% of his base
salary. The actual value of the grants may be greater or less
than the target amount and will depend on the company’s
performance, as determined by our compensation committee. In
connection with his promotion to Chief Executive Officer, we
also agreed to grant Mr. Chidsey an award of 210,769
restricted shares or restricted stock units. This grant will be
made on the effective date of this offering at the public
offering price and will vest in five equal installments on each
anniversary of the grant date.
If we terminate Mr. Chidsey’s employment without cause
or he terminates his employment with good reason or due to his
death or disability (as such terms are defined in the
agreement), he will be entitled to receive an amount equal to
two times his annual base salary and target annual bonus (or
three times, if his termination occurs after a change in
control). He will also be entitled to continued coverage under
our medical, dental and life insurance plans for him and his
eligible dependents and payment of his perquisite allowance,
each during the two-year period following termination (or
three-year period, if his termination
99
occurs after a change in control). If Mr. Chidsey’s
employment is terminated due to his death or disability or
during the 24-month
period after a change in control of the company either without
cause or for good reason, all options and other equity awards
held by Mr. Chidsey will vest in full and he will have one
year to exercise such awards. Among other events, a resignation
for any reason within the
30-day period
immediately following the one-year anniversary of a change in
control involving a strategic buyer (as determined by our board)
constitutes a termination by us without cause under the
employment agreement. If any payments due to Mr. Chidsey in
connection with a change in control would be subject to an
excise tax, we will provide Mr. Chidsey with a related tax
gross-up payment,
unless a reduction in Mr. Chidsey’s payments by up to
10% would avoid the excise tax.
|
|
|
Employment Agreements with Messrs. Klein, Wells, Hyatt
and Smith |
We have entered into employment agreements with each of
Mr. Russell B. Klein, our Chief Marketing Officer,
Mr. Ben K. Wells, our Chief Financial Officer and
Treasurer, Mr. James F. Hyatt, our Chief Operations Officer
and Mr. Peter C. Smith, our Chief Human Resources Officer.
The term of each of the agreements ends on June 30, 2007.
At the end of the term, each executive’s employment will be
automatically extended for additional one-year periods, unless
we have given a notice of non-renewal to the executive at least
ninety days prior to the expiration of the relevant period. The
agreements provide for an annual base salary of $450,000 for
Mr. Klein, $425,000 for Mr. Wells, $412,000 for
Mr. Hyatt and $412,000 for Mr. Smith. Each executive
is eligible to receive a performance-based annual cash bonus
with a target payment equal to 70% of his annual base salary if
we achieve the target performance goals set by our compensation
committee for a particular fiscal year; provided that if we
exceed the targets set for a particular fiscal year, the
executive is able to earn a cash bonus of up to 140% of his
annual base salary. See “Annual Bonus Plan—Burger King
Corporation Fiscal Year 2006 Executive Team Restaurant Support
Incentive Plan.” In fiscal 2006, the amount of the annual
cash bonus for each executive will be determined in accordance
with the RSIP, and for periods after this, performance based
cash bonus awards will be determined in accordance with the
Omnibus Plan. Each executive may elect to receive up to 50% of
his annual bonus in the form of restricted stock units or in any
other form that our compensation committee makes available to
members of our senior management team. Each executive also is
entitled to receive an annual perquisite allowance of $35,000
and is eligible to participate in our long-term equity programs,
which starting in fiscal year 2007 will be the Omnibus Plan.
If we terminate the executive’s employment without cause or
he terminates his employment with good reason (as defined in the
relevant agreement), he will be entitled to receive his then
current base salary and his perquisite allowance for one year, a
pro-rata bonus for the year of termination and continued
coverage for one year under our medical, dental and life
insurance plans for him and his eligible dependents. If the
executive’s employment is terminated at any time within
twenty-four months after a change in control of the company
either without cause or for good reason, all options held by the
executive will become fully vested upon termination and he will
have 90 days to exercise such options.
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Non-Competition and Confidentiality |
Each of our named executive officers listed above has agreed not
to compete with us and not to solicit our employees or
franchisees during the term of his employment and for one year
after a termination of his employment. If the executive breaches
any of these covenants, we will cease paying any severance due
to him and he will be obligated to repay any severance amounts
paid to him. The agreements also require each executive to
maintain the confidentiality of our information.
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Separation and Consulting Services Agreement with
Mr. Brenneman |
Mr. Gregory D. Brenneman served as our chief executive
officer from August 1, 2004 until April 7, 2006 and
was also our chairman of the board. In connection with his
separation, we entered into a separation and consulting services
agreement with him. This agreement provides that
Mr. Brenneman will continue to provide certain consulting
services to us through June 30, 2006 (or such earlier date
as either party may choose) in exchange for continued payment of
his base salary at the time of separation until
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such date. In addition, in connection with his separation, he
will receive the following benefits: (a) continued payment
of his base salary at the time of separation of
$1.03 million for three years from the end of the
consulting period (the unpaid amounts of which will be paid in
full on April 2, 2007 if consistent with Section 409A
of the Code), (b) an annual bonus payment of
$2.06 million for fiscal year 2006 (which will be paid to
him at the same time as bonuses are paid to our active
employees), (c) continued coverage under our medical and
dental plans until April 30, 2007 (or, if earlier, until he
receives such benefits from a subsequent employer), (d) a
relocation benefit in accordance with company policy if
Mr. Brenneman relocates his home outside of the Miami,
Florida area within 18 months after separation and
(e) accelerated vesting of 605,117 stock options that
would have vested on August 1, 2006, with all vested
options to be exercised on or before April 6, 2007. His
remaining unvested options to
purchase 1,815,508 shares were cancelled on
April 7, 2006. Mr. Brenneman remains bound by the
shareholders agreement he entered into with us, and we have
agreed not to exercise our repurchase rights with respect to any
shares he owns or may acquire as a result of option exercises.
In addition, Mr. Brenneman remains subject to one-year
post-separation non-competition and non-solicitation covenants
as well as the other restrictive covenants contained in the
employment agreement that governed his employment with us.
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Separation Agreement with Mr. Bradley Blum |
Mr. Bradley Blum served as our chief executive officer from
January 6, 2003 until June 21, 2004. In connection
with his separation, we entered into a separation agreement with
him. The agreement provided that Mr. Blum was entitled to
retain his commencement bonus of $2.673 million, receive
continued payments of base salary for one year from the date of
termination and continued coverage for one year from the date of
termination under our medical and dental insurance plans for him
and his eligible dependents. In consideration of providing
certain transition services from June 21, 2004 through
September 1, 2004, we agreed to (a) continue monthly
payments of Mr. Blum’s base salary during the
transition period; (b) pay him his annual bonus for our
2004 fiscal year ending June 30, 2004 and a pro rata bonus
for the 2005 fiscal year; (c) accelerate the vesting of 30%
of his options; (d) provide Mr. Blum until
March 1, 2006 to exercise his vested options (in lieu of
the customary 90 day post-termination exercise period
following terminations without cause); and (e) not exercise
our right to repurchase 256,874 shares of stock purchased
by Mr. Blum on August 21, 2003.
Equity Incentive Plans
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Burger King Holdings, Inc. Equity Incentive Plan |
The following is a description of the material terms of the
Burger King Holdings, Inc. Equity Incentive Plan, which we refer
to as the “Plan”. This summary is not a complete
description of all provisions of the Plan and is qualified in
its entirety by reference to the Plan, which is filed as an
exhibit to the registration statement of which this prospectus
is a part.
Purpose. The purpose of the Plan is to motivate Plan
participants to perform to the best of their abilities and to
align their interests with the interests of our shareholders by
giving participants an ownership interest in our common stock.
Plan Administration. The Plan is administered by the
compensation committee of our board (referred to as the
“compensation committee”). The compensation committee
has the authority, among other things, to select eligible
individuals to participate in the Plan, to determine the terms
and conditions of awards granted under the Plan and to make all
determinations necessary for the administration of the Plan.
Authorized Shares. Subject to certain adjustments, the
maximum number of shares of common stock that may be delivered
pursuant to awards under the Plan is 13,684,417. Shares of
common stock to be issued under the Plan may be authorized but
unissued shares of common stock or shares held in treasury. Any
shares of common stock covered by an award that terminates,
lapses or is otherwise cancelled will again be available for
issuance under the Plan.
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Eligibility. Our officers, designated employees and
consultants as well as independent members of our board are
eligible to participate in the Plan.
Types of Awards. The compensation committee may grant the
following types of awards under the Plan: investment rights,
stock options and restricted stock units. The exercise price of
an option may not be less than the fair market value of a share
of common stock on the date of grant and each option will have a
ten-year term, unless otherwise determined by the compensation
committee.
An investment right is a one-time opportunity granted to members
of our executive team, other senior executives and independent
board members to purchase shares of our common stock on or soon
after the grant of the right at a price per share equal to the
fair market value of our common stock on the date of grant of
the investment right. Investment rights were granted to certain
of our officers at the time we adopted the plan and, after this
date, to newly hired executive team employees and newly
appointed members of our board.
A restricted stock unit consists of a contractual right
denominated in shares of our common stock which represents the
right to receive a share of our common stock at a future date,
subject to certain vesting and other conditions.
Vesting; Settlement. The compensation committee has the
authority to determine the vesting schedule applicable to each
award. Unless otherwise set forth in an award agreement, options
granted to employees vest in equal installments on each of the
first five anniversaries of the grant date and options granted
to members of our board at the election of a director in lieu of
receiving a portion of his or her annual cash retainer vest 25%
each quarter after the grant date. Restricted stock units
granted in respect of our 2005 fiscal year or earlier at the
election of an employee in lieu of receiving a portion of his or
her annual bonus vest in two equal installments on each of the
first two anniversaries of the grant date. Vested restricted
stock units will be paid out upon the earlier of a termination
of employment or December 31, 2007.
Termination of Employment. Unless otherwise determined by
the compensation committee and provided in an applicable option
agreement, upon a termination of employment or service, all
unvested options will terminate. A participant will have ninety
days to exercise vested options upon a termination without cause
or upon his or her resignation and one year upon a termination
due to his or her death, disability or retirement (or, if
shorter, the remaining term of the option). If a
participant’s service is terminated for cause, all options,
whether or not vested, will terminate.
Unless otherwise determined by the compensation committee and
provided in an applicable restricted stock unit agreement,
restricted stock units granted at the election of an employee in
lieu of receiving a portion of his or her annual bonus will
become fully vested upon a termination without cause or due to
death, disability or retirement.
Change in Control. If there is a change of control (as
defined in the Plan) and, within twenty-four months following
the change of control, a participant’s employment is
terminated without cause, all unvested options will vest upon
termination.
In the event of a change of control, the compensation committee
may (1) accelerate the vesting of unvested options and
restricted stock units, (2) direct that options and
restricted stock units be assumed by the acquiror in the change
of control transaction or converted into new awards with
substantially the same terms or (3) cancel awards in
exchange for a payment, which may be in cash or equity
securities.
Repurchase Rights. If a participant’s employment or
service with us is terminated prior to the completion of this
offering, we will have the ability to repurchase any shares held
by such participant.
Transferability. Awards granted under the Plan may not be
sold, pledged or otherwise transferred, other than following the
death of a participant by will or the laws of descent. A
participant’s beneficiary or estate may exercise vested
options (but not investment rights) during the applicable
exercise period following the death of the participant, subject
to the same conditions that would have applied to exercise by
the participant.
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Lock-Ups. Except as otherwise provided in an applicable
award agreement, no participant may transfer shares of our
common stock during the twenty days prior to, and the
180 days following (or such other period as the
underwriters may determine), the effective date of the
registration statement of which this prospectus is a part.
Adjustment. The compensation committee has the authority
to adjust the number of shares covered by outstanding awards,
the applicable exercise or purchase price of an existing award
and the number of shares of common stock issuable under the Plan
as a result of any change in the number of shares resulting from
a reorganization, merger, consolidation, stock split, reverse
stock split or other similar transaction.
Amendment and Termination. The compensation committee may
amend or terminate the plan or any award agreement entered into
under the Plan, except that no amendment shall increase the
number of shares available for grant under the plan without the
approval of our stockholders and no amendment may adversely
affect the rights of a participant without a participant’s
consent.
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Burger King Holdings, Inc. 2006 Omnibus Incentive
Plan |
Our board of directors and stockholders have approved and
adopted the Burger King Holdings, Inc. 2006 Omnibus Incentive
Plan (the “Omnibus Plan”). The Omnibus Plan will
replace our annual bonus plan described below. The following
summary describes the material terms of the Omnibus Plan. This
summary is not a complete description of all provisions of the
Omnibus Plan and is qualified in its entirety by reference to
the Omnibus Plan, which is filed as an exhibit to the
registration statement of which this prospectus is a part.
Authorized Shares. Subject to adjustment, up to
7,113,442 shares of our common stock will be available for
awards to be granted under the Omnibus Plan. No participant in
the Omnibus Plan may receive stock options and stock
appreciation rights in any fiscal year that relate to more than
1,053,843 shares of our common stock. Shares of common
stock to be issued under the Omnibus Plan may be made available
from authorized but unissued common stock or common stock that
we acquire.
If any shares of our common stock covered by an award (other
than a substitute award as defined below) terminate or are
forfeited, then the shares of our common stock covered by such
award will again be available for issuance under the Omnibus
Plan. Shares of our common stock underlying substitute awards
shall not reduce the number of shares of our common stock
available for delivery under the Omnibus Plan. A
“substitute award” is any award granted in assumption
of, or in substitution for, an outstanding award previously
granted by a company acquired by us or with which we combine.
Administration. The compensation committee will
administer the Omnibus Plan and will have authority to select
individuals to whom awards are granted, determine the types of
awards and number of shares covered, and determine the terms and
conditions of awards, including the applicable vesting schedule
and whether the award will be settled in cash, shares or a
combination of the two. The compensation committee may delegate
to one or more of our officers the authority to grant awards to
participants who are not our directors or executive officers.
Types of Awards. The Omnibus Plan provides for grants of
incentive stock options,
non-qualified stock
options, stock appreciation rights, restricted stock, deferred
shares, performance awards, including cash bonus awards, and
other stock-based awards.
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Stock options: The exercise price of an option (other than a
substitute award) may not be less than the fair market value of
a share of our common stock on the date of grant and each option
will have a term to be determined by the compensation committee
(not to exceed ten years). Stock options will be
exercisable at such time or times as determined by the
compensation committee. |
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Stock appreciation rights. A stock appreciation right (SAR) may
be granted free-standing or in tandem with another award under
the plan. Upon exercise of a SAR, the holder of that SAR is
entitled to receive the excess of the fair market value of the
shares for which the right is exercised |
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over the exercise price of the SAR. The exercise price of a SAR
(other than a substitute award) will not be less than the fair
market value of a share of our common stock on the date of grant. |
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Restricted stock/restricted stock units: Shares of restricted
stock are shares of common stock subject to restrictions on
transfer and a substantial risk of forfeiture. A restricted
stock unit consists of a contractual right denominated in shares
of our common stock which represents the right to receive the
value of a share of common stock at a future date, subject to
certain vesting and other restrictions. Awards of restricted
stock and restricted stock units will be subject to restrictions
and such other terms and conditions as the compensation
committee may determine, which restrictions and such other terms
and conditions may lapse separately or in combination at such
time or times, in such installments or otherwise, as the
compensation committee may deem appropriate. |
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Deferred shares. An award of deferred shares entitles the
participant to receive shares of our common stock upon the
expiration of a specified deferral period. In addition, deferred
shares may be subject to restrictions on transferability,
forfeiture and other restrictions as determined by the
compensation committee. |
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Other awards: The compensation committee is authorized to grant
other stock-based awards, either alone or in addition to other
awards granted under the Omnibus Plan. Other awards may be
settled in shares, cash, awards granted under the plan or any
other form of property as the compensation committee determines. |
Eligibility. Our employees, directors, consultants and
other advisors or service providers to the company will be
eligible to participate in the Omnibus Plan.
Adjustments. The compensation committee has the authority
to adjust the terms of any outstanding awards and the number of
shares of common stock issuable under the Omnibus Plan for any
change in shares of our common stock resulting from a stock
split, reverse stock split, stock dividend, spin-off,
combination or reclassification of the common stock, or any
other event that the compensation committee determines affects
our capitalization if it determines that an adjustment is
appropriate in order to prevent enlargement or dilution of the
benefits or potential benefits intended to be made available
under the plan.
Performance Awards. The Omnibus Plan will provide that
grants of performance awards, including cash-denominated awards,
and (when determined by the compensation committee) options,
deferred shares, restricted stock or other stock-based awards,
will be made based upon, and subject to achieving,
“performance objectives.” Performance objectives with
respect to those awards that are intended to qualify as
“performance-based compensation” for purposes of
Section 162(m) of the Internal Revenue Code are limited to
specified levels of or increases in our or one of our
subsidiaries’ return on equity, diluted earnings per share,
total earnings, earnings growth, return on capital, return on
assets, return on equity, earnings before interest and taxes,
EBITDA, EBITDA minus capital expenditures, sales or sales
growth, customer growth, traffic, revenue or revenue growth,
gross margin return on investment, increase in the fair market
value of common stock, share price (including but not limited
to, growth measures and total stockholder return), operating
profit, net earnings, cash flow (including, but not limited to,
operating cash flow and free cash flow), cash flow return on
investment (which equals net cash flow divided by total
capital), inventory turns, financial return ratios, total return
to stockholders, market share, earnings measures/ratios,
economic value added (EVA), balance sheet measurements such as
receivable turnover, internal rate of return, increase in net
present value, or expense targets, customer satisfaction surveys
and productivity.
Performance criteria may be measured on an absolute
(e.g., plan or budget) or relative basis. Relative
performance may be measured against a group of peer companies, a
financial market index or other acceptable objective and
quantifiable indices. Except in the case of an award intended to
qualify as “performance-based compensation” under
Section 162(m) of the Internal Revenue Code, if the
compensation committee determines that a change in our business,
operations, corporate structure or capital structure, or the
manner in which we conduct our business, or other events or
circumstances render the performance objectives unsuitable, the
compensation committee may modify the performance
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objectives or the related minimum acceptable level of
achievement, in whole or in part, as the compensation committee
deems appropriate and equitable. The maximum number of shares of
our common stock subject to a performance award in any fiscal
year is 1,053,843 shares and the maximum amount that can be
earned in respect of a performance award denominated in cash or
value other than shares on an annualized basis is
$10 million.
Termination of Service. The compensation committee will
determine the effect of a termination of employment or service
on awards granted under the plan.
Change in Control. Upon the occurrence of a change in
control (as defined in the Omnibus Plan), the compensation
committee will determine whether outstanding options will become
fully exercisable and whether outstanding awards (other than
options) will become fully vested or payable. The compensation
committee will determine the treatment of outstanding awards in
connection with any transaction or transactions resulting in a
change in control.
Duration of the Omnibus Plan. The Omnibus Plan is
effective on May 1, 2006. No award may be granted under the
plan after April 19, 2016. However, unless otherwise
expressly provided in the Omnibus Plan or in an applicable award
agreement, any award granted prior to this date may extend
beyond such date, and the authority of the compensation
committee to administer the plan and to amend, suspend or
terminate any such award, or to waive any conditions or rights
under any such award, and the authority of our board to amend
the plan, will extend beyond such date.
Amendment, Modification and Termination. Except as
otherwise provided in an award agreement, our board may from
time to time suspend, discontinue, revise or amend the Omnibus
Plan and the compensation committee may amend the terms of any
award in any respect, provided that no such action will
adversely impair or affect the rights of a holder of an
outstanding award under the plan without the holder’s
consent, and no such action will be taken without shareholder
approval, if required by the rules of the stock exchange on
which our shares are traded.
Annual Bonus Plan
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Burger King Corporation Fiscal Year 2006 Executive Team
Restaurant Support Incentive Plan |
We have established the Burger King Corporation Fiscal Year 2006
Executive Team Restaurant Support Incentive Plan (the
“RSIP”) for certain of our executive officers,
including the named executive officers, with respect to the
fiscal year ended June 30, 2006. For periods after this,
performance-based cash bonus awards for our executive team will
be granted under the Omnibus Plan.
For the fiscal year ended June 30, 2006, the incentive
payout for each executive under the RSIP will be determined by
reference to several factors and expressed as a percentage of
the executive’s annual base salary. The overall business
performance factor measures performance against an EBITDA target
set for the fiscal year. EBITDA is measured on a worldwide basis
and on the basis of the scope of the executives’ role
within the company. Each business performance factor has a
minimum “threshold” performance level, at which a 50%
payout is earned; a “target” performance level, at
which a 100% payout is earned; and a “maximum”
performance level, at which a 200% payout can be earned. The
amount of the incentive payout calculated based on the
achievement of the business performance factor is then
multiplied by an individual performance factor based upon an
executive’s overall performance rating. The incentive
payout amount then can be reduced by up to 50%, but not
increased, on the basis of two additional corporate-wide
financial performance metrics: (1) minimum cash flow and
(2) growth in comparable sales. Incentive payouts under the
RSIP range from 0% to 250% of base salary, depending on the
individual participant. Incentive payments under the RSIP are
determined by our compensation committee.
An executive must be employed by us on the last day of the
fiscal year to be entitled to incentive compensation under the
RSIP. If an executive’s employment is terminated prior to
such date as a result of death or involuntary termination of
employment without cause or with good reason (if applicable),
all or a pro-rata
amount of the bonus may be paid. Bonus amounts to executives on
approved leave of absence will be determined by the committee in
its sole discretion.
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Executive Benefit Programs
We sponsor various benefit programs exclusively for certain
executives, including the named executive officers who are
currently employed by us, as described below.
Our Executive Retirement Program permits certain executives to
voluntarily defer portions of their base salary and annual bonus
until retirement or termination of employment. Amounts deferred,
up to a maximum of 6% of base salary, are matched by us on a
dollar-for-dollar basis. Depending on the level at which we
achieve specified financial performance results, an
officer’s account under the plan may also be credited with
up to 6% of his or her base salary. All amounts deferred by the
executive or credited to his or her account by us earn interest
at a rate that reflects a reasonable long-term return for a
balanced portfolio, currently an annual rate of 8.5%. All
contributions by us vest on a graded basis over a
three-year period.
Our Executive Life Insurance Program provides company-paid life
insurance coverage to certain executives and allows such
executives to purchase additional life insurance coverage at
their own cost. Company-paid coverage is limited to the lesser
of 2.75 times base salary or $1.3 million.
Our Executive Health Plan covers all currently employed named
executive officers and certain other executives. It serves as a
fully insured supplement to the medical plan provided to all our
employees.
Out-of-pocket costs and
expenses for deductibles, coinsurance, dental care, orthodontia,
vision care, prescription drugs, and preventative care are
reimbursed to those executives up to an annual maximum of
$100,000.
In addition, each executive officer is provided with an annual
perquisite allowance to be used, at his election, in connection
with financial planning services, automobile allowance and
additional life and other insurance benefits. Currently, the
allowance amount for Mr. Chidsey is $50,000 and for
Messrs. Klein, Wells, Hyatt and Smith is $35,000.
Mr. Chidsey is also entitled to personal use of company
aircraft on the terms set forth in his employment agreement with
us, as described above.
Other Employee Compensation and Benefit Programs
We also have additional annual bonus plans which cover most of
our employees, a 401(k) plan with an employer match feature, a
severance program and a comprehensive health and welfare benefit
program.
May 2006 Executive Equity Grant
We intend to grant an aggregate of 237,115 stock options to
several employees, including 131,750 to Mr. Klein and
79,038 to Mr. Wells, at the effective time of this offering
with an exercise price equal to the initial public offering
price. In addition, as described above under “Agreements
with Our Named Executive Officers—Employment Agreement with
Mr. Chidsey,” we have agreed to make a grant of
210,769 restricted shares or restricted stock units to
Mr. Chidsey in connection with his entering into a new
employment agreement with us, which grant will also be made at
the effective time of this offering at a price per share equal
to the initial public offering price.
February 2006 Employee Option Grant
On February 14, 2006, we granted options to purchase
53 shares of our common stock to each of approximately
5,000 of our employees worldwide who were not previously
eligible to receive option grants, such as restaurant managers
and support staff, at an exercise price of $21.64 per
share. These options generally vest on February 14, 2011,
so long as the employee remains employed by us, and expire on
February 14, 2016.
Compensatory Make-Whole Payment
On February 21, 2006 in connection with the payment of a
cash dividend to holders of record of our common stock on
February 9, 2006, we also paid a compensatory make-whole
payment to holders of our
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options and restricted stock unit awards, primarily members of
senior management. Our board of directors decided to pay the
compensatory make-whole payment because our board recognized
that the payment of the February 2006 dividend and the February
2006 financing would decrease the value of the equity interests
of holders of our options and restricted stock unit awards as
these holders were not otherwise entitled to receive the
dividend. Our board also recognized that the holders of our
options and restricted stock unit awards had significantly
contributed to the improvement in our business performance and
equity value over the past two years. Accordingly, it decided to
pay the same amount of the February 2006 dividend, on a per
share basis, to the holders of our options and restricted stock
unit awards to compensate them for this decline in the value of
their equity interests. The chart under the caption
“Certain Relationships and Related Transactions—
Payment of the February 2006 Dividend, Compensatory Make-Whole
Payment and the Sponsor Management Termination Fee” sets
forth the amount of the compensatory make-whole payment received
by each of our executive officers, including our named executive
officers.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of the date of this prospectus
certain information regarding the beneficial ownership of our
common stock as of May 1, 2006, by:
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each of our directors and named executive officers, including
our two prior Chief Executive Officers, individually; |
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all directors and executive officers as a group; and |
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each person who is known to us to be the beneficial owner of
more than 5% of our common stock. |
As of May 1, 2006, our outstanding equity securities, as
determined under the rules of the SEC, consisted of
110,664,148 shares of common stock, of which
33,501,675 shares are held by the Goldman Sachs Funds,
which are affiliates of Goldman, Sachs & Co., one of
the representatives of the underwriters, which has granted an
option to the underwriters to purchase 1,200,000 shares in this
offering. The Goldman Sachs Funds are affiliates of a
broker-dealer and purchased the shares to be sold in this
offering in the ordinary course of its business and at the time
of such purchase had no agreements or understandings, directly
or indirectly, with any person to distribute such shares. The
selling stockholders are only selling shares in this offering if
the underwriters exercise their option to purchase additional
shares from the selling stockholders. The selling stockholders
in this offering may be deemed to be underwriters.
The number of shares beneficially owned by each stockholder is
determined under rules promulgated by the SEC and generally
includes voting or investment power over the shares. The
information does not necessarily indicate beneficial ownership
for any other purpose. Under the SEC rules, the number of shares
of common stock deemed outstanding includes shares issuable upon
conversion of other securities, as well as the exercise of
options or the settlement of restricted stock units held by the
respective person or group that may be exercised or settled on
or within 60 days of May 1, 2006. For purposes of
calculating each person’s or group’s percentage
ownership, shares of common stock issuable pursuant to stock
options and restricted stock units exercisable or settleable on
or within 60 days of May 1, 2006 are included as
outstanding and beneficially owned for that person or group but
are not treated as outstanding for the purpose of computing the
percentage ownership of any other person or group.
The address for each listed stockholder, unless otherwise
indicated, is: c/o Burger King Holdings, Inc.,
5505 Blue Lagoon Drive, Miami, Florida 33126. To our
knowledge, except as indicated in the footnotes to this table
and pursuant to applicable community property laws, the persons
named in the table have sole voting and investment power with
respect to all shares of common stock beneficially owned by them.
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Named Executive Officers and Directors:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John W. Chidsey
|
|
|
708,209 |
|
|
|
* |
|
|
|
— |
|
|
|
708,209 |
|
|
|
* |
|
|
|
708,209 |
|
|
|
* |
|
Russell B. Klein
|
|
|
198,913 |
|
|
|
* |
|
|
|
— |
|
|
|
198,913 |
|
|
|
* |
|
|
|
198,913 |
|
|
|
* |
|
James F. Hyatt
|
|
|
79,038 |
|
|
|
* |
|
|
|
— |
|
|
|
79,038 |
|
|
|
* |
|
|
|
79,038 |
|
|
|
* |
|
Peter C. Smith
|
|
|
234,375 |
|
|
|
* |
|
|
|
— |
|
|
|
234,375 |
|
|
|
* |
|
|
|
234,375 |
|
|
|
* |
|
Andrew B. Balson(b)
|
|
|
33,501,675 |
|
|
|
30.24 |
% |
|
|
— |
|
|
|
33,501,675 |
|
|
|
24.67 |
% |
|
|
32,301,675 |
|
|
|
23.79 |
% |
David Bonderman(c)
|
|
|
37,689,385 |
|
|
|
34.02 |
% |
|
|
— |
|
|
|
37,689,385 |
|
|
|
27.76 |
% |
|
|
36,339,602 |
|
|
|
26.76 |
% |
Richard W. Boyce
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
David M. Brandon
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Armando Codina
|
|
|
46,211 |
|
|
|
* |
|
|
|
— |
|
|
|
46,211 |
|
|
|
* |
|
|
|
46,211 |
|
|
|
* |
|
Peter Raemin Formanek
|
|
|
246,836 |
|
|
|
* |
|
|
|
— |
|
|
|
246,836 |
|
|
|
* |
|
|
|
246,836 |
|
|
|
* |
|
Manny Garcia
|
|
|
85,625 |
|
|
|
* |
|
|
|
— |
|
|
|
85,625 |
|
|
|
* |
|
|
|
85,625 |
|
|
|
* |
|
Adrian Jones(d)
|
|
|
33,501,675 |
|
|
|
30.24 |
% |
|
|
— |
|
|
|
33,501,675 |
|
|
|
24.67 |
% |
|
|
32,301,675 |
|
|
|
23.79 |
% |
Sanjeev K. Mehra(d)
|
|
|
33,501,675 |
|
|
|
30.24 |
% |
|
|
— |
|
|
|
33,501,675 |
|
|
|
24.67 |
% |
|
|
32,301,675 |
|
|
|
23.79 |
% |
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially | |
|
Shares Beneficially | |
|
|
Shares Beneficially | |
|
|
|
Owned After This | |
|
Owned After This | |
|
|
Owned Before | |
|
|
|
Offering Without | |
|
Offering With Exercise | |
|
|
This Offering(a) | |
|
Shares | |
|
Exercise of Option | |
|
of Option | |
|
|
| |
|
Offered | |
|
| |
|
| |
Name and Address of Beneficial Owner |
|
Number | |
|
Percent | |
|
Hereby | |
|
Number | |
|
Percent | |
|
Number | |
|
Percent | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Stephen G. Pagliuca(e)
|
|
|
33,501,675 |
|
|
|
30.24 |
% |
|
|
— |
|
|
|
33,501,675 |
|
|
|
24.67 |
% |
|
|
32,301,675 |
|
|
|
23.79 |
% |
Brian Thomas Swette
|
|
|
85,625 |
|
|
|
* |
|
|
|
— |
|
|
|
85,625 |
|
|
|
* |
|
|
|
85,625 |
|
|
|
* |
|
Kneeland C. Youngblood
|
|
|
115,607 |
|
|
|
* |
|
|
|
— |
|
|
|
115,607 |
|
|
|
* |
|
|
|
115,607 |
|
|
|
* |
|
Gregory D. Brenneman
|
|
|
1,723,982 |
|
|
|
1.56 |
% |
|
|
— |
|
|
|
1,723,982 |
|
|
|
1.27 |
% |
|
|
1,723,982 |
|
|
|
1.27 |
% |
Bradley Blum
|
|
|
1,073,629 |
|
|
|
* |
|
|
|
— |
|
|
|
1,073,629 |
|
|
|
* |
|
|
|
1,073,629 |
|
|
|
* |
|
All Executive Officers and Directors as a group
(26 persons)(b)(c)(d)(e)
|
|
|
106,874,270 |
|
|
|
96.48 |
% |
|
|
— |
|
|
|
106,874,270 |
|
|
|
78.71 |
% |
|
|
103,124,270 |
|
|
|
75.95 |
% |
5% Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment funds affiliated with Bain Capital Investors, LLC(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
c/o Bain Capital Partners, LLC
|
|
|
33,501,675 |
|
|
|
30.24 |
% |
|
|
— |
|
|
|
33,501,675 |
|
|
|
24.67 |
% |
|
|
32,301,675 |
|
|
|
23.79 |
% |
|
111 Huntington Avenue
Boston, MA 02199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Goldman Sachs Group, Inc.(g)
|
|
|
33,501,675 |
|
|
|
30.24 |
% |
|
|
— |
|
|
|
33,501,675 |
|
|
|
24.67 |
% |
|
|
32,301,675 |
|
|
|
23.79 |
% |
|
85 Broad Street
New York, NY 10004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TPG BK Holdco LLC(h)
|
|
|
37,689,385 |
|
|
|
34.02 |
% |
|
|
— |
|
|
|
37,689,385 |
|
|
|
27.76 |
% |
|
|
36,339,385 |
|
|
|
26.76 |
% |
|
c/o Texas Pacific Group
301 Commerce Street
Suite 3300
Fort Worth, Texas 76102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Less than one percent (1%). |
|
|
|
|
(a) |
|
Includes beneficial ownership of shares of common stock for
which the following persons hold options exercisable on or
within 60 days of May 1, 2006: Mr. Chidsey,
482,950 shares; Mr. Hyatt, 79,038 shares;
Mr. Formanek, 75,587 shares; all directors and
executive officers as a group, 2,011,631 shares; and
Mr. Brenneman, 1,210,234 shares. Also includes
beneficial ownership of shares of common stock underlying
restricted stock units held by the following persons that have
vested or will vest on or within 60 days of May 1,
2006: Mr. Chidsey, 105,384 shares, Mr. Klein,
12,040 shares; Mr. Smith, 26,399 shares; and all
directors and executive officers as a group, 190,429 shares. |
|
|
|
(b) |
|
Includes 33,501,675 shares of common stock owned by
investment funds affiliated with Bain Capital Investors, LLC.
Mr. Balson disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest. |
|
|
|
(c) |
|
Includes 37,689,385 shares held by TPG BK Holdco LLC, whose
managing member is TPG Partners III, LP, whose general
partner is TPG GenPar III, LP, whose general partner is TPG
Advisors III, Inc. Mr. Bonderman disclaims beneficial
ownership of such securities. |
|
|
|
(d) |
|
The Goldman Sachs Group, Inc., and certain affiliates, including
Goldman, Sachs & Co., may be deemed to directly or
indirectly own in the aggregate 33,501,675 shares of common
stock which are owned directly or indirectly by investment
partnerships, which we refer to as the Goldman Sachs Funds, of
which affiliates of The Goldman Sachs Group, Inc. and Goldman,
Sachs & Co. are the general partner, managing limited
partner or the managing partner. Goldman, Sachs & Co.
is the investment manager for certain of the Goldman Sachs
Funds. Goldman, Sachs & Co. is a direct and indirect,
wholly owned subsidiary of The Goldman Sachs Group, Inc. The
Goldman Sachs Group, Inc., Goldman, Sachs & Co. and the
Goldman Sachs Funds share voting power and investment power with
certain of their respective affiliates. Shares beneficially
owned by the Goldman Sachs Funds consist of:
(i) 17,504,125 shares of common stock owned by GS
Capital Partners 2000, L.P.; (ii) 6,360,339 shares of
common stock owned by GS Capital Partners 2000 Offshore, L.P.;
(iii) 731,631 shares of common stock owned by GS
Capital Partners 2000 GmbH & Co. Beteiligungs KG;
(iv) 5,558,153 shares of common stock owned by GS
Capital Partners 2000 Employee Fund, L.P.;
(v) 257,507 shares of common stock owned by Bridge
Street Special Opportunities Fund 2000, L.P.;
(vi) 514,987 shares of common stock owned by Stone
Street Fund 2000, L.P.; (vii) 858,303 shares of
common stock owned by Goldman Sachs Direct Investment
Fund 2000, L.P.; (viii) 995,250 shares of common
stock owned by GS Private Equity Partners 2000, L.P.;
(ix) 342,104 shares of common stock owned by GS
Private Equity Partners 2000 Offshore Holdings, L.P.; and
(x) 379,278 shares of common stock owned by GS Private
Equity Partners 2000-Direct Investment Fund, L.P. Sanjeev Mehra
and Adrian Jones are each managing directors of Goldman,
Sachs & Co. Mr. Mehra, Mr. Jones, The Goldman
Sachs Group, Inc. and Goldman, Sachs & Co. each
disclaims beneficial ownership of the common shares owned
directly or indirectly by the Goldman Sachs Funds, except to the
extent of their pecuniary interest therein, if any. Three
additional funds (GS Vintage Fund II, L.P., GS Vintage
Fund II Offshore Holdings, L.P. and GS Vintage II
Employee Fund, L.P.) of which affiliates of The Goldman Sachs
Group, Inc. and Goldman, Sachs & Co. are the |
|
109
|
|
|
|
|
general partner, managing limited partner, the managing partner
or investment manager have an approximately 1% limited
partnership interest in TPG BK Holdco LLC. Such additional
funds, Mr. Mehra, Mr. Jones, The Goldman Sachs Group,
Inc. and Goldman, Sachs & Co. do not have voting power
or investment discretion with respect to the common shares
represented by the limited partnership interest and therefore do
not have beneficial ownership of such shares. |
|
|
(e) |
|
Includes 33,501,675 shares of common stock owned by
investment funds affiliated with Bain Capital Investors, LLC.
Mr. Pagliuca disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest. |
|
|
|
(f) |
|
The shares included in the table consist of:
(i) 25,944,908 shares of common stock owned by Bain
Capital Integral Investors, LLC, whose administrative member is
Bain Capital Investors, LLC; (ii) 7,415,236 shares of
common stock owned by Bain Capital VII Coinvestment Fund,
LLC, whose sole member is Bain Capital VII Coinvestment
Fund, L.P., whose general partner is Bain Capital
Partners VII, L.P., whose general partner is Bain Capital
Investors, LLC and (iii) 141,531 shares of common
stock owned by BCIP TCV, LLC, whose administrative member
is Bain Capital Investors, LLC. |
|
|
|
(g) |
|
The shares included in the table consist of:
(i) 17,504,125 shares of common stock owned by GS
Capital Partners 2000, L.P., whose general partner is GS
Advisors 2000, L.L.C.; (ii) 6,360,339 shares of common
stock owned by GS Capital Partners 2000 Offshore, L.P.,
whose general partner is GS Advisors 2000, L.L.C.;
(iii) 731,631 shares of common stock owned by
GS Capital Partners 2000 GmbH & Co. Beteiligungs
KG, whose general partner is Goldman Sachs Management GP GmbH;
(iv) 5,558,153 shares of common stock owned by
GS Capital Partners 2000 Employee Fund, L.P., whose general
partner is GS Employee Funds 2000 GP, L.L.C.;
(v) 257,507 shares of common stock owned by Bridge
Street Special Opportunities Fund 2000, L.P., whose general
partner is Bridge Street Special Opportunities 2000, L.L.C.;
(vi) 514,987 shares of common stock owned by Stone
Street Fund 2000, L.P., whose general partner is Stone
Street 2000, L.L.C.; (vii) 858,303 shares of common
stock owned by Goldman Sachs Direct Investment Fund 2000,
L.P., whose general partner is GS Employee Funds 2000 GP,
L.L.C.; (viii) 995,250 shares of common stock owned by
GS Private Equity Partners 2000, L.P., whose general partner is
GS PEP 2000 Advisors, L.L.C., whose managing partner is GSAM
Gen-Par, L.L.C.;
(ix) 342,104 shares of common stock owned by GS
Private Equity Partners 2000 Offshore Holdings, L.P., whose
general partner is GS PEP 2000 Offshore Holdings Advisors, Inc.;
and (x) 379,278 shares of common stock owned by GS
Private Equity Partners 2000-Direct Investment Fund, L.P., whose
general partner is GS PEP 2000 Direct Investment Advisors,
L.L.C., whose managing partner is GSAM Gen-Par, L.L.C. |
|
|
(h) |
|
The shares included in the table are owned by TPG BK Holdco LLC,
whose managing member is TPG Partners III, LP, whose
general partner is TPG GenPar III, LP, whose general
partner is TPG Advisors III, Inc. |
110
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Shareholders’ Agreement
In connection with our acquisition of BKC, we entered into a
shareholders’ agreement dated June 27, 2003 with BKC
and the sponsors. The shareholders’ agreement provided,
among other things, that each of the sponsors would be entitled
to appoint three members of our board of directors. Six of our
current directors, Messrs. Balson, Bonderman, Boyce, Jones,
Mehra and Pagliuca, were appointed pursuant to the
shareholders’ agreement. We have entered into an amended
and restated shareholders’ agreement with the sponsors that
provides for (i) the right of each sponsor to appoint two
members to our board of directors, (ii) certain provisions
relating to drag-along and tag-along rights and transfer
restrictions and (iii) registration rights provisions. A
sponsor’s right to appoint directors will be reduced to one
director if that sponsor’s stock ownership drops to 10% or
less, and will be eliminated if that sponsor’s stock
ownership drops to 2% or less. The provisions relating to
drag-along and tag-along rights and transfer restrictions
obligate or allow a sponsor to participate in the sale of shares
by the other sponsors or limit the transfer of shares held by
the sponsors to third parties. The registration rights
provisions grant shelf registration rights, demand registration
rights and piggyback registration rights to those shareholders
and transferees. As of May 1, 2006, the private equity
funds controlled by the sponsors collectively held
104,692,735 shares (or 100,942,735 shares after giving
effect to the sale of shares by the private equity funds
controlled by the sponsors in this offering assuming that the
underwriters exercise their option to purchase additional shares
in full) of our common stock to which these registration rights
apply. The shareholders’ agreement includes customary
indemnification provisions in favor of all shareholders or
transferees that are party to the shareholders’ agreement,
the related parties and the controlling persons (within the
meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) of such shareholders
against liabilities under the Securities Act incurred in
connection with the registration of any of our debt or equity
securities. We agreed to reimburse these persons for any legal
or other expenses incurred in connection with investigating or
defending any such liability, action or proceeding, except that
we will not be required to indemnify any of these persons or
reimburse related legal or other expenses if such loss or
expense arises out of or is based on any untrue statement or
omission made in reliance upon and in conformity with written
information provided by these persons.
Management Subscription and Shareholders’ Agreement
We have entered into a management subscription and
shareholders’ agreement with our directors and executive
officers. Upon the completion of this offering, all of the
provisions of the management subscription and shareholders
agreement will terminate, except for certain transfer
restrictions and restrictions on the ability of parties to the
agreement to sell shares for a period of 180 days after the
date of this prospectus.
Management Agreement
In connection with our acquisition of BKC, we entered into a
management agreement dated December 13, 2002 with the
sponsors and entities affiliated with the sponsors, pursuant to
which we pay the sponsors a quarterly management fee not to
exceed 0.5% of the prior quarter’s total revenues. Since
2002, we have paid an aggregate of $27 million in quarterly
management fees, which were paid as compensation to the sponsors
for monitoring our business through board of director
participation, executive team recruitment, interim senior
management services that were provided from
time-to-time and other
services consistent with arrangements with private equity funds.
Under the management agreement, we also paid the sponsors a
separate fee of approximately $22.4 million at the time of
the acquisition. The amounts of these fees were determined by
agreement among the sponsors at the time of the acquisition and
we believe that these fees are comparable to arrangements
between other companies and their ownership groups. We also
reimbursed the sponsors for certain
out-of-pocket expenses
incurred by their employees. See “—Expense
Reimbursement to the Sponsors”. The management agreement
includes customary indemnification provisions pursuant to which
we indemnify each of the sponsors and those
111
members of our board of directors who hold senior positions at
the sponsors or their affiliates from and against all
liabilities and expenses incurred in connection with our
acquisition of BKC, the management agreement or transactions
related to their investment in us, except for such liability or
expense arising on account of an indemnified person’s gross
negligence or willful misconduct.
In connection with the closing of this offering, we will pay a
one-time sponsor management termination fee of $30 million,
which will be split equally among the three sponsors, to
terminate all provisions of the management agreement, except for
the indemnification provisions which will survive. The sponsor
management termination fee resulted from negotiations with the
sponsors to terminate the management agreement which obligated
us to pay the quarterly management fee. Our board of directors
concluded that it was in the best interests of the company to
terminate these arrangements with the sponsors and the resulting
payments upon becoming a publicly-traded company because the
directors believed that these affiliated-party payments should
not continue after this offering.
Payment of the February 2006 Dividend, Compensatory
Make-Whole Payment and the Sponsor Management Termination Fee
The table below sets forth the amounts received by the private
equity funds controlled by the sponsors, members of our board of
directors and our executive officers in connection with the
February 2006 dividend and the compensatory make-whole payment.
Messrs. Balson, Bonderman, Boyce, Jones, Mehra and
Pagliuca, who are each members of our board of directors
nominated by the sponsors, did not receive any payments in
connection with the February 2006 dividend and the compensatory
make-whole payment. In addition to the amounts described below,
the $30 million sponsor management termination fee will be
split equally among the three sponsors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensatory | |
|
|
|
|
February 2006 | |
|
Make-Whole | |
|
|
|
|
Dividend Amount | |
|
Payment Amount | |
|
Total Amount | |
|
|
| |
|
| |
|
| |
Private Equity Funds Controlled by the Sponsors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GS Capital Partners 2000, L.P.
|
|
$ |
59,941,116 |
|
|
$ |
— |
|
|
$ |
59,941,116 |
|
TPG BK Holdco, LLC
|
|
|
129,063,506 |
|
|
|
— |
|
|
|
129,063,506 |
|
GS Capital Partners 2000 Employee Fund, L.P.
|
|
|
19,033,377 |
|
|
|
— |
|
|
|
19,033,377 |
|
Stone Street Fund 2000, L.P.
|
|
|
1,763,524 |
|
|
|
— |
|
|
|
1,763,524 |
|
Bridge Street Special Opportunities Fund 2000, L.P.
|
|
|
881,762 |
|
|
|
— |
|
|
|
881,762 |
|
Goldman Sachs Direct Investment Fund 2000, L.P.
|
|
|
2,939,207 |
|
|
|
— |
|
|
|
2,939,207 |
|
GS Private Equity Partners 2000, L.P.
|
|
|
3,408,134 |
|
|
|
— |
|
|
|
3,408,134 |
|
GS Private Equity Partners 2000-Direct Investment Fund,
L.P.
|
|
|
1,298,771 |
|
|
|
— |
|
|
|
1,298,771 |
|
Bain Capital Integral Investors, LLC
|
|
|
88,845,694 |
|
|
|
— |
|
|
|
88,845,694 |
|
BCIP TCV, LLC
|
|
|
484,674 |
|
|
|
— |
|
|
|
484,674 |
|
Bain Capital VII Coinvestment Fund, LLC
|
|
|
25,392,748 |
|
|
|
— |
|
|
|
25,392,748 |
|
GS Capital Partners 2000 Offshore, L.P.
|
|
|
21,780,316 |
|
|
|
— |
|
|
|
21,780,316 |
|
GS Private Equity Partners 2000 Offshore Holdings, L.P.
|
|
|
1,171,509 |
|
|
|
— |
|
|
|
1,171,509 |
|
GS Capital Partners 2000 GmbH & Co. Beteiligungs KG
|
|
$ |
2,505,402 |
|
|
$ |
— |
|
|
$ |
2,505,402 |
|
|
Board of Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Armando Codina
|
|
$ |
158,245 |
|
|
$ |
— |
|
|
$ |
158,245 |
|
Peter Raemin Formanek
|
|
|
586,427 |
|
|
|
258,840 |
|
|
|
845,267 |
|
Manny Garcia
|
|
|
293,213 |
|
|
|
— |
|
|
|
293,213 |
|
Brian Thomas Swette
|
|
|
293,213 |
|
|
|
— |
|
|
|
293,213 |
|
Kneeland C. Youngblood
|
|
$ |
395,883 |
|
|
$ |
— |
|
|
|
395,883 |
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensatory | |
|
|
|
|
February 2006 | |
|
Make-Whole | |
|
|
|
|
Dividend Amount | |
|
Payment Amount | |
|
Total Amount | |
|
|
| |
|
| |
|
| |
Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John W. Chidsey
|
|
$ |
410,499 |
|
|
$ |
4,900,813 |
|
|
$ |
5,311,312 |
|
Russell B. Klein
|
|
|
639,927 |
|
|
|
862,589 |
|
|
|
1,502,516 |
|
Ben K. Wells
|
|
|
— |
|
|
|
180,439 |
|
|
|
180,439 |
|
James F. Hyatt
|
|
|
— |
|
|
|
902,195 |
|
|
|
902,195 |
|
Peter C. Smith
|
|
|
351,856 |
|
|
|
1,280,395 |
|
|
|
1,632,251 |
|
Martin Brok
|
|
|
— |
|
|
|
238,540 |
|
|
|
238,540 |
|
Anne Chwat
|
|
|
249,276 |
|
|
|
721,756 |
|
|
|
971,032 |
|
Steve DeSutter
|
|
|
— |
|
|
|
721,756 |
|
|
|
721,756 |
|
David Gagnon
|
|
|
— |
|
|
|
586,607 |
|
|
|
586,607 |
|
Denny Marie Post
|
|
|
— |
|
|
|
404,995 |
|
|
|
404,995 |
|
Julio Ramirez
|
|
|
131,991 |
|
|
|
360,878 |
|
|
|
492,869 |
|
Clyde Rucker
|
|
|
58,643 |
|
|
|
383,613 |
|
|
|
442,256 |
|
Peter Tan
|
|
|
— |
|
|
|
451,098 |
|
|
|
451,098 |
|
Gregory D.
Brenneman(1)
|
|
$ |
1,759,280 |
|
|
$ |
10,361,349 |
|
|
$ |
12,120,629 |
|
|
|
(1) |
Mr. Brenneman served as our Chairman of the Board and Chief
Executive Officer until April 7, 2006. |
Payment-in-Kind
Notes
In order to finance, in part, our acquisition of BKC, we issued
$212.5 million in
payment-in-kind, or
PIK, notes to the private equity funds controlled by the
sponsors on December 13, 2002. These private equity funds
subsequently transferred $0.9 million in PIK notes to four
of our directors. The PIK notes accreted interest at a rate of
9% per annum. As of June 30, 2004 and 2005, the
amounts outstanding under the PIK Notes were $242 million
and $264 million, respectively. Our interest expense on the
PIK Notes totaled $11 million for the period
December 13, 2002 to June 30, 2003, $21 million
for the year ended June 30, 2004 and $23 million for
the year ended June 30, 2005.
On July 13, 2005, we repaid the PIK notes in full,
including accreted interest, as part of the July 2005
refinancing of our indebtedness. We do not expect to borrow any
other amounts in the future from the sponsors or from the
private equity funds controlled by the sponsors.
Expense Reimbursement to the Sponsors
We have reimbursed the sponsors for certain travel-related
expenses of their employees in connection with meetings of our
board of directors and other meetings related to the management
and monitoring of our business by the sponsors. Since our
December 13, 2002 acquisition of BKC, we have paid
approximately $650,000 in total expense reimbursements to the
sponsors.
In addition, we paid on behalf of the sponsors approximately
$500,000 in legal fees and expenses to Cleary Gottlieb
Steen & Hamilton LLP that were incurred by the sponsors
in connection with their management of us and arrangements
between us and the sponsors. Cleary Gottlieb Steen &
Hamilton LLP is providing legal advice to the underwriters in
connection with this offering.
New Global Headquarters
One of our directors, Mr. Codina, is an executive officer
and approximately 4.9% owner of a public company that has agreed
to lease us a 224,638 square foot building currently under
construction in Coral Gables, Florida that will serve as our new
global headquarters beginning in 2008. The lease runs for
15 years from the date we occupy the building or
60 days from when the landlord substantially completes
construction and the estimated annual rent for the
15-year initial lease
term is expected to approximate the
113
combined rent of the two facilities that currently serve as our
global headquarters. The lease terms were negotiated on an
arm’s length basis prior to the time that Mr. Codina
was asked to join our board of directors, and we believe the
terms reflect market terms. This public company currently
intends to assign the lease to a partnership between a
wholly-owned subsidiary of the public company and an affiliate
of JPMorgan Chase Bank, N.A.
Relocation Expenses
In connection with his relocation from Texas to the Miami area,
in accordance with our relocation policy, a relocation firm
hired by us advanced our former Chief Executive Officer,
Mr. Brenneman, $1.4 million for three months on
an interest-free basis in July 2004 in connection with the sale
of his home. This advance was repaid in September 2004 when
Mr. Brenneman’s Texas home was sold. In connection
with his relocation from New Jersey to the Miami area, a
relocation firm hired by us purchased the home of our Chief
Executive Officer, Mr. Chidsey, in March 2005 for
$2.4 million in accordance with our relocation policy.
Under our domestic relocation policy, we reimburse the
relocation firm hired by us for any loss on the sale of the home
of a relocated executive officer and we plan to continue this
policy after this offering. While advances or loans by us or the
relocation firm in connection with a relocation were permitted
under our prior relocation policy, we amended this provision in
April 2005 so that advances and loans are no longer permitted.
114
DESCRIPTION OF CAPITAL STOCK
General Matters
The following description of our common stock and preferred
stock and the relevant provisions of our certificate of
incorporation and bylaws are summaries thereof and are qualified
by reference to our certificate of incorporation and bylaws,
copies of which have been filed with the Securities and Exchange
Commission as exhibits to our registration statement, of which
this prospectus forms a part, and applicable law.
Our authorized capital stock currently consists of
300,000,000 shares of common stock, $0.01 par value,
and 10,000,000 shares of preferred stock, $0.01 par value.
Common Stock
Immediately following the completion of this offering, there
will be 132,578,053 shares of common stock outstanding.
The holders of common stock are entitled to one vote per share
on all matters to be voted upon by the stockholders and do not
have cumulative voting rights. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of
common stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by our board of
directors out of funds legally available therefor. See
“Dividend Policy”. In the event of liquidation,
dissolution or winding up of our company, the holders of common
stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding
shares of common stock are fully paid and non-assessable, and
the shares of common stock to be issued upon completion of this
offering will be fully paid and non-assessable. As of
April 24, 2006, there were approximately 62 holders of our
common stock.
Preferred Stock
Our board of directors has the authority to issue preferred
stock in one or more classes or series and to fix the
designations, powers, preferences and rights, and the
qualifications, limitations or restrictions thereof including
dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any class or
series, without further vote or action by the stockholders. The
issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of our company
without further action by the shareholders and may adversely
affect the voting and other rights of the holders of common
stock. At present, we have no plans to issue any of the
preferred stock.
Voting
The affirmative vote of a majority of the shares of our capital
stock present, in person or by written proxy, at a meeting of
stockholders and entitled to vote on the subject matter will be
the act of the stockholders.
Our certificate of incorporation may be amended in any manner
provided by the Delaware General Corporation Law. Our board of
directors has the power to adopt, amend or repeal our bylaws.
Action by Written Consent
Our certificate of incorporation and bylaws provide that
stockholder action can be taken at an annual or special meeting
of stockholders and can not be taken by written consent of the
stockholders once the private equity funds controlled by the
sponsors cease to own 50% or more of our outstanding shares.
115
Ability to Call Special Meetings
Our bylaws provide that special meetings of our stockholders can
only be called pursuant to a resolution adopted by a majority of
our board of directors or by the chairman of our board of
directors. Special meetings may also be called by the holders of
at least 25% of the outstanding shares of our common stock until
the private equity funds controlled by the sponsors own less
than 50% of the outstanding common stock. Thereafter,
stockholders will not be permitted to call a special meeting or
to require our board to call a special meeting.
Shareholder Proposals
Our bylaws establish an advance notice procedure for shareholder
proposals to be brought before an annual meeting of
stockholders, including proposed nominations of persons for
election to the board of directors.
Stockholders at our annual meeting may only consider proposals
or nominations specified in the notice of meeting or brought
before the meeting by or at the direction of our board of
directors or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the
meeting and who has given to our secretary timely written
notice, in proper form, of the stockholder’s intention to
bring that business before the meeting. Although neither our
certificate of incorporation nor our bylaws gives the board of
directors the power to approve or disapprove stockholder
nominations of candidates or proposals about other business to
be conducted at a special or annual meeting, our bylaws may have
the effect of precluding the conduct of certain business at a
meeting if the proper procedures are not followed or may
discourage or deter a potential acquirer from conducting a
solicitation of proxies to elect its own slate of directors or
otherwise attempting to obtain control of us.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation provides that a director of our
company will not be liable to us or our shareholders for
monetary damages for breach of fiduciary duty as a director,
except in certain cases where liability is mandated by the
Delaware General Corporation Law. Our certificate of
incorporation also provides for indemnification, to the fullest
extent permitted by law, by our company of any person made or
threatened to be made a party to, or who is involved in, any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director or
officer of our company, or at the request of our company, serves
or served as a director or officer of any other enterprise,
against all expenses, liabilities, losses and claims actually
incurred or suffered by such person in connection with the
action, suit or proceeding. Our certificate of incorporation
also provides that, to the extent authorized from time to time
by our board of directors, we may provide indemnification to any
one or more employees and other agents of our company to the
extent and effect determined by our board of directors to be
appropriate and authorized by the Delaware General Corporation
Law. Our certificate of incorporation also permits us to
purchase and maintain insurance for the foregoing and we expect
to maintain such insurance.
Corporate Opportunities
Our certificate of incorporation provides that the sponsors have
no obligation to offer us an opportunity to participate in
business opportunities presented to the sponsors or their
respective affiliates even if the opportunity is one that we
might reasonably have pursued, and that neither the sponsors nor
their respective affiliates will be liable to us or our
stockholders for breach of any duty by reason of any such
activities unless, in the case of any person who is a director
or officer of our company, such business opportunity is
expressly offered to such director or officer in writing solely
in his or her capacity as an officer or director of our company.
Stockholders will be deemed to have notice of and consented to
this provision of our certificate of incorporation.
116
Listing
We have applied to list our common stock on the New York Stock
Exchange under the symbol “BKC”.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be
The Bank of New York.
117
DESCRIPTION OF OUR CREDIT FACILITY
On July 13, 2005, we and BKC entered into a
$1.15 billion senior secured credit facility with JPMorgan
Chase Bank N.A., as Administrative Agent, Citicorp North
America, Inc., as Syndication Agent, and Bank of America N.A.,
RBC Capital Markets and Wachovia Bank, National Association, as
Documentation Agents, and various other lenders which consisted
of a $150 million revolving credit facility, a
$250 million term loan, which we refer to as term
loan A, and a $750 million term loan, which we refer
to as term loan B. We used $1 billion in proceeds from
the term loans A and B, $47 million in proceeds from
the revolving credit facility, and cash on hand to pay in full
BKC’s existing senior secured credit facility and our
payment-in-kind notes
payable to Diageo plc, the private equity funds controlled by
the sponsors and certain directors that we incurred in
connection with our acquisition of BKC and to pay
$16 million in financing costs.
On February 15, 2006, we amended and restated the senior
secured credit facility, which amendment and restatement we
refer to as our senior secured credit facility, to borrow an
additional $350 million by replacing the $746 million
outstanding under term loan B with a new term loan B,
which we refer to as term
loan B-1, in an
amount of $1.096 billion and to permit the payment of the
February 2006 dividend, the compensatory
make-whole payment and
the sponsor management termination fee. We used the
$350 million in additional borrowings and $55 million
in cash on hand to pay the $367 million February 2006
dividend and the $33 million compensatory
make-whole payment on
February 21, 2006 and $5 million in financing costs
and expenses. We expect to pay the $30 million sponsor
management termination fee from cash on hand upon the completion
of this offering.
The interest rate under the senior secured credit facility for
term loan A and the revolving credit facility is at our
option either (a) the greater of the federal funds
effective rate plus 0.50% and the prime rate, which we refer to
as ABR, plus a rate not to exceed 0.75%, which varies according
to our leverage ratio or (b) LIBOR plus a rate not to
exceed 1.75%, which varies according to our leverage ratio. The
interest rate for term
loan B-1 is at our
option either (a) ABR, plus a rate of 0.50% or
(b) LIBOR plus 1.50%, in each case so long as our leverage
ratio remains at or below certain levels (but in any event not
to exceed 0.75%, in the case of ABR loans, and 1.75% in the case
of LIBOR loans).
The quarterly principal payments will begin on
September 30, 2006 for term loan A and began on
March 31, 2006 for term
loan B-1 and the
level of required principal repayments will increase over time.
The maturity dates of term loan A, term
loan B-1, and
amounts drawn under the revolving credit facility are June 2011,
June 2012, and June 2011, respectively.
Our senior secured credit facility contains certain customary
financial and other covenants. These covenants impose
restrictions on additional indebtedness, liens, investments,
advances, guarantees, mergers and acquisitions. These covenants
also place restrictions on asset sales, sale and leaseback
transactions, dividends, payments between us and our
subsidiaries and certain transactions with affiliates.
Additionally, our senior secured credit facility contains
customary events of default, including payment defaults,
breaches of representations and warranties, covenant defaults,
cross-defaults to other material indebtedness, events of
bankruptcy and insolvency, judgment defaults, failure of any
guaranty or security document to be in full force and effect and
a change of control of our business.
The financial covenants include a requirement to maintain a
certain interest expense coverage ratio and leverage ratio,
which are calculated excluding the effect of the payments of the
February 2006 dividend, the compensatory
make-whole payment and
the sponsor management termination fee, and limit the maximum
amount of capital expenditures to an amount ranging from
$180 million to $250 million per fiscal year over the
term of our senior secured credit facility. Following the end of
each fiscal year, we are required to prepay the term debt in an
amount equal to 50% of excess cash flow (as defined in our
senior secured credit facility) for such fiscal year. This
prepayment requirement is not applicable if our leverage ratio
is less than a predetermined amount. There are other events and
transactions, such as certain asset sales, sale and leaseback
transactions resulting in aggregate net proceeds over
$2.5 million in any fiscal year, proceeds from casualty
events and incurrence of debt that will trigger additional
mandatory prepayment.
118
Our senior secured credit facility permits us to pay cash
dividends on our common stock, in an aggregate amount, taken
together with the amount of certain investments permitted under
our senior secured credit facility, following the completion of
this offering, equal to the greater of (x) 50% of excess
cash flow of BKC for the period from July 1, 2005 through
the end of the most-recently ended fiscal year of BKC and
(y) the sum of (A) $50 million, (B) 50% of
consolidated net income for the period from December 31,
2005 to the end of the most-recently ended fiscal quarter (or
where consolidated net income is a deficit, minus 100% of the
deficit) and (C) the aggregate amount of proceeds received
by us from the issuance of certain equity interests.
While BKC is the only borrower under our senior secured credit
facility, we and certain of our subsidiaries have jointly and
severally unconditionally guaranteed the payment of the amounts
due under our senior secured credit facility. We and certain of
our subsidiaries, including BKC, have pledged as collateral a
100% equity interest in our and BKC’s domestic subsidiaries
with some exceptions. Furthermore, BKC has pledged as collateral
a 65% equity interest in certain of its foreign subsidiaries.
As of March 31, 2006, we had $108 million available
for borrowing under our $150 million revolving credit
facility (net of $42 million in letters of credit issued
under the revolving credit facility).
See Note 9 to our unaudited consolidated financial
statements and Note 20 to our audited consolidated
financial statements included elsewhere in this prospectus for
further information about our senior secured credit facility.
119
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
FOR NON-UNITED STATES HOLDERS OF COMMON STOCK
The following is a general discussion of the material
U.S. federal income and estate tax consequences of the
ownership and disposition of common stock by a beneficial owner
that is a
“non-U.S. holder”
and that does not own, and is not deemed to own, more than 5% of
the Company’s common stock. A
“non-U.S. holder”
is a person or entity that, for U.S. federal income tax
purposes, is a:
|
|
|
|
• |
non-resident alien individual, other than certain former
citizens and residents of the United States subject to tax as
expatriates, |
|
|
|
• |
foreign corporation, or |
|
|
|
• |
foreign estate or trust. |
A
“non-U.S. holder”
does not include an individual who is present in the United
States for 183 days or more in the taxable year of
disposition and is not otherwise a resident of the United States
for U.S. federal income tax purposes. Such an individual is
urged to consult his or her own tax advisor regarding the
U.S. federal income tax consequences of the sale, exchange
or other disposition of common stock.
This discussion is based on the Internal Revenue Code of 1986,
as amended (the “Code”), and administrative
pronouncements, judicial decisions and final, temporary and
proposed Treasury Regulations, changes to any of which
subsequent to the date of this prospectus may affect the tax
consequences described herein. This discussion does not address
all aspects of U.S. federal income and estate taxation that
may be relevant to
non-U.S. holders
in light of their particular circumstances and does not address
any tax consequences arising under the laws of any state, local
or foreign jurisdiction. Prospective holders are urged to
consult their tax advisors with respect to the particular tax
consequences to them of owning and disposing of common stock,
including the consequences under the laws of any state, local or
foreign jurisdiction.
Dividends
Dividends paid by the Company to a
non-U.S. holder of
common stock generally will be subject to withholding tax at a
30% rate or a reduced rate specified by an applicable income tax
treaty. In order to obtain a reduced rate of withholding, a
non-U.S. holder
will be required to provide an Internal Revenue Service
Form W-8BEN certifying its entitlement to benefits under a
treaty.
The withholding tax does not apply to dividends paid to a
non-U.S. holder
who provides a Form W-8ECI, certifying that the dividends
are effectively connected with the
non-U.S. holder’s
conduct of a trade or business within the United States.
Instead, the effectively connected dividends will be subject to
regular U.S. income tax as if the
non-U.S. holder
were a U.S. resident. A
non-U.S. corporation
receiving effectively connected dividends may also be subject to
an additional “branch profits tax” imposed at a rate
of 30% (or a lower treaty rate).
Gain on Disposition of Common Stock
A non-U.S. holder
generally will not be subject to U.S. federal income tax on
gain realized on a sale or other disposition of common stock
unless:
|
|
|
|
• |
the gain is effectively connected with a trade or business of
the non-U.S.
holder in the United States, subject to an applicable treaty
providing otherwise, or |
|
|
• |
the Company is or has been a U.S. real property holding
corporation, as defined below, at any time within the five-year
period preceding the disposition or the
non-U.S. holder’s
holding period, whichever period is shorter, and its common
stock has ceased to be traded on an established securities
market prior to the beginning of the calendar year in which the
sale or disposition occurs. |
120
The Company believes that it is not, and does not anticipate
becoming, a U.S. real property holding corporation.
Information Reporting Requirements and Backup Withholding
Information returns will be filed with the Internal Revenue
Service in connection with payments of dividends and the
proceeds from a sale or other disposition of common stock. You
may have to comply with certification procedures to establish
that you are not a U.S. person in order to avoid
information reporting and backup withholding tax requirements.
The certification procedures required to claim a reduced rate of
withholding under a treaty will satisfy the certification
requirements necessary to avoid the backup withholding tax as
well. The amount of any backup withholding from a payment to you
will be allowed as a credit against your U.S. federal
income tax liability and may entitle you to a refund, provided
that the required information is furnished to the Internal
Revenue Service.
Federal Estate Tax
An individual
non-U.S. holder
who is treated as the owner of, or has made certain lifetime
transfers of, an interest in the common stock will be required
to include the value of the stock in his gross estate for
U.S. federal estate tax purposes, and may be subject to
U.S. federal estate tax, unless an applicable estate tax
treaty provides otherwise.
121
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock. Future sales of substantial amounts of common
stock in the public market, or the perception that such sales
may occur, could adversely affect the prevailing market price of
the common stock. Upon completion of this offering, there will
be 132,578,053 shares of common stock outstanding. Of these
shares, 25,000,000 shares of common stock sold in this
offering (or 28,750,000 shares of common stock if the
underwriters exercise their option to purchase additional shares
in full) will be freely transferable without restriction or
further registration under the Securities Act of 1933. The
remaining 103,828,053 shares of common stock outstanding
will be available for sale after the expiration of the
lock-up agreements
(180 days after the date of the final prospectus unless
earlier waived in the manner described under
“Underwriting” pursuant to Rule 144).
Rule 144
In general, under Rule 144 as currently in effect, a person
(or persons whose shares are aggregated), including an
affiliate, who beneficially owns “restricted
securities” may not sell those securities until they have
been beneficially owned for at least one year. Thereafter, the
person would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
|
|
|
|
|
• |
1% of the number of shares of common stock then outstanding
(which will equal approximately 1,325,781 shares
immediately after this offering); or |
|
|
|
• |
the average weekly trading volume of the common stock on the New
York Stock Exchange during the four calendar weeks preceding the
filing with the SEC of a notice on the SEC’s Form 144
with respect to such sale. |
Sales under Rule 144 are also subject to certain other
requirements regarding the manner of sale, notice and
availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not, and has not been at
any time during the 90 days preceding a sale, an affiliate
of ours and who has beneficially owned the shares proposed to be
sold for at least two years (including the holding period of any
prior owner except an affiliate) is entitled to sell such shares
without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Rule 701
In general, under Rule 701 of the Securities Act as
currently in effect, each of our employees, consultants or
advisors who purchased shares from us in connection with a
compensatory stock plan or other written agreement is eligible
to resell those shares 90 days after the effective date of
this offering in reliance on Rule 144 (or earlier, if such
shares are registered on a Registration Statement pursuant to
Form S-8), but
without compliance with some of the restrictions, including the
holding period, contained in Rule 144.
No precise prediction can be made as to the effect, if any, that
market sales of shares or the availability of shares for sale
will have on the market price of our common stock prevailing
from time to time. We are unable to estimate the number of our
shares that may be sold in the public market pursuant to
Rule 144 or Rule 701 (or pursuant to
Form S-8, if
applicable) because this will depend on the market price of our
common stock, the personal circumstances of the sellers and
other factors. Nevertheless, sales of significant amounts of our
common stock in the public market could adversely affect the
market price of our common stock.
122
Stock Plans
We intend to file a registration statement or statements under
the Securities Act covering shares of common stock both reserved
for issuance under our equity plans and pursuant to all equity
award grants made prior to this offering. Subject to
lock-up arrangements,
these registration statements are expected to be filed as soon
as practicable after the completion of this offering. As of
March 31, 2006, there were 9,628,913 shares of our common
stock issuable upon the exercise of options or the settlement of
restricted stock unit awards outstanding, of which options to
purchase 1,834,609 shares were exercisable. Shares issued upon
the exercise of stock options or the settlement of other equity
awards after the effective date of the applicable
Form S-8
registration statement will be eligible for resale in the public
market without restriction, subject to Rule 144 limitations
applicable to affiliates and the
lock-up agreements
described above.
Registration Rights Under Shareholders’ Agreement
Following this offering, holders of substantially all of our
common stock will have the right to require us to register their
shares for future sale. See “Certain Relationships and
Related Transactions— Shareholders’ Agreement”.
123
UNDERWRITING
We and the selling stockholders are offering the shares of
common stock described in this prospectus through a number of
underwriters. J.P. Morgan Securities Inc., Citigroup Global
Markets Inc., Goldman, Sachs & Co. and Morgan
Stanley & Co. Incorporated are acting as joint
book-running managers of the offering and as representatives of
the underwriters. We and the selling stockholders have entered
into an underwriting agreement with the underwriters. Subject to
the terms and conditions of the underwriting agreement, we have
agreed to sell to the underwriters, and each underwriter has
severally agreed to purchase, at the public offering price less
the underwriting discounts and commissions set forth on the
cover page of this prospectus, the number of shares of common
stock listed next to its name in the following table:
|
|
|
|
|
|
|
Number of | |
Name |
|
Shares | |
|
|
| |
J.P. Morgan Securities Inc.
|
|
|
|
|
Citigroup Global Markets Inc.
|
|
|
|
|
Goldman, Sachs & Co.
|
|
|
|
|
Morgan Stanley & Co. Incorporated
|
|
|
|
|
Wachovia Capital Markets, LLC
|
|
|
|
|
Bear, Stearns & Co. Inc.
|
|
|
|
|
Credit Suisse Securities (USA) LLC
|
|
|
|
|
Lehman Brothers Inc.
|
|
|
|
|
Loop Capital Markets, LLC
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
The underwriters are committed to purchase all the common shares
offered by us if they purchase any shares. The underwriting
agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may also be
increased or the offering may be terminated.
The underwriters propose to offer the common shares directly to
the public at the initial public offering price set forth on the
cover page of this prospectus and to certain dealers at that
price less a concession not in excess of
$ per
share. Any such dealers may resell shares to certain other
brokers or dealers at a discount of up to
$ per
share from the initial public offering price. After the initial
public offering of the shares, the offering price and other
selling terms may be changed by the underwriters. Sales of
shares made outside of the United States may be made by
affiliates of the underwriters.
The underwriters have an option to buy up to 3,750,000
additional shares of common stock from the selling stockholders
to cover sales of shares by the underwriters which exceed the
number of shares specified in the table above. The underwriters
have 30 days from the date of this prospectus to exercise
this over-allotment option. If any shares are purchased with
this over-allotment option, the underwriters will purchase
shares in approximately the same proportion as shown in the
table above. If any additional shares of common stock are
purchased, the underwriters will offer the additional shares on
the same terms as those on which the shares are being offered.
The selling stockholders are only selling shares in this
offering if the underwriters exercise their option and we will
not receive any of the proceeds from a sale of shares by the
selling stockholders.
The underwriting fee is equal to the public offering price per
share of common stock less the amount paid by the underwriters
to us and the selling stockholders per share of common stock.
The following table shows the per share and total underwriting
discounts and commissions to be paid by us and the selling
124
stockholders to the underwriters assuming both no exercise and
full exercise of the underwriters’ option to purchase
additional shares.
|
|
|
|
|
|
|
|
|
|
|
Without | |
|
With Full |
|
|
Over-Allotment | |
|
Over-Allotment |
Paid by the Company |
|
Exercise | |
|
Exercise |
|
|
| |
|
|
Per Share
|
|
$ |
|
|
|
$ |
— |
|
Total
|
|
$ |
|
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
Without |
|
With Full | |
|
|
Over-Allotment |
|
Over-Allotment | |
Paid by the Selling Stockholders |
|
Exercise |
|
Exercise | |
|
|
|
|
| |
Per Share
|
|
$ |
— |
|
|
$ |
|
|
Total
|
|
$ |
— |
|
|
$ |
|
|
At our request, the underwriters have reserved 10 percent of the
shares of common stock offered by this prospectus for sale, at
the initial public offering price, to our directors, officers,
employees, franchisees and certain other business partners as
designated by us. Persons who purchase such reserved shares will
be required to enter into
lock-up agreements with
the underwriters pursuant to which each of these persons, with
certain exceptions, for a period of 180 days after the date
of this prospectus, may not, without the prior written consent
of J.P. Morgan Securities Inc., (1) offer, pledge,
announce the intention to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, such reserved shares, or (2) enter
into any swap or other agreement that transfers, in whole or in
part, any of the economic consequences of ownership of such
reserved shares, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery
of common stock or such other securities, in cash or otherwise.
Notwithstanding the foregoing, if (1) during the last
17 days of the
180-day restricted
period, we issue an earnings release or material news or a
material event relating to our company occurs; or (2) prior
to the expiration of the
180-day restricted
period, we announce that we will release earnings results during
the 16-day period
beginning on the last day of the
180-day period, the
restrictions described above shall continue to apply until the
expiration of the
18-day period beginning
on the issuance of the earnings release or the occurrence of the
material news or material event. The number of shares available
for sale to other investors will be reduced to the extent these
individuals purchase such reserved shares. Any reserved shares
that are not so purchased will be offered by the underwriters to
the general public on the same basis as the other shares offered
by this prospectus.
We estimate that the total expenses of this offering, including
registration, filing and listing fees, printing fees and legal
and accounting expenses, but excluding the underwriting
discounts and commissions, will be approximately $4 million.
A prospectus in electronic format may be made available on the
web sites maintained by one or more underwriters, or selling
group members, if any, participating in the offering. The
underwriters may agree to allocate a number of shares to
underwriters and selling group members for sale to their online
brokerage account holders. Internet distributions will be
allocated by the representatives to underwriters and selling
group members that may make Internet distributions on the same
basis as other allocations.
We have agreed that, subject to certain exceptions, we will not
offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, or file with the Securities and Exchange
Commission a registration statement under the Securities Act
relating to, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares
of our common stock, or publicly disclose the intention to make
any offer, sale, pledge, disposition or filing, without the
prior written consent of J.P. Morgan Securities Inc. for a
period of 180 days after the date of this prospectus.
Notwithstanding the foregoing, if (1) during the last
17 days of the
180-day restricted
period, we issue an earnings release or material news or a
material event relating to our company occurs; or (2) prior
to the expiration of the
180-day restricted
period, we announce that we will release earnings results during
the 16-day period
beginning on the last day of the
180-day period, the
restrictions described above shall continue to apply
125
until the expiration of the
18-day period beginning
on the issuance of the earnings release or the occurrence of the
material news or material event.
All of our directors and executive officers, and holders of
substantially all of our common stock, including the selling
stockholders, and certain of our other officers, have entered
into lock-up agreements
with the underwriters prior to the commencement of this offering
pursuant to which each of these persons or entities, with
certain exceptions, for a period of 180 days after the date
of this prospectus, may not, without the prior written consent
of J.P. Morgan Securities Inc., (1) offer, pledge,
announce the intention to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock
(including, without limitation, common stock which may be deemed
to be beneficially owned by such persons in accordance with the
rules and regulations of the SEC and securities which may be
issued upon exercise of a stock option or warrant) or
(2) enter into any swap or other agreement that transfers,
in whole or in part, any of the economic consequences of
ownership of the common stock, whether any such transaction
described in clause (1) or (2) above is to be settled
by delivery of common stock or such other securities, in cash or
otherwise. Notwithstanding the foregoing, if (1) during the
last 17 days of the
180-day restricted
period, we issue an earnings release or material news or a
material event relating to our company occurs; or (2) prior
to the expiration of the
180-day restricted
period, we announce that we will release earnings results during
the 16-day period
beginning on the last day of the
180-day period, the
restrictions described above shall continue to apply until the
expiration of the
18-day period beginning
on the issuance of the earnings release or the occurrence of the
material news or material event.
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act of 1933.
We have applied to have our common stock approved for listing on
the New York Stock Exchange under the symbol “BKC.”
In connection with this offering, the underwriters may engage in
stabilizing transactions, which involves making bids for,
purchasing and selling shares of common stock in the open market
for the purpose of preventing or retarding a decline in the
market price of the common stock while this offering is in
progress. These stabilizing transactions may include making
short sales of the common stock, which involves the sale by the
underwriters of a greater number of shares of common stock than
they are required to purchase in this offering, and purchasing
shares of common stock on the open market to cover positions
created by short sales. Short sales may be “covered”
shorts, which are short positions in an amount not greater than
the underwriters’ over allotment option referred to above,
or may be “naked” shorts, which are short positions in
excess of that amount. The underwriters may close out any
covered short position either by exercising their over allotment
option, in whole or in part, or by purchasing shares in the open
market. In making this determination, the underwriters will
consider, among other things, the price of shares available for
purchase in the open market compared to the price at which the
underwriters may purchase shares through the over allotment
option. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market
that could adversely affect investors who purchase in this
offering. To the extent that the underwriters create a naked
short position, they will purchase shares in the open market to
cover the position.
The underwriters have advised us that, pursuant to
Regulation M of the Securities Act of 1933, they may also
engage in other activities that stabilize, maintain or otherwise
affect the price of the common stock, including the imposition
of penalty bids. This means that if the representatives of the
underwriters purchase common stock in the open market in
stabilizing transactions or to cover short sales, the
representatives can require the underwriters that sold those
shares as part of this offering to repay the underwriting
discount received by them.
These activities, as well as other purchases by the underwriters
for their own account, may have the effect of raising or
maintaining the market price of the common stock or preventing
or retarding a decline in the market price of the common stock,
and, as a result, the price of the common stock may be higher
126
than the price that otherwise might exist in the open market. If
the underwriters commence these activities, they may discontinue
them at any time. The underwriters may carry out these
transactions on the New York Stock Exchange, in the
over-the-counter market
or otherwise.
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
determined by negotiations between us and the representatives of
the underwriters. In determining the initial public offering
price, we and the representatives of the underwriters expect to
consider a number of factors including:
|
|
|
|
• |
the information set forth in this prospectus and otherwise
available to the representatives; |
|
|
• |
our prospects and the history and prospects for the industry in
which we compete; |
|
|
• |
an assessment of our management; |
|
|
• |
our prospects for future earnings; |
|
|
• |
the general condition of the securities markets at the time of
this offering; |
|
|
• |
the recent market prices of, and demand for, publicly traded
common stock of generally comparable companies; and |
|
|
• |
other factors deemed relevant by the underwriters and us. |
Neither we nor the selling stockholders nor the underwriters can
assure investors that an active trading market will develop for
our common shares, or that the shares will trade in the public
market at or above the initial public offering price.
Each underwriter has represented that (i) it has only
communicated or caused to be communicated and will only
communicate or cause to be communicated any invitation or
inducement to engage in investment activity (within the meaning
of Section 21 of the FSMA) received by it in connection
with the issue or sale of any common stock in circumstances in
which Section 21(1) of the FSMA does not apply to us and
(ii) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the
United Kingdom.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
“Relevant Member State”), each underwriter has
represented and agreed that with effect from and including the
date on which the European Union Prospectus Directive (the
“EU Prospectus Directive”) is implemented in that
Relevant Member State (the “Relevant Implementation
Date”) it has not made and will not make an offer of common
stock to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the shares which has
been approved by the competent authority in that Relevant Member
State or, where appropriate, approved in another Relevant Member
State and notified to the competent authority in that Relevant
Member State, all in accordance with the EU Prospectus
Directive, except that it may, with effect from and including
the Relevant Implementation Date, make an offer of shares to the
public in that Relevant Member State at any time:
|
|
|
|
• |
to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities; |
|
|
|
• |
to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than
€43,000,000 and
(3) an annual net turnover of more than
€
50,000,000, as shown in its last annual or consolidated
accounts; or |
|
|
|
• |
in any other circumstances which do not require the publication
by the Issuer of a prospectus pursuant to Article 3 of the
Prospectus Directive. |
For the purposes of this provision, the expression an
“offer of shares to the public” in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to
127
decide to purchase or subscribe the shares, as the same may be
varied in that Member State by any measure implementing the EU
Prospectus Directive in that Member State and the expression EU
Prospectus Directive means Directive 2003/71/EC and includes any
relevant implementing measure in each Relevant Member State.
The shares may not be offered or sold by means of any document
other than to persons whose ordinary business is to buy or sell
shares or debentures, whether as principal or agent, or in
circumstances which do not constitute an offer to the public
within the meaning of the Companies Ordinance (Cap. 32) of
Hong Kong, and no advertisement, invitation or document relating
to the shares may be issued, whether in Hong Kong or elsewhere,
which is directed at, or the contents of which are likely to be
accessed or read by, the public in Hong Kong (except if
permitted to do so under the securities laws of Hong Kong) other
than with respect to shares which are or are intended to be
disposed of only to persons outside Hong Kong or only to
“professional investors” within the meaning of the
Securities and Futures Ordinance (Cap. 571) of Hong Kong
and any rules made thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore (the “SFA”),
(ii) to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other
applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries’ rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
The securities have not been and will not be registered under
the Securities and Exchange Law of Japan (the Securities and
Exchange Law) and each underwriter has agreed that it will not
offer or sell any securities, directly or indirectly, in Japan
or to, or for the benefit of, any resident of Japan (which term
as used herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan),
or to others for
re-offering or resale,
directly or indirectly, in Japan or to a resident of Japan,
except pursuant to an exemption from the registration
requirements of, and otherwise in compliance with, the
Securities and Exchange Law and any other applicable laws,
regulations and ministerial guidelines of Japan.
Prior to this offering, the Goldman Sachs Funds, affiliates of
Goldman, Sachs & Co., own in excess of 10% of the
issued and outstanding shares of our common stock. Accordingly,
under Rule 2720 of the National Association of Securities
Dealers, Inc.’s Conduct Rules, Goldman, Sachs & Co. may
be deemed to be our “affiliate”. When a NASD member
participates as an underwriter in a public offering of an
affiliated issuer, the rule requires that the initial public
offering price can be no higher than that recommended by a
“qualified independent underwriter,” as defined by the
NASD. In accordance with the rule, Loop Capital Markets, LLC
will assume the responsibility of acting as a qualified
independent underwriter. In this role, Loop Capital Markets, LLC
will perform a due diligence investigation and review and
participate in the preparation of the registration statement of
which this prospectus forms a part. The
128
underwriters may not confirm sales to any discretionary account
without the prior specific written approval of the customer.
Certain of the underwriters and their affiliates have provided
in the past to us, our affiliates and the sponsors and may
provide from time to time in the future certain commercial
banking, financial advisory, investment banking and other
services for us, such affiliates and the sponsors in the
ordinary course of their business, for which they have received
and may continue to receive customary fees and commissions. For
example, J.P. Morgan Chase Bank N.A., an affiliate of
J.P. Morgan Securities Inc., is the administrative agent
for our senior secured credit facility and Citicorp North
America Inc., an affiliate of Citigroup Global Markets Inc., is
syndication agent for our senior secured credit facility.
Affiliates of each of the underwriters, except Loop Capital
Markets, LLC, are lenders under our senior secured credit
facility. In addition, from time to time, certain of the
underwriters and their affiliates may effect transactions for
their own account or the account of customers, and hold on
behalf of themselves or their customers, long or short positions
in our debt or equity securities or loans, and may do so in the
future. In addition, TurnWorks, Inc., a consulting company 100%
owned by our former Chairman and Chief Executive Officer, has
provided certain consulting and other advisory services
unrelated to this offering to an affiliate of J.P. Morgan
Securities Inc.
129
LEGAL MATTERS
The validity of the shares of common stock offered hereby will
be passed upon for us by Davis Polk & Wardwell, New
York, New York, and certain legal matters will be passed upon
for the underwriters by Cleary Gottlieb Steen &
Hamilton LLP, New York, New York. Cleary Gottlieb
Steen & Hamilton LLP has in the past provided legal
services to us and the sponsors, including in connection with
the acquisition of BKC in December 2002, and may in the future
continue to provide legal services to us and the sponsors. In
addition, Cleary Gottlieb Steen & Hamilton LLP
currently provides legal services to the sponsors, including
legal services regarding modifications to the arrangements
between us and the sponsors in connection with this offering.
EXPERTS
The consolidated financial statements of Burger King Holdings,
Inc. and subsidiaries (Successor) as of June 30, 2004 and
2005, the period from December 13, 2002 to June 30,
2003 and for each of the years in the two-year period ended
June 30, 2005, and for the period from July 1, 2002 to
December 12, 2002 of Burger King Corporation and
subsidiaries (Predecessor), have been included herein in
reliance upon the report of KPMG LLP, independent registered
public accounting firm, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission or
SEC, in Washington, DC, a registration statement on
Form S-1 under the
Securities Act with respect to the common stock offered hereby.
For further information with respect to us and our common stock,
reference is made to the registration statement and the exhibits
and any schedules filed therewith. Statements contained in this
prospectus as to the contents of any contract or other document
referred to are not necessarily complete and in each instance,
if such contract or document is filed as an exhibit, reference
is made to the copy of such contract or other document filed as
an exhibit to the registration statement, each statement being
qualified in all respects by such reference. A copy of the
registration statement, including the exhibits and schedules
thereto, may be read and copied at the SEC’s Public
Reference Room at 100 F Street, N.E., Room 1580,
Washington, DC 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. In
addition, the SEC maintains an Internet site at
http://www.sec.gov, from which interested persons can
electronically access the registration statement, including the
exhibits and any schedules thereto. The registration statement,
including the exhibits and schedules thereto, are also available
for reading and copying at the offices of the New York Stock
Exchange at 20 Broad Street, New York, New York 10005.
As a result of this offering, we will become subject to the full
informational requirements of the Securities Exchange Act of
1934, as amended. We will fulfill our obligations with respect
to such requirements by filing periodic reports and other
information with the SEC. We intend to furnish our shareholders
with annual reports containing consolidated financial statements
certified by an independent public accounting firm. We also
maintain an Internet site at http://www.bk.com. Our website and
the information contained therein or connected thereto shall not
be deemed to be incorporated into this prospectus or the
registration statement of which it forms a part.
You may obtain a copy of any of our filings, at no cost, by
writing or telephoning us at:
Burger King Holdings, Inc.
5505 Blue Lagoon Drive
Miami, Florida 33126
(305) 378-3000
Attn: Corporate Secretary
130
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page | |
|
|
| |
Unaudited Financial Statements
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
F-3 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-7 |
|
Audited Financial Statements
|
|
|
|
|
|
|
|
F-18 |
|
|
|
|
F-19 |
|
|
|
|
F-20 |
|
|
|
|
F-21 |
|
|
|
|
F-22 |
|
|
|
|
F-24 |
|
F-1
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets as of
June 30, 2005 and March 31, 2006
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
|
|
|
(Unaudited) | |
Assets |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
432 |
|
|
$ |
197 |
|
|
Trade and notes receivable, net
|
|
|
110 |
|
|
|
105 |
|
|
Prepaids and other current assets, net
|
|
|
35 |
|
|
|
42 |
|
|
Deferred income taxes, net
|
|
|
57 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
634 |
|
|
|
399 |
|
Property and equipment, net
|
|
|
899 |
|
|
|
863 |
|
Intangibles, net
|
|
|
995 |
|
|
|
986 |
|
Goodwill
|
|
|
17 |
|
|
|
19 |
|
Net investment in property leased to franchisees
|
|
|
149 |
|
|
|
149 |
|
Other assets, net
|
|
|
29 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,723 |
|
|
$ |
2,466 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts and drafts payable
|
|
$ |
83 |
|
|
$ |
68 |
|
|
Accrued advertising
|
|
|
59 |
|
|
|
50 |
|
|
Other accrued liabilities
|
|
|
248 |
|
|
|
237 |
|
|
Current portion of term debt and capital leases
|
|
|
4 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
394 |
|
|
|
389 |
|
|
|
|
|
|
|
|
Term debt
|
|
|
1,282 |
|
|
|
1,317 |
|
Capital leases
|
|
|
53 |
|
|
|
61 |
|
Other deferrals and liabilities
|
|
|
375 |
|
|
|
365 |
|
Deferred income taxes, net
|
|
|
142 |
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,246 |
|
|
|
2,303 |
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 118,557,360 shares
authorized; 106,332,410 and 107,578,053 shares issued and
outstanding at June 30, 2005 and March 31, 2006,
respectively
|
|
|
1 |
|
|
|
1 |
|
|
Restricted stock units
|
|
|
2 |
|
|
|
5 |
|
|
Additional paid-in capital
|
|
|
406 |
|
|
|
146 |
|
|
Retained earnings
|
|
|
76 |
|
|
|
13 |
|
|
Unearned compensation
|
|
|
— |
|
|
|
(1 |
) |
|
Accumulated other comprehensive (loss) income
|
|
|
(6 |
) |
|
|
1 |
|
|
Treasury stock, at cost; 402,463 shares at June 30,
2005 and March 31, 2006
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
477 |
|
|
|
163 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
2,723 |
|
|
$ |
2,466 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
F-2
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations for the nine
months ended
March 31, 2005 and March 31, 2006
(Unaudited)
(In millions, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
Company restaurant
|
|
$ |
1,043 |
|
|
$ |
1,122 |
|
|
Franchise and property
|
|
|
394 |
|
|
|
393 |
|
|
|
|
|
|
|
|
|
|
|
1,437 |
|
|
|
1,515 |
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
322 |
|
|
|
351 |
|
|
Payroll and employee benefits
|
|
|
308 |
|
|
|
330 |
|
|
Occupancy and other operating costs
|
|
|
256 |
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses
|
|
|
886 |
|
|
|
961 |
|
|
Selling, general and administrative expenses
|
|
|
363 |
|
|
|
361 |
|
|
Property expenses
|
|
|
43 |
|
|
|
42 |
|
|
Other operating expense (income), net
|
|
|
18 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
1,310 |
|
|
|
1,359 |
|
|
|
|
|
|
|
|
Income from operations
|
|
|
127 |
|
|
|
156 |
|
Interest expense, net
|
|
|
53 |
|
|
|
53 |
|
Loss on early extinguishment of debt
|
|
|
— |
|
|
|
14 |
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
74 |
|
|
|
89 |
|
Income tax expense
|
|
|
29 |
|
|
|
52 |
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
45 |
|
|
$ |
37 |
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.42 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.42 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
106,421,908 |
|
|
|
106,845,289 |
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
106,808,273 |
|
|
|
111,140,533 |
|
|
|
|
|
|
|
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
Pro forma weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
127,470,289 |
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
131,765,533 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
F-3
BURGER KING HOLDINGS, INC AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
For the Nine Months Ended March 31, 2006
(Unaudited)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
Restricted | |
|
Additional | |
|
|
|
|
|
Other | |
|
|
|
|
|
|
Common | |
|
Stock | |
|
Paid-in | |
|
Retained | |
|
Unearned | |
|
Comprehensive | |
|
Treasury | |
|
|
|
|
Stock | |
|
Units | |
|
Capital | |
|
Earnings | |
|
Compensation | |
|
(Loss) Income | |
|
Stock | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balances at June 30, 2005
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
406 |
|
|
$ |
76 |
|
|
$ |
— |
|
|
$ |
(6 |
) |
|
$ |
(2 |
) |
|
$ |
477 |
|
|
Issuance of restricted stock units
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
Exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
Dividends paid on common shares
|
|
|
— |
|
|
|
— |
|
|
|
(267 |
) |
|
|
(100 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(367 |
) |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
37 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
37 |
|
|
|
Translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
|
|
Unrealized gain on hedging activity, net of tax of $(7)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
11 |
|
|
|
Minimum pension liability, net of tax of $4
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2006
|
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
146 |
|
|
$ |
13 |
|
|
$ |
(1 |
) |
|
$ |
1 |
|
|
$ |
(2 |
) |
|
$ |
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements
F-4
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows for the nine
months ended
March 31, 2005 and March 31, 2006
(Unaudited)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
45 |
|
|
$ |
37 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
53 |
|
|
|
63 |
|
|
|
Interest expense payable in kind
|
|
|
33 |
|
|
|
— |
|
|
|
Gain on asset disposals
|
|
|
(3 |
) |
|
|
(2 |
) |
|
|
Provision for bad debts
|
|
|
3 |
|
|
|
(1 |
) |
|
|
Impairment of debt investments
|
|
|
4 |
|
|
|
— |
|
|
|
Pension curtailment gain
|
|
|
— |
|
|
|
(6 |
) |
|
|
Loss on early extinguishment of debt
|
|
|
— |
|
|
|
14 |
|
|
|
Deferred income taxes
|
|
|
18 |
|
|
|
36 |
|
|
|
Changes in current assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
Trade and notes receivables
|
|
|
(1 |
) |
|
|
9 |
|
|
|
|
Prepaids and other current assets, net
|
|
|
(7 |
) |
|
|
(12 |
) |
|
|
|
Accounts and drafts payable
|
|
|
(26 |
) |
|
|
(23 |
) |
|
|
|
Accrued advertising
|
|
|
(5 |
) |
|
|
(9 |
) |
|
|
|
Other accrued liabilities
|
|
|
30 |
|
|
|
7 |
|
|
|
Payment of interest on PIK Notes
|
|
|
— |
|
|
|
(103 |
) |
|
|
Changes in other long-term assets and liabilities, net
|
|
|
7 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
151 |
|
|
|
21 |
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Sale of investment securities available for sale
|
|
|
387 |
|
|
|
— |
|
|
Purchase of investment securities available for sale
|
|
|
(552 |
) |
|
|
— |
|
|
Additions to property and equipment
|
|
|
(51 |
) |
|
|
(48 |
) |
|
Proceeds from dispositions of assets and business disposals
|
|
|
10 |
|
|
|
15 |
|
|
Payments for acquired franchisee operations
|
|
|
(21 |
) |
|
|
(7 |
) |
|
Investment in franchisee debt
|
|
|
(17 |
) |
|
|
(3 |
) |
|
Collections on franchisee debt
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(243 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from term debt and credit facility
|
|
|
— |
|
|
|
2,143 |
|
|
Repayments of term debt, credit facility and capital leases
|
|
|
(2 |
) |
|
|
(1,978 |
) |
|
Payment of deferred financing costs
|
|
|
— |
|
|
|
(19 |
) |
|
Proceeds from exercise of options
|
|
|
3 |
|
|
|
7 |
|
|
Dividends paid on common stock
|
|
|
— |
|
|
|
(367 |
) |
|
Purchases of treasury stock
|
|
|
(2 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(1 |
) |
|
|
(214 |
) |
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(93 |
) |
|
|
(235 |
) |
Cash and cash equivalents at beginning of period
|
|
|
221 |
|
|
|
432 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
128 |
|
|
$ |
197 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
F-5
BURGER KING HOLDINGS, INC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows for the nine
months ended
March 31, 2005 and March 31, 2006
(Unaudited)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months | |
|
|
Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Supplemental cash— flow disclosures:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
20 |
|
|
$ |
159 |
|
|
Income taxes paid
|
|
|
10 |
|
|
|
11 |
|
Non— cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Acquisition of franchise operations
|
|
$ |
9 |
|
|
$ |
— |
|
|
Acquisition of property with capital leases
|
|
|
— |
|
|
|
11 |
|
See accompanying notes to condensed consolidated financial
statements.
F-6
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
Note 1. |
Description of Business and Organization |
Burger King Holdings, Inc. (“BKH”) is a Delaware
corporation, formed on July 23, 2002 and the parent of
Burger King Corporation (“BKC”), a Florida
corporation, that is a worldwide franchisor and operator of fast
food hamburger restaurants, principally under the Burger King
brand. BKH is owned by funds controlled by Texas Pacific
Group, the Goldman Sachs Funds and Bain Capital Partners
(collectively, the “Sponsors”). BKH and its
subsidiaries, including BKC, are collectively referred to herein
as the “Company”. The Company anticipates completing
an initial public offering of its common stock in the quarter
ending June 30, 2006. After the completion of the initial
public offering, the Sponsors will continue to own a controlling
interest in the Company.
The Company generates revenues from three sources:
(i) sales at restaurants owned by the Company;
(ii) royalties and franchise fees paid by franchisees; and
(iii) property income from the franchise restaurants that
the Company leases or subleases to franchisees. The Company
receives monthly royalties and advertising contributions from
franchisees based on a percentage of restaurant sales.
|
|
Note 2. |
Basis of Consolidation and Presentation |
The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation. The condensed unaudited consolidated financial
statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission
(“SEC”) for interim financial information.
Accordingly, they do not include all of the information and
footnotes required by Unites States generally accepted
accounting principles for complete financial statements.
Therefore, these condensed consolidated financial statements
should be read in conjunction with the Company’s audited
financial statements for the year ended June 30, 2005. In
the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary for the fair presentation of
the accompanying condensed unaudited consolidated financial
statements have been made. Operating results for the nine months
ended March 31, 2006 are not necessarily indicative of the
results that may be expected for the full year.
In connection with a proposed public offering of the
Company’s common stock, on May 1, 2006 the Company
authorized an increase in the number of shares of the
Company’s $0.01 par value common stock to 300 million
shares, authorized a 26.34608 to one stock split, and authorized
10 million shares of a new class of preferred stock, with a
par value of $0.01 per share. As of May 1, 2006, no shares
of this new class of preferred stock were issued or outstanding.
All references to the numbers of shares in these condensed
consolidated financial statements and accompanying notes have
been adjusted to reflect the stock split on a retroactive basis.
All acquisitions of franchised restaurant operations are
accounted for using the purchase method of accounting. The
operating results of acquired restaurants have been included in
the consolidated
F-7
statements of operations since their respective dates of
acquisition. These acquisitions are summarized as follows (in
millions, except for number of restaurants):
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Number of restaurants acquired
|
|
|
63 |
|
|
|
41 |
|
Property and equipment, net
|
|
$ |
25 |
|
|
$ |
2 |
|
Goodwill and other intangible assets
|
|
|
6 |
|
|
|
6 |
|
Other miscellaneous
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Total purchase price
|
|
$ |
30 |
|
|
$ |
7 |
|
|
|
|
|
|
|
|
Included in the total purchase price of $30 million for the
nine months ended March 31, 2005 was goodwill and property
leased to franchisees of $6 million and $14 million,
respectively.
The Company’s settlement losses, recorded in accordance
with Emerging Issues Task Force (“EITF”) 04-1,
Accounting for Preexisting Relationships between the Parties
to a Business Combination were $4 million for the nine
months ended March 31, 2005. During the nine months ended
March 31, 2006 settlement losses on acquisitions were
insignificant. These settlement losses and other expenses are
recorded in other operating expenses (income), net, in the
accompanying condensed consolidated statements of operations.
|
|
Note 4. |
Related Party Transactions |
In connection with the Company acquisition of BKC, the Company
entered into a management agreement with the Sponsors for
monitoring the Company’s business through board of director
participation, executive team recruitment, interim senior
management services and other services consistent with
arrangements with private equity funds (the “management
agreement”). Pursuant to the management agreement, the
Company is charged a quarterly fee by the Sponsors not to exceed
0.5% of the prior quarter’s total revenues. For both the
nine months ended March 31, 2005 and 2006, the Company
incurred management fees and reimbursable
out-of-pocket expenses
totaling $7 million. These fees and expenses are recorded
within selling, general and administrative expenses in the
accompanying condensed consolidated statement of operations. At
June 30, 2005 and March 31, 2006, amounts payable to
the Sponsors for management fees and reimbursable
out-of-pocket expenses
totaled $2 million, which are included within other accrued
liabilities in the accompanying condensed consolidated balance
sheet. In February 2006, the Company entered into an agreement
with the Sponsors to pay a termination fee totaling
$30 million to the Sponsors to terminate the management
agreement upon the completion of an initial public offering of
the Company’s common stock. As a result, the Company will
recognize a selling, general and administrative expense of
$30 million in the period in which the initial public
offering occurs.
As of June 30, 2005, the Company had
payment-in-kind notes
(“PIK Notes”) outstanding to affiliates of
$528 million. The outstanding balance of the PIK Notes,
which included $103 million of
payment-in-kind
interest as of June 30, 2005, and $2 million of
accrued interest for the current fiscal year, was repaid in July
2005. There were no PIK Notes outstanding as of
December 31, 2005. Interest expense on the PIK Notes for
the nine months ended March 31, 2005 was $33 million.
A member of the Board of Directors of the Company has a direct
financial interest in a company with which the Company has
entered into a lease agreement for the Company’s new
corporate headquarters (see Note 14).
|
|
Note 5. |
Prepaid Expenses and Other Current Assets, Net |
Included in prepaid expenses and other current assets, net are
inventory of $15 million as of June 30, 2005 and
March 31, 2006.
F-8
|
|
Note 6. |
Property & Equipment, Net |
Property and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 | |
|
March 31, 2006 | |
|
|
| |
|
| |
Property and equipment
|
|
$ |
1,151 |
|
|
$ |
1,191 |
|
Accumulated depreciation
|
|
|
(252 |
) |
|
|
(328 |
) |
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
899 |
|
|
$ |
863 |
|
|
|
|
|
|
|
|
|
|
Note 7. |
Earnings Per Share |
Basic earnings per share is computed by dividing net earnings
attributable to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted
earnings per share, calculated using the treasury stock method,
reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company.
Basic and diluted earnings per share were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, | |
|
|
| |
|
|
2005 | |
|
2006 | |
(In millions, except share and per share amounts) |
|
| |
|
| |
Numerator:
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share-net income
|
|
$ |
45 |
|
|
$ |
37 |
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share-weighted average shares
|
|
|
106,421,908 |
|
|
|
106,845,289 |
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
386,365 |
|
|
|
663,854 |
|
|
Employee stock options
|
|
|
— |
|
|
|
3,631,390 |
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share- adjusted weighted
average shares
|
|
|
106,808,273 |
|
|
|
111,140,533 |
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
0.42 |
|
|
$ |
0.35 |
|
|
Diluted earnings per share
|
|
$ |
0.42 |
|
|
$ |
0.33 |
|
For the nine months ended March 31, 2005 and 2006,
9,166,065 and 814,147 of the Company’s options to purchase
common stock, respectively, were excluded from the calculation
of diluted earnings per share since the options were
anti-dilutive.
Unaudited Pro Forma earnings
per share attributable to common stockholders
Pro forma basic and diluted earnings per share for the nine
months ended March 31, 2006 has been computed to give
effect to the number of shares to be sold in the Company’s
initial public offering that would have been necessary to pay
the portion of the February 2006 dividend of $367 million
in excess of current period earnings.
|
|
Note 8. |
Other Accrued Liabilities |
Included in other accrued liabilities as of June 30, 2005
and March 31, 2006, were accrued payroll and
employee-related benefit costs totaling $93 million and
$87 million, respectively.
In July 2005, the Company entered into a $1.15 billion
credit agreement, which consists of a $150 million
revolving credit facility, a $250 million term loan
(“Term Loan A”), and a $750 million term
F-9
loan (“Term Loan B”). The interest rate for Term
Loan A, Term Loan B, and the revolving credit
facility, as selected by the Company, is either (a) the
greater of the prime rate or the federal funds effective rate
plus 0.5% plus a rate not to exceed 0.75%, which varies
according to the Company’s leverage ratio or (b) LIBOR
plus a rate not to exceed 1.75%, which varies according to the
Company’s leverage ratio. The Company utilized
$1 billion in proceeds from Term Loan A and Term
Loan B, $47 million from the revolving credit
facility, and cash on hand to repay BKC’s existing term
debt and the PIK Notes. The unamortized balance of deferred
financing costs, totaling $13 million, related to the
existing term debt was recorded as a loss on early
extinguishment of debt in the accompanying condensed
consolidated statement of operations for the nine months ended
March 31, 2006. The Company recorded deferred financing
costs of $16 million in connection with the facility.
In February 2006, the Company amended and restated its secured
credit facility (“amended facility”) to replace the
existing $750 million Term Loan B loan with a new Term
Loan B loan (“Term Loan B-1”) in an amount
of $1.1 billion. As a result of this transaction, the
Company received net proceeds of $347 million. The interest
rate for the Term Loan B-1 is, at the Company’s
option, either (a) Average Borrowing Rate
(“ABR”), plus 0.50% or (b) LIBOR plus 1.50%; in
each case so long as the Company’s leverage ratio remains
at or below certain levels (but in any event, the interest rate
shall not exceed 0.75%, in the case of ABR rate, and 1.75% in
the case of LIBOR rate). The Company recorded deferred financing
costs of $3 million in connection with the amended facility
in addition to a $1 million write-off of deferred financing
costs, which is recorded as a loss on early extinguishment of
debt in the accompanying condensed consolidated statement of
operations for the three and nine months ended March 31,
2006. The amended facility also allows the Company:
|
|
|
|
• |
to make a one-time payment of up to $400 million to holders
of the Company’s common stock and certain option and
restricted stock unit holders; |
|
|
• |
to enter into an agreement with the Sponsors to pay a fee to
terminate the quarterly management fee currently charged by the
Sponsors; |
|
|
• |
to make dividend payments after an initial public offering,
subject to certain covenant restrictions. |
The additional $350 million borrowing under the amended
facility in February 2006 and cash on hand was used to make the
$367 million dividend payment to the holders of the
Company’s common stock (see Note 10) and to make a
one-time compensatory make-whole payment in the amount of
$33 million to certain BKH option and restricted stock unit
holders (see Note 11).
The aggregate debt maturities including the Term Loan A,
Term Loan B-1 and other debt as of March 31, 2006 are
as follows (in millions):
|
|
|
|
|
2006
|
|
$ |
3 |
|
2007
|
|
|
37 |
|
2008
|
|
|
36 |
|
2009
|
|
|
61 |
|
2010
|
|
|
74 |
|
Thereafter
|
|
|
1,136 |
|
|
|
|
|
|
|
$ |
1,347 |
|
|
|
|
|
The amended facility contains certain customary financial and
other covenants. These covenants impose restrictions on
additional indebtedness, liens, investments, advances,
guarantees, and acquisitions. These covenants also place
restrictions on asset sales, sale and leaseback transactions,
dividends, payments between BKC and BKH, and certain
transactions with affiliates. The financial covenants include a
requirement to maintain a certain interest expense coverage
ratio and leverage ratio and limit the maximum amount of capital
expenditures in a year. Following the end of each fiscal year,
the Company is required to prepay the term debt in an amount
equal to 50% of excess cash flow (as defined in the credit
agreement). This prepayment requirement is not applicable if the
Company’s leverage ratio is less than a
F-10
predetermined amount. There are other events and transactions
such as sale and leaseback transactions, proceeds from casualty
events, and incurrence of debt that will trigger additional
mandatory prepayments.
During the nine months ended March 31, 2006, the Company
entered into interest rate swap contracts with a notional value
of $750 million that qualify as cash flow hedges under
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, as amended. These
interest rate swaps are used to convert the floating
interest-rate component of certain debt obligations to fixed
rates.
The fair value of the interest rate swaps was $19 million
as of March 31, 2006 and is recorded within other assets,
net in the accompanying condensed consolidated March 2006
balance sheet. During the nine months ended March 31, 2006,
the Company recorded a $11 million, net of tax, unrealized
gain on hedging activity, respectively, in accumulated other
comprehensive loss included in stockholder’s equity, due to
the increase in fair value of the interest rate swaps.
Unrealized gains and losses in other comprehensive income
related to these hedges are expected to be recorded to the
Company’s statement of operations in the future and will
offset interest expense on certain variable rate debt. The
actual amounts that will be recorded to the Company’s
statement of operations could vary materially from this
estimated amount as a result of changes in interest rates in the
future.
|
|
Note 10. |
Dividends Paid and Return of Capital |
On February 21, 2006, the Company paid a dividend of
$367 million, or $3.42 per share, to holders of record
of the Company’s common stock on February 9, 2006,
primarily the private equity funds controlled by the Sponsors
which owned approximately 95% of the outstanding shares of the
Company’s common stock at that date, and members of senior
management. The payment of the dividend was financed primarily
from proceeds of the amended facility (see Note 9) and was
recorded as a cash dividend of $100 million ($0.93 per
share) to retained earnings, which represents the Company’s
historical cumulative retained earnings through the dividend
date, and a return of capital of $267 million
($2.49 per share) to additional paid-in capital in the
accompanying condensed consolidated statement of
stockholders’ equity and balance sheet for the nine months
ended March 31, 2006.
Stock options granted by the Company generally vest over a
five-year period commencing on the date of grant and have a
ten-year contractual life. During the nine months ended
March 31, 2005 and 2006, certain officers and employees of
the Company were granted options to purchase 5,417,703 and
1,709,808 shares of the common stock of BKH, respectively.
During the nine months ended March 31, 2005 and 2006,
options to purchase 3,061,362 and 218,225 shares of
common stock, respectively, were forfeited. In addition, certain
former officers and directors exercised their right to purchase
1,169,740 shares of common stock during the nine months
ended March 31, 2006. During the nine months ended
March 31, 2005, none of the options to purchase shares of
common stock had been exercised.
The Company accounts for stock-based compensation in accordance
with Accounting Principles Board (“APB”) Opinion
No. 25, Accounting for Stock Issued to Employees,
and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options
granted by the Company had an exercise price equal to the fair
market value of the underlying common stock on the date of
grant. The provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure, as they apply to
stock-based employee compensation require disclosure of the
effect on net income and earnings per share had the Company
applied the fair value method under SFAS No. 123. The
impact under the fair value method was insignificant for the
nine months ended March 31, 2005 and 2006.
F-11
Pursuant to BKH’s Equity Incentive Plan, certain officers
of BKC are eligible to receive a portion of their annual
incentive plan award in restricted stock units
(“RSUs”). During the nine months ended March 31,
2006 and March 31, 2005, the Company granted 229,053 and
390,133 RSUs, respectively, at a fair market value to certain
officers of the Company in connection with their annual
incentive award. During the nine months ended March 31,
2006, RSU’s to purchase 29,745 shares of common stock
were exercised and options to purchase 3,267 shares of
common stock were forfeited.
The Company, under the BKH Equity Incentive Plan, may also grant
RSUs to new members of senior management as a condition of their
employment with the Company. For the nine months ended
March 31, 2006, the Company granted 52,692 RSUs at fair
market value to one new member of senior management. The fair
value of these RSUs was recorded as Unearned Compensation in the
accompanying condensed consolidated statement of
stockholders’ equity at March 31, 2006. The Company
recognizes compensation expense on such RSUs ratably over the
vesting period. There were no RSUs issued as Unearned
Compensation for the nine months ended March 31, 2005.
|
|
|
Compensatory Make Whole Payment |
In February 2006, the Company paid $33 million to holders
of its stock options and restricted stock units, primarily
members of senior management, the Board of Directors, and a
former member of senior management, in order to compensate such
holders for the decrease in value of their equity interests as a
result of the February 2006 dividend payment (see Note 10)
and the February 2006 debt refinancing (the “make whole
payment”). The make whole payment was recorded as employee
compensation cost, and is included in selling general and
administrative expenses in the accompanying statement of
operations for the nine months ended March 31, 2006.
|
|
Note 12. |
Retirement Plan and Other Postretirement Benefits |
A summary of the components of net periodic benefit cost for the
defined benefit plans (retirement benefits) and postretirement
benefit plans (other benefits) is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement | |
|
|
|
|
Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
Nine Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
March 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2006 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Service cost— benefits earned during the period
|
|
$ |
5 |
|
|
$ |
4 |
|
|
$ |
— |
|
|
$ |
— |
|
Interest costs on projected benefit obligations
|
|
|
7 |
|
|
|
8 |
|
|
|
1 |
|
|
|
1 |
|
Expected return on plan assets
|
|
|
(6 |
) |
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
Recognized net actuarial loss
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
Curtailment gain
|
|
|
— |
|
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
$ |
7 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has noncontributory defined benefit plans for its
salaried employees in the United States (the “Plans”)
and noncontributory defined benefit plans for certain employees
in the United Kingdom and Germany. In November 2005, the Company
announced that effective December 31, 2005 all benefits
accrued under the Plans would be frozen at the level attained on
that date. As a result, the Company recognized a one-time
pension curtailment gain of $6 million, recorded in the
Company’s second fiscal quarter, equal to the unamortized
balances as of December 31, 2005 from prior plan amendments
and allowable gains to be realized. The curtailment gain was
recorded as a component of selling, general and administrative
expenses in the accompanying condensed consolidated statements
of operations for the nine months ended March 31, 2006. The
benefits accrued through December 31, 2005 were not reduced
F-12
and market assets used to fund the Plans’ obligations will
continue to be invested after that date. At December 31,
2005 the projected benefit obligation of the Plans exceeded
pension assets by $62 million.
In conjunction with the curtailment gain, the Company approved a
distribution totaling $6 million on behalf of those
participants who were affected by the curtailment of the Plans.
The distribution was recorded as a component of selling, general
and administrative expenses in the accompanying condensed
consolidated statements of operations for the nine months ended
March 31, 2006 and was paid by the Company to employees in
cash or contributed to the plan in which the employee
participates.
|
|
Note 13. |
Segment Information |
The Company operates in the fast food hamburger restaurant
industry. Revenues include retail sales at BKC-owned restaurants
and franchise and property revenues. The business is managed as
distinct geographic segments: United States and Canada, Europe,
Middle East and Asia Pacific (“EMEA/ APAC”), and Latin
America. Unallocated includes corporate support costs in areas
such as facilities, finance, human resources, information
technology, legal, marketing and supply chain management.
The following tables present revenues, operating income,
depreciation and amortization and long-lived assets information
by geographic segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months | |
|
|
Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
938 |
|
|
$ |
1,021 |
|
EMEA/ APAC
|
|
|
441 |
|
|
|
428 |
|
Latin America
|
|
|
58 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
1,437 |
|
|
$ |
1,515 |
|
|
|
|
|
|
|
|
Other than the United States and Germany, no other individual
country represented 10% or more of the Company’s total
revenues. Revenues in the United States totaled
$841 million and $916 million for the nine months
ended March 31, 2005 and 2006, respectively. Revenues in
Germany totaled $197 million and $200 million for the
nine months ended March 31, 2005 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Operating Income:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
193 |
|
|
$ |
219 |
|
EMEA/ APAC
|
|
|
36 |
|
|
|
51 |
|
Latin America
|
|
|
19 |
|
|
|
22 |
|
Unallocated
|
|
|
(121 |
) |
|
|
(136 |
) |
|
|
|
|
|
|
|
|
Total operating income
|
|
$ |
127 |
|
|
$ |
156 |
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
53 |
|
|
|
53 |
|
|
Loss on early extinguishment of debt
|
|
|
— |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$ |
74 |
|
|
$ |
89 |
|
|
|
|
|
|
|
|
F-13
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
38 |
|
|
$ |
43 |
|
EMEA/ APAC
|
|
|
2 |
|
|
|
5 |
|
Latin America
|
|
|
1 |
|
|
|
2 |
|
Unallocated
|
|
|
12 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$ |
53 |
|
|
$ |
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
March 31, | |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Long-Lived Assets:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
892 |
|
|
$ |
859 |
|
EMEA/ APAC
|
|
|
102 |
|
|
|
97 |
|
Latin America
|
|
|
31 |
|
|
|
32 |
|
Unallocated
|
|
|
23 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$ |
1,048 |
|
|
$ |
1,012 |
|
|
|
|
|
|
|
|
Long-lived assets include property and equipment, net, and net
investment in property leased to franchisees. Other than the
United States, no other individual country represented 10% or
more of the Company’s total long-lived assets. Long-lived
assets in the United States totaled $845 million and
$814 million at June 30, 2005 and March 31, 2006,
respectively.
|
|
Note 14. |
Commitments and Contingencies |
|
|
|
Financial Restructuring Program |
During 2003, the Company initiated a program in the United
States and Canada designed to provide assistance to franchisees
experiencing financial difficulties. Under this program, the
Company worked with franchisees meeting certain operational
criteria, their lenders, and other creditors to attempt to
strengthen the franchisees’ financial condition. As part of
this program, the Company has agreed to provide financial
support to certain franchisees.
During the nine months ended March 31, 2005 and 2006, the
Company funded $2 million and $8 million,
respectively, in loans for capital expenditures (“Capex
Loans”) and grants for improvements to restaurant
properties that the Company leases to franchisees. In addition,
as of March 31, 2006, the Company has committed to provide
future Capex Loans of $11 million and grants for
improvements to properties that the Company leases to
franchisees of up to $10 million.
For both the nine months ended March 31, 2005 and 2006,
temporary reductions in rent (“rent relief”) for
certain franchisees that leased restaurant properties from the
Company was $2 million. As of March 31, 2006, the
Company has also committed to provide future rent relief of up
to $8 million.
Contingent cash flow subsidies represent commitments by the
Company to provide future cash grants to certain franchisees for
limited periods in the event of a failure to achieve their debt
service coverage ratio. No contingent cash flow subsidy has been
provided through March 31, 2006. The maximum total
contingent cash flow subsidy commitment for future periods as of
March 31, 2006 is $6 million.
Other commitments, arising out of normal business operations,
were $10 million and $8 million as of June 30,
2005 and March 31, 2006, respectively. These commitments
consist primarily of guarantees covering foreign
franchisees’ obligations, obligations to suppliers, and
acquisition related guarantees.
F-14
The Company also guarantees certain lease payments of
franchisees, arising from leases assigned in connection with
sales of company restaurants to franchisees, by remaining
secondarily liable under the assigned leases of varying terms,
for base and contingent rents. The maximum contingent rent
amount payable is not determinable as the amount is based on
future revenues. In the event of default by the franchisees, the
Company has typically retained the right to acquire possession
of the related restaurants, subject to landlord consent. The
aggregate contingent obligation arising from these assigned
lease guarantees was $119 million at March 31, 2006,
expiring over an average period of seven years.
At March 31, 2006, there were $42 million in
irrevocable standby letters of credit outstanding, of which
$41 million were issued to certain insurance carriers to
guarantee payment for various insurance programs such as health
and commercial liability insurance. Of these, $41 million
were collateralized by the Company’s $150 million
revolving credit facility and $1 million was posted by
Diageo plc on behalf of the Company relating to open casualty
claim matters. Additionally, $1 million in letters of
credit were issued relating to the Company’s current
headquarters. As of March 31, 2006, none of these
irrevocable standby letters of credit had been drawn on.
As of March 31, 2006, the Company had posted bonds totaling
$2 million, which related to certain promotional activities.
In fiscal 2000, the Company entered into long-term, exclusive
contracts with the Coca-Cola Company and with Dr Pepper/
Seven Up, Inc. to supply Company and franchise restaurants with
their products and obligating Burger Kingrestaurants 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, 2005, the Company estimates
that it will take approximately 17 years and 19 years
to complete the Coca-Cola and Dr Pepper purchase
commitments, respectively. In the event of early termination of
these arrangements, the Company may be required to make
termination payments that could be material to the
Company’s results of operations and financial position.
Additionally, in connection with these contracts, the Company
has received upfront fees, which are being amortized over the
term of the contracts. At June 30, 2005 and March 31,
2006, the deferred amounts of upfront fees received totaled
$26 million and $23 million, respectively. These
deferred amounts are amortized as a reduction to food, paper and
product costs in the accompanying condensed consolidated
statement of operations.
The Company also enters into commitments to purchase advertising
for periods up to twelve months. At March 31, 2006
commitments to purchase advertising totaled $81 million.
In May 2005, the Company entered into an agreement for the
Company’s new global headquarters. The estimated annual
rent for the 15 year initial term is approximately
$5 million, to be finalized upon the completion of the
building’s construction, expected in 2008. The Company will
receive a tenant improvement allowance, estimated at
approximately $8 million to be finalized upon the
completion of the building’s construction.
The Company is self-insured for most domestic workers’
compensation, general liability, and automotive liability losses
subject to per occurrence and aggregate annual liability
limitations. The Company is also self-insured for healthcare
claims for eligible participating employees subject to certain
deductibles and limitations. The Company determines its
liability for claims incurred but not reported on an actuarial
basis.
F-15
The Company is a party to legal proceedings arising in the
ordinary course of business, some of which are covered by
insurance. In the opinion of management, disposition of these
matters will not materially affect the Company’s financial
condition or results of its operations.
As a matter of course, the Company is regularly audited by
various tax authorities. From time to time, these audits result
in proposed assessments where the ultimate resolution may result
in the Company owing additional taxes. The Company believes that
its tax positions comply with applicable tax law and that it has
adequately provided for these matters.
|
|
Note 15. |
New Accounting Pronouncements |
In February 2006, the Financial Accounting Standards Board
(“FASB”) issued FASB Staff Position
No. FAS 123(R)-4, Classification of Options and
Similar Instruments Issued as Employee Compensation That Allow
for Cash Settlement upon the Occurrence of a Contingent Event
(“FSP 123(R)-4”). The guidance of FSP 123(R)-4
amends paragraphs 32 and A229 of SFAS No. 123
(revised 2004), Share-Based Payment
(“SFAS 123(R)”) to incorporate the concept
articulated in footnote 16 of SFAS 123(R), i.e., a
cash settlement feature that can be exercised only upon the
occurrence of a contingent event that is outside the
employee’s control does not meet the condition in
paragraphs 32 and A229 until it becomes probable that the
event will occur. An option or similar instrument that is
classified as equity, but subsequently becomes a liability
because the contingent cash settlement event is probable of
occurring, shall be accounted for similar to a modification from
an equity to a liability award. To the extent the liability
equals or is less than the amount previously recognized in
equity, the offsetting debit is a charge to equity. To the
extent the liability exceeds the amount previously recognized in
equity, the excess is recognized as compensation cost.
The guidance in FSP 123(R)-4 shall be applied upon initial
adoption of SFAS 123(R), which for the Company is
July 1, 2006, the beginning of the Company’s next
fiscal year. The Company does not expect FSP 123(R)-4 to have a
significant impact on its financial statements.
In December 2004, the FASB issued Statement No. 123
(revised 2004), SFAS 123(R), which is a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”). SFAS 123(R)
supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (“APB
No. 25”). SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.
Under SFAS 123(R) the effective date for a nonpublic entity
that becomes a public entity after June 15, 2005 is the
first interim or annual reporting period beginning after
becoming a public company. Further, SFAS 123(R) states that
an entity that makes a filing with a regulatory agency in
preparation for the sale of any class of equity securities in a
public market is considered a public entity for purposes of
SFAS 123(R). The Company expects to implement
SFAS 123(R) effective July 1, 2006, the beginning of
the Company’s next fiscal year. As a result, after the
filing date of a registration statement in connection with the
Company’s initial public offering of its common stock, the
Company will be required to apply the modified prospective
transition method to any share-based payments issued subsequent
to the filing of the registration statement but prior to the
effective date of the Company’s adoption of SFAS
No. 123(R). Under the modified prospective transition
method, compensation expense is recognized for any unvested
portion of the awards granted between filing date and adoption
date of SFAS No. 123(R) over the remaining vesting period
of the awards beginning on the adoption date for the Company
July 1, 2006.
As permitted by SFAS 123, the Company currently accounts
for share-based payments to employees using APB
No. 25’s intrinsic value method and, as such,
generally recognizes no compensation expense for employee stock
options. As the Company currently applies SFAS 123 pro
forma disclosure using the minimum value method of accounting,
the Company is required to adopt SFAS 123(R) using the
prospective transition method. Under the prospective transition
method, non-public entities that previously applied
SFAS 123 using the minimum value method continue to account
for non-vested awards outstanding at the date of adoption of
SFAS 123(R) in the same manner as they had been accounted to
F-16
prior to adoption. The Company currently accounts for equity
awards using the minimum value method under APB No. 25, and
will continue to apply APB No. 25 in future periods to
equity awards outstanding at the adoption date of
SFAS 123(R). The Company will not recognize compensation
expense for awards issued prior to the date of adoption, unless
those awards are modified after the Company becomes a public
company, as described above.
For any awards granted subsequent to the adoption of
SFAS 123(R), compensation expense will be recognized
generally over the vesting period of the award. As a result of
the transition method described above, the Company does not
expect to recognize any compensation expense under
SFAS 123(R) for awards outstanding at the date of adoption.
|
|
Note 16. |
Subsequent Events |
|
|
|
Resignation of Chief Executive Officer |
The Company announced that Mr. Gregory D. Brenneman has
resigned as its Chairman and Chief Executive Officer effective
April 7, 2006. Mr. Brenneman will continue to work
with the Board of Directors in a consulting capacity in
connection with the transition through June 30, 2006. The
Company will record a severance charge during the quarter ended
June 30, 2006 associated with the resignation totaling
approximately $4 million to be paid out over a period of
three years. In addition, Mr. Brenneman will receive his
2006 bonus payment of $2.06 million in the first quarter of
fiscal 2007. In accordance with the terms of
Mr. Brenneman’s employment agreement
605,117 shares, which would have vested in August 2006 were
accelerated. There will be no impact to the financial statements
as the options were granted at fair value and the acceleration
was in accordance with the employment agreement entered into in
August 2004. Mr. Brenneman has one year from the date of
resignation to exercise any vested options.
Mr. Brenneman’s remaining 1,815,508 unvested options
were forfeited.
F-17
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 (Successor) as of
June 30, 2004 and 2005, and the related consolidated
statements of operations, stockholders’ equity, and cash
flows for the period from December 13, 2002 to
June 30, 2003, and for each of the years in the two-year
period ended June 30, 2005 (Successor period), and for the
period from July 1, 2002 to December 12, 2002
(Predecessor period) of Burger King Corporation and subsidiaries
(Predecessor). These consolidated financial statements are the
responsibility of the Companies’ 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 aforementioned Successor consolidated
financial statements present fairly, in all material respects,
the financial position of Burger King Holdings, Inc. and
subsidiaries as of June 30, 2004 and 2005, and the results
of their operations and their cash flows for the Successor
period, in conformity with U.S. generally accepted
accounting principles. Further, in our opinion, the
aforementioned Predecessor consolidated financial statements
present fairly, in all material respects, the results of their
operations and their cash flows of Burger King Corporation and
subsidiaries for the Predecessor periods, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, effective December 13, 2002, Burger King
Holdings, Inc., through a wholly owned subsidiary, acquired all
of the outstanding stock of Burger King Corporation in a
business combination accounted for as a purchase. As a result of
the acquisition, the consolidated financial information for the
periods after the acquisition is presented on a different cost
basis than that for the periods before the acquisition and,
therefore, is not comparable.
/s/ KPMG LLP
September 1, 2005
Miami, Florida
Certified Public Accountants
F-18
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of June 30, 2004 and 2005
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Assets |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
221 |
|
|
$ |
432 |
|
|
Investment in auction rate notes
|
|
|
122 |
|
|
|
— |
|
|
Trade and notes receivable, net
|
|
|
111 |
|
|
|
110 |
|
|
Prepaids and other current assets, net
|
|
|
39 |
|
|
|
35 |
|
|
Deferred income taxes, net
|
|
|
94 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
587 |
|
|
|
634 |
|
Property and equipment, net
|
|
|
880 |
|
|
|
899 |
|
Intangible assets, net
|
|
|
1,001 |
|
|
|
995 |
|
Goodwill
|
|
|
5 |
|
|
|
17 |
|
Net investment in property leased to franchisees
|
|
|
159 |
|
|
|
149 |
|
Other assets, net
|
|
|
33 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,665 |
|
|
$ |
2,723 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts and drafts payable
|
|
$ |
105 |
|
|
$ |
83 |
|
|
Accrued advertising
|
|
|
52 |
|
|
|
59 |
|
|
Other accrued liabilities
|
|
|
194 |
|
|
|
248 |
|
|
Current portion of long term debt and capital leases
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
355 |
|
|
|
394 |
|
Term debt
|
|
|
1,238 |
|
|
|
1,282 |
|
Capital leases
|
|
|
52 |
|
|
|
53 |
|
Other deferrals and liabilities
|
|
|
424 |
|
|
|
375 |
|
Deferred income taxes, net
|
|
|
172 |
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$ |
2,241 |
|
|
$ |
2,246 |
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 118,557,360 shares
authorized; 106,349,614 and 106,332,410 shares issued and
outstanding at June 30, 2004 and June 30, 2005,
respectively
|
|
|
1 |
|
|
|
1 |
|
|
Restricted stock units
|
|
|
— |
|
|
|
2 |
|
|
Additional paid-in capital
|
|
|
403 |
|
|
|
406 |
|
|
Retained earnings
|
|
|
29 |
|
|
|
76 |
|
|
Accumulated other comprehensive loss
|
|
|
(9 |
) |
|
|
(6 |
) |
|
Treasury stock, at cost; 0 and 402,463 shares, respectively
|
|
|
— |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
424 |
|
|
|
477 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
2,665 |
|
|
$ |
2,723 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
F-19
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations for the periods
July 1, 2002 to
December 12, 2002 (Predecessor) and December 13, 2002
to June 30, 2003, and
for each of the years in the two-year period ended June 30
2005
(Successor)
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
Successor | |
|
|
| |
|
| |
|
|
July 1, | |
|
December 13, | |
|
|
|
|
2002 to | |
|
2002 to | |
|
Years Ended June 30, | |
|
|
December 12, | |
|
June 30, | |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant
|
|
$ |
526 |
|
|
$ |
648 |
|
|
$ |
1,276 |
|
|
$ |
1,407 |
|
Franchise and property
|
|
|
225 |
|
|
|
258 |
|
|
|
478 |
|
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
751 |
|
|
|
906 |
|
|
|
1,754 |
|
|
|
1,940 |
|
Company restaurant expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food, paper and product costs
|
|
|
162 |
|
|
|
197 |
|
|
|
391 |
|
|
|
437 |
|
|
Payroll and employee benefits
|
|
|
157 |
|
|
|
192 |
|
|
|
382 |
|
|
|
415 |
|
|
Occupancy and other operating costs
|
|
|
146 |
|
|
|
168 |
|
|
|
314 |
|
|
|
343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses
|
|
|
465 |
|
|
|
557 |
|
|
|
1,087 |
|
|
|
1,195 |
|
|
|
Selling, general and administrative expenses
|
|
|
225 |
|
|
|
253 |
|
|
|
482 |
|
|
|
496 |
|
|
Property expenses
|
|
|
27 |
|
|
|
28 |
|
|
|
58 |
|
|
|
64 |
|
|
Impairment of goodwill
|
|
|
875 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other operating expenses (income), net
|
|
|
39 |
|
|
|
(7 |
) |
|
|
54 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
1,631 |
|
|
|
831 |
|
|
|
1,681 |
|
|
|
1,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(880 |
) |
|
|
75 |
|
|
|
73 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
48 |
|
|
|
37 |
|
|
|
68 |
|
|
|
82 |
|
Interest income
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(4 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense, net
|
|
|
46 |
|
|
|
35 |
|
|
|
64 |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(926 |
) |
|
|
40 |
|
|
|
9 |
|
|
|
78 |
|
Income tax (benefit) expense
|
|
|
(34 |
) |
|
|
16 |
|
|
|
4 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(892 |
) |
|
$ |
24 |
|
|
$ |
5 |
|
|
$ |
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(8.43 |
) |
|
$ |
0.23 |
|
|
$ |
0.05 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(8.43 |
) |
|
$ |
0.23 |
|
|
$ |
0.05 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
105,754,800 |
|
|
|
104,692,735 |
|
|
|
106,061,888 |
|
|
|
106,499,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
105,754,800 |
|
|
|
104,692,735 |
|
|
|
106,061,888 |
|
|
|
106,910,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,499,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,910,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
F-20
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity for the
periods July 1, 2002 to
December 12, 2002 (Predecessor) and December 13, 2002
to June 30, 2003, and
for each of the years in the two-year period ended June 30,
2005
(Successor)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated | |
|
Accumulated | |
|
|
|
|
|
|
|
|
Restricted | |
|
Additional | |
|
Deficit) | |
|
Other | |
|
|
|
|
|
|
Common | |
|
Stock | |
|
Paid-in | |
|
Retained | |
|
Comprehensive | |
|
Treasury | |
|
|
|
|
Stock | |
|
Units | |
|
Capital | |
|
Earnings | |
|
(Loss) Income | |
|
Stock | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2002
|
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
1,246 |
|
|
$ |
(75 |
) |
|
$ |
(29 |
) |
|
$ |
— |
|
|
$ |
1,143 |
|
|
Capital contribution from affiliates
|
|
|
— |
|
|
|
— |
|
|
|
1,448 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,448 |
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(892 |
) |
|
|
— |
|
|
|
— |
|
|
|
(892 |
) |
|
|
Translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
|
|
|
Minimum pension liability adjustment, net of tax of $6
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10 |
) |
|
|
— |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 12, 2002
|
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
2,694 |
|
|
$ |
(967 |
) |
|
$ |
(36 |
) |
|
$ |
— |
|
|
$ |
1,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 13, 2002
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Initial capitalization of the Company
|
|
|
1 |
|
|
|
— |
|
|
|
397 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
398 |
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
24 |
|
|
|
— |
|
|
|
— |
|
|
|
24 |
|
|
|
Translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10 |
|
|
|
— |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2003
|
|
|
1 |
|
|
|
— |
|
|
|
397 |
|
|
|
24 |
|
|
|
10 |
|
|
|
— |
|
|
|
432 |
|
|
Sale of common stock
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
Translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19 |
) |
|
|
— |
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2004
|
|
|
1 |
|
|
|
— |
|
|
|
403 |
|
|
|
29 |
|
|
|
(9 |
) |
|
|
— |
|
|
|
424 |
|
|
Sale of common stock
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
Treasury stock purchases
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
(2 |
) |
|
Issuance of restricted stock units
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
47 |
|
|
|
— |
|
|
|
— |
|
|
|
47 |
|
|
|
Translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
— |
|
|
|
6 |
|
|
|
Minimum pension liability adjustment, net of tax of $2
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2005
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
406 |
|
|
$ |
76 |
|
|
$ |
(6 |
) |
|
$ |
(2 |
) |
|
$ |
477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
F-21
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows for the periods
July 1, 2002
to December 12, 2002 (Predecessor) and December 13,
2002 to June 30, 2003, and
for each of the years in the two-year period ended June 30,
2005
(Successor)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
Successor | |
|
|
| |
|
|
| |
|
|
July 1, | |
|
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
|
June 30, | |
|
| |
|
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
|
| |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(892 |
) |
|
|
$ |
24 |
|
|
$ |
5 |
|
|
$ |
47 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
43 |
|
|
|
|
43 |
|
|
|
63 |
|
|
|
74 |
|
|
|
|
Interest expense payable in kind
|
|
|
— |
|
|
|
|
21 |
|
|
|
41 |
|
|
|
45 |
|
|
|
|
(Gain) loss on asset disposals
|
|
|
(5 |
) |
|
|
|
2 |
|
|
|
12 |
|
|
|
(4 |
) |
|
|
|
Provision for bad debt expense
|
|
|
23 |
|
|
|
|
30 |
|
|
|
11 |
|
|
|
1 |
|
|
|
|
Impairment of debt investments and investments in unconsolidated
companies and joint ventures
|
|
|
— |
|
|
|
|
— |
|
|
|
24 |
|
|
|
4 |
|
|
|
|
Impairment of goodwill and long-lived assets
|
|
|
927 |
|
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
|
Deferred income tax (benefit) expense
|
|
|
(45 |
) |
|
|
|
1 |
|
|
|
(12 |
) |
|
|
9 |
|
|
|
|
Changes in current assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and notes receivables
|
|
|
(9 |
) |
|
|
|
(18 |
) |
|
|
(8 |
) |
|
|
(2 |
) |
|
|
|
|
Prepaids and other current assets, net
|
|
|
(8 |
) |
|
|
|
16 |
|
|
|
(6 |
) |
|
|
(2 |
) |
|
|
|
|
Accounts and drafts payable
|
|
|
(37 |
) |
|
|
|
(20 |
) |
|
|
23 |
|
|
|
(21 |
) |
|
|
|
|
Accrued advertising
|
|
|
5 |
|
|
|
|
4 |
|
|
|
(3 |
) |
|
|
7 |
|
|
|
|
|
Other accrued liabilities
|
|
|
(1 |
) |
|
|
|
(41 |
) |
|
|
28 |
|
|
|
48 |
|
|
|
|
Changes in other long-term assets and liabilities, net
|
|
|
— |
|
|
|
|
19 |
|
|
|
21 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1 |
|
|
|
|
81 |
|
|
|
199 |
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities available for sale
|
|
|
— |
|
|
|
|
— |
|
|
|
(308 |
) |
|
|
(768 |
) |
|
Sales of securities available for sale
|
|
|
— |
|
|
|
|
— |
|
|
|
186 |
|
|
|
890 |
|
|
Additions to property and equipment
|
|
|
(95 |
) |
|
|
|
(47 |
) |
|
|
(81 |
) |
|
|
(93 |
) |
|
Proceeds from dispositions of assets and business disposals
|
|
|
6 |
|
|
|
|
13 |
|
|
|
26 |
|
|
|
18 |
|
|
Payments for acquired franchisee operations
|
|
|
(13 |
) |
|
|
|
(1 |
) |
|
|
(6 |
) |
|
|
(28 |
) |
|
Investment in franchisee debt
|
|
|
— |
|
|
|
|
— |
|
|
|
(22 |
) |
|
|
(27 |
) |
|
Repayments of franchisee debt
|
|
|
— |
|
|
|
|
— |
|
|
|
3 |
|
|
|
3 |
|
|
Net (payments)/proceeds for purchase of BKC
|
|
|
— |
|
|
|
|
(377 |
) |
|
|
5 |
|
|
|
— |
|
|
Costs incurred for purchase of BKC
|
|
|
— |
|
|
|
|
(62 |
) |
|
|
— |
|
|
|
— |
|
|
(Deposits to) release from restricted cash/escrow
|
|
|
— |
|
|
|
|
(11 |
) |
|
|
13 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(102 |
) |
|
|
|
(485 |
) |
|
|
(184 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
Successor | |
|
|
| |
|
| |
|
|
July 1, | |
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
June 30, | |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
3 |
|
|
Treasury stock purchases
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
Repayments of term debt and capital leases
|
|
|
(5 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
Proceeds from capitalization of the Company
|
|
|
— |
|
|
|
398 |
|
|
|
— |
|
|
|
— |
|
|
Proceeds from issuance of PIK Notes to stockholders
|
|
|
— |
|
|
|
212 |
|
|
|
— |
|
|
|
— |
|
|
Advances from affiliates, net
|
|
|
90 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Capital contributions from affiliates
|
|
|
27 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
112 |
|
|
|
607 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
11 |
|
|
|
203 |
|
|
|
18 |
|
|
|
211 |
|
Cash and cash equivalents at beginning of period
|
|
|
54 |
|
|
|
— |
|
|
|
203 |
|
|
|
221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
65 |
|
|
$ |
203 |
|
|
$ |
221 |
|
|
$ |
432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash-flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
45 |
|
|
|
12 |
|
|
|
21 |
|
|
|
26 |
|
|
Income taxes paid
|
|
|
6 |
|
|
|
14 |
|
|
|
13 |
|
|
|
14 |
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of franchisee operations
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
16 |
|
|
Notes issued to Diageo for purchase of Burger King
|
|
|
— |
|
|
|
212 |
|
|
|
— |
|
|
|
— |
|
|
Capital contributions from affiliates
|
|
|
1,421 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Non-cash settlement of term debt
|
|
|
37 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
See accompanying notes to consolidated financial
statements.
F-23
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
Note 1. |
Description of Business and Organization |
Burger King Holdings, Inc. (“BKH”) is a Delaware
corporation formed on July 23, 2002 and the parent of
Burger King Corporation (“BKC”), a Florida corporation
that is a worldwide franchisor and operator of fast food
hamburger restaurants, principally under the Burger King
brand. BKH is owned by funds controlled by Texas Pacific
Group, the Goldman Sachs Capital Funds and Bain Capital Partners
(collectively, the “Sponsors”). As discussed in
Note 13, certain officers of BKH and independent members of
the Board of Directors also own a minority interest in BKH. BKH
and its subsidiaries, including BKC, are collectively referred
to herein as the “Company” or the
“Successor,” for all periods subsequent to the
Transaction, as defined below. All references to the
“Predecessor” refer to BKC and its subsidiaries for
all periods prior to the Transaction, which operated under a
different ownership and capital structure.
The Company generates revenues from three sources:
(i) sales at restaurants owned by the Company;
(ii) royalties and franchise fees paid by franchisees; and
(iii) property income from the franchise restaurants that
the Company leases or subleases to franchisees. The Company
receives monthly royalties and advertising contributions from
franchisees based on a percentage of restaurant sales.
On December 13, 2002 (the “Transaction Date”),
Gramet Holding Corporation (“GHC”), a wholly-owned
subsidiary of Diageo plc and the former parent of BKC, completed
its sale of 100% of the outstanding common stock of BKC to
Burger King Acquisition Corporation (“BKAC”) for
$1,510 million, subject to adjustment (the
“Transaction”). All references to the
“Predecessor” are to BKC and its subsidiaries for all
periods prior to the Transaction Date.
BKAC was established as an acquisition vehicle by the Sponsors
for the purpose of acquiring BKC. BKAC was capitalized with an
$822.5 million capital contribution from BKH. Of the
aggregate contribution, $610 million was paid in cash and
$212.5 million was due from the Company.
On the Transaction Date, BKAC paid GHC a total of
$1,404.3 million, calculated as $1,510.0 million less
a preliminary purchase price adjustment of $105.7 million.
The Company and GHC ultimately settled on a further reduction to
the purchase price of $5 million, and $13.3 million in
restricted cash was reclassified to cash and cash equivalents in
December 2003. Of the total amount, GHC received
$441.8 million in cash from BKAC, $750 million in loan
proceeds from BKAC’s lenders and $212.5 million in the
form of a
payment-in-kind note,
or PIK note, issued by BKH to GHC. Additionally, BKAC paid
$62.5 million in costs associated with the Transaction,
comprised of $28.8 million in deferred financing fees and
$33.7 in professional fees. Of the $33.7 in professional fees,
$22.4 million was paid to the Sponsors.
On the Transaction Date, BKH also issued PIK notes in the
aggregate amount of $212.5 million to the same funds that
own the common stock of BKH, and the proceeds were contributed
to BKAC. The terms of these PIK notes are identical to the PIK
note issued to GHC. All of the PIK notes were payable in June
2013 with interest accreting and added to principal on
June 1 and December 1 of each year.
BKAC was merged into BKC upon completion of the Transaction. The
merger was accounted for as a combination of entities under
common control.
The Transaction was accounted for using the purchase method of
accounting, or purchase accounting, in accordance with Statement
of Financial Accounting Standard (“SFAS”)
No. 141, Business Combinations
(“SFAS No. 141”). At the time of the
Transaction, the Company made a preliminary allocation of the
purchase price to the assets acquired and liabilities assumed at
their estimated fair market
F-24
value. After the transaction, the Company hired a third party
valuation firm to assist in determining the fair market value of
the assets. In December 2003, the Company completed its fair
market value calculations and finalized the purchase accounting
adjustments to these preliminary allocations. The sum of the
fair value of assets acquired and liabilities assumed exceeded
the acquisition cost, resulting in negative goodwill of
$154 million. The negative goodwill was allocated on a pro
rata basis to reduce the carrying value of long-lived assets in
accordance with SFAS No. 141.
The following table represents the adjustments recorded in
December 2003 to the preliminary allocations as of the
Transaction Date (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary | |
|
|
|
Final | |
|
|
Allocation | |
|
|
|
Allocation | |
|
|
of Initial | |
|
|
|
of Initial | |
|
|
Balance Sheet | |
|
Adjustments | |
|
Balance Sheet | |
|
|
| |
|
| |
|
| |
Cash, cash equivalents and restricted cash
|
|
$ |
182.5 |
|
|
$ |
— |
|
|
$ |
182.5 |
|
Trade and notes receivable, net
|
|
|
120.4 |
|
|
|
— |
|
|
|
120.4 |
|
Income tax receivable
|
|
|
— |
|
|
|
2.6 |
|
|
|
2.6 |
|
Other current assets, net
|
|
|
43.0 |
|
|
|
4.0 |
|
|
|
47.0 |
|
Deferred income taxes, net
|
|
|
91.2 |
|
|
|
0.8 |
|
|
|
92.0 |
|
Property and equipment, net
|
|
|
864.3 |
|
|
|
72.1 |
|
|
|
936.4 |
|
Intangible assets, net
|
|
|
924.0 |
|
|
|
127.0 |
|
|
|
1,051.0 |
|
Net investment in property leased to franchisees
|
|
|
177.6 |
|
|
|
(1.4 |
) |
|
|
176.2 |
|
Other assets, net
|
|
|
50.6 |
|
|
|
6.2 |
|
|
|
56.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
2,453.6 |
|
|
|
211.3 |
|
|
|
2,664.9 |
|
Accounts and drafts payable and other current liabilities
|
|
|
368.6 |
|
|
|
(18.1 |
) |
|
|
350.5 |
|
Long-term obligations, including current maturities
|
|
|
808.1 |
|
|
|
3.4 |
|
|
|
811.5 |
|
Other deferrals and liabilities
|
|
|
192.3 |
|
|
|
262.2 |
|
|
|
454.5 |
|
Deferred income taxes, net
|
|
|
262.1 |
|
|
|
(36.2 |
) |
|
|
225.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,631.1 |
|
|
|
211.3 |
|
|
|
1,842.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$ |
822.5 |
|
|
$ |
— |
|
|
$ |
822.5 |
|
|
|
|
|
|
|
|
|
|
|
In connection with the final allocation of the purchase price,
the Company adjusted the valuation of our long-lived assets,
primarily property and equipment, and recorded favorable and
unfavorable leases as intangible assets and other liabilities,
respectively. In connection with these adjustments to the
preliminary allocations, the Company recognized a net benefit of
$1.7 million for the period December 13, 2002 to
June 30, 2003 as a change in accounting estimate. This net
benefit consisted of $23.3 million in additional
amortization related to the adjustment to unfavorable leases and
$1.1 million in other adjustments, partially offset by
$18.5 million in additional depreciation expense related to
the adjustment to property and equipment and $4.2 million
of additional amortization expense related to the adjustment to
favorable leases.
Note 2. Summary of
Significant Accounting Policies
|
|
|
Basis of Presentation and Consolidation |
The consolidated financial statements of the Successor include
the accounts of BKH and its majority-owned subsidiaries and the
consolidated financial statements of the Predecessor include the
accounts of BKC and its majority-owned subsidiaries. All
material intercompany balances and transactions have been
eliminated in consolidation. Investments in affiliates where the
Company owns 50% or less are accounted for under the equity
method, except as discussed below.
In December 2003, the FASB issued Interpretation No. 46R,
Consolidation of Variable Interest Entities— an
interpretation of ARB No. 51
(“FIN 46R”). FIN 46R replaced
FIN 46 and establishes
F-25
guidance to identify variable interest entities
(“VIE’s”). FIN 46R requires VIE’s to be
consolidated by the primary beneficiary who is exposed to the
majority of the VIE’s expected losses, expected residual
returns, or both. FIN 46R excludes from its scope operating
businesses unless certain conditions exist.
A majority of franchise entities meet the definition of an
operating business and, therefore, are exempt from the scope of
FIN 46R. Additionally, there are a number of franchise
entities which do not meet the definition of a business as a
result of leasing arrangements and other forms of subordinated
financial support provided by the Company, including certain
franchise entities that participated in the franchise financial
restructuring program (see Note 3). The Company is not
exposed to the majority of expected losses in any of these
arrangements and, therefore, is not the primary beneficiary
required to consolidate any of these franchisees.
The Company has consolidated one joint venture created in fiscal
2005 that operates restaurants where the Company is a 49%
partner, but is deemed to be the primary beneficiary as the
joint venture agreement provides protection to the joint venture
partner from absorbing expected losses. The results of
operations of this joint venture are not material to the
Company’s results of operations and financial position.
In connection with a proposed public offering of the
Company’s common stock, on May 1, 2006 the Company
authorized an increase in the number of shares of the
Company’s $0.01 par value common stock to 300 million
shares, authorized a 26.34608 to one stock split and authorized
10 million shares of a new class of preferred stock, with a
par value of $0.01 per share. As of May 1, 2006, no shares
of this new class of preferred stock were issued or outstanding.
All references to the numbers of shares in these consolidated
financial statements and accompanying notes have been adjusted
to reflect the stock split on a retroactive basis.
The Company’s operations include Company-owned and
franchise restaurants located throughout the United States of
America, its territories and 63 other countries. Of the 11,104
restaurants in operation as of June 30, 2005, 1,187 are
Company-owned and operated and 9,917 are franchisee operated.
The Company has an operating agreement with a third party,
Restaurant Services, Inc., or RSI, which acts as the exclusive
purchasing agent for Company-owned and franchised Burger King
restaurants in the U.S. for the purchase of food,
packaging, and equipment. These restaurants place purchase
orders and receive the respective products from distributors
with whom, in most cases, RSI has service agreements. For the
year ended June 30, 2005, the five largest
U.S. distributors represented 81% of total
U.S. purchases by Company-owned and franchised restaurants.
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the Company’s consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
|
|
|
Foreign Currency Translation |
Foreign currency balance sheets are translated using the end of
period exchange rates, and statements of operations are
translated at the average exchange rates for each period. The
resulting translation adjustments are recorded in accumulated
other comprehensive loss within stockholder’s equity. Local
currencies have been determined to be the functional currencies
of the respective countries.
|
|
|
Cash and Cash Equivalents |
Cash and cash equivalents include short-term, highly liquid
investments with original maturities of three months or less.
F-26
|
|
|
Investment in Auction Rate Notes |
Auction rate notes represent long-term variable rate bonds tied
to short-term interest rates that are reset through a
“dutch auction” process, which occurs every seven to
thirty-five days. Auction rate notes are considered highly
liquid by market participants because of the auction process.
However, because the auction rate notes have long-term maturity
dates and there is no guarantee the holder will be able to
liquidate its holding, they do not meet the definition of cash
equivalents in SFAS No. 95, Statement of Cash Flows
and, accordingly, are recorded as investments.
|
|
|
Allowance for Doubtful Accounts |
The Company evaluates the collectibility of its trade and notes
receivable from franchisees based on a combination of factors,
including the length of time the receivables are past due and
the probability of any success from litigation or default
proceedings, where applicable. In such circumstances, the
Company records a specific allowance for doubtful accounts in an
amount required to adjust the carrying values of such balances
to the amount that the Company estimates to be net realizable
value. The Company writes off a specific account when
(a) the Company enters into an agreement with a franchisee
that releases the franchisee from outstanding obligations, (b)
franchise agreements are terminated and the projected costs of
collections exceed the benefits expected to be received from
pursuing the balance owed through legal action, or
(c) franchisees do not have the financial wherewithal or
unprotected assets from which collection is reasonably assured.
Inventories, totaling $16 million and $15 million at
June 30, 2004 and 2005, respectively, are stated at the
lower of cost
(first-in, first-out)
or net realizable value, and consist primarily of restaurant
food items and paper supplies. Inventories are included in
prepaids and other current assets in the accompanying
consolidated balance sheets.
|
|
|
Property and Equipment, net |
Property and equipment, net, owned by the Company are recorded
at historical cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using
the straight-line method based on the estimated useful lives of
the assets. Leasehold improvements are amortized over the lesser
of the remaining term of the lease or the life of the
improvement.
Improvements and major repairs with a useful life greater than
one year are capitalized, while minor maintenance and repairs
are expensed when incurred.
The Company accounts for leases in accordance with
SFAS No. 13, Accounting for Leases
(“SFAS No. 13”), and other related
authoritative literature. Assets acquired under capital leases
are stated at the lower of the present value of future minimum
lease payments or fair market value at the date of inception of
the lease. Capital lease assets are depreciated using the
straight-line method over the shorter of the useful life or the
underlying lease term.
The Company records rent expense for operating leases that
contain scheduled rent increases on a straight-line basis over
the lease term, including any option periods considered in the
determination of that lease term. Contingent rentals are
generally based on sales levels in excess of stipulated amounts,
and thus are not considered minimum lease payments.
The Company also enters into capital leases as lessor. Capital
leases meeting the criteria of direct financing leases under
SFAS No. 13 are recorded on a net basis, consisting of
the gross investment and residual value in the lease less the
unearned income. Unearned income is recognized over the lease
term yielding a constant periodic rate of return on the net
investment in the lease. Direct financing leases are
F-27
reviewed for impairments whenever events or circumstances
indicate that the carrying amount of an asset may not be
recoverable based on the payment history under the lease.
Favorable and unfavorable lease contracts were recorded as part
of the Transaction (see Note 1). The Company amortizes
favorable and unfavorable lease contracts on a straight-line
basis over the terms of the leases. Upon early termination of a
lease, the favorable or unfavorable lease contract balance
associated with the lease contract is recognized as a loss or
gain in the statement of operations.
|
|
|
Goodwill and Intangible Assets |
Goodwill and the Burger King brand are assessed annually
for impairment by segment or more frequently if events or
circumstances indicate that either asset may be impaired in
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets (“SFAS No. 142”).
In accordance with the requirements of SFAS No. 142,
goodwill has been assigned to reporting units for purposes of
impairment testing. The reporting units are the Company’s
operating segments. As of June 30, 2005, all of the
goodwill recorded is included in the United States and Canada
operating segment.
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, long lived
assets, such as property and equipment, and acquired intangibles
subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Some of the events or
changes in circumstances that would trigger an impairment review
include, but are not limited to, a significant under-performance
relative to expected and/or historical results (two-years
comparable restaurant sales decrease or two years negative
operating cash flow), significant negative industry or economic
trends, or knowledge of transactions involving the sale of
similar property at amounts below our carrying value. Assets are
grouped for recognition and measurement of impairment at the
lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets. Assets are
grouped together for impairment testing at the operating market
level (based on geographic areas) in the case of the United
States, Canada, the United Kingdom and Germany. The operating
market asset groupings within the United States and Canada are
predominantly based on major metropolitan areas within the
United States and Canada. Similarly, operating markets within
the other foreign countries with larger asset concentrations
(the United Kingdom and Germany) are comprised of geographic
regions within those countries (three in the United Kingdom and
four in Germany). These operating market definitions are based
upon the following primary factors:
|
|
|
|
• |
we do not evaluate individual restaurants to build, acquire or
close independent of an analysis of other restaurants in these
operating markets; and |
|
|
• |
management views profitability of the restaurants within the
operating markets as a whole, based on cash flows generated by a
portfolio of restaurants, rather than by individual restaurants
and area managers receive incentives on this basis. |
In the smaller countries in which we have long-lived assets (the
Netherlands, Spain, Mexico and China) most operating functions
and advertising are performed at the country level, and shared
by all restaurants in the country. As a result, the Registrant
has defined operating markets as the entire country in the case
of the Netherlands, Spain, Mexico and China. If the carrying
amount of an asset exceeds the estimated and undiscounted future
cash flows generated by the asset, an impairment charge is
recognized by the amount by which the carrying amount of the
asset exceeds the fair value of the asset.
Other comprehensive loss refers to revenues, expenses, gains,
and losses that are included in comprehensive loss but are
excluded from net income as these amounts are recorded directly
as an adjustment to stockholders’ equity, net of tax. The
Company’s other comprehensive loss is comprised of
F-28
unrealized gains and losses on foreign currency translation
adjustments and minimum pension liability adjustments, net of
tax.
|
|
|
Derivative Financial Instruments |
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended, establishes accounting
and reporting standards for derivative instruments and for
hedging activities by requiring that all derivatives be
recognized in the balance sheet and measured at fair value.
Gains or losses resulting from changes in the fair value of
derivatives are recognized in earnings or recorded in other
comprehensive income and recognized in the statement of
operations when the hedged item affects earnings, depending on
the purpose of the derivatives and whether they qualify for
hedge accounting treatment.
The Company’s policy is to designate at a derivative’s
inception the specific assets, liabilities or future commitments
being hedged and monitor the derivatives for effectiveness. The
Company recognizes gains or losses for amounts received or paid
when the underlying transaction settles. The Company does not
enter into or hold derivatives for trading or speculative
purposes.
|
|
|
Disclosures About Fair Value of Financial
Instruments |
Cash and cash equivalents, investment in auction rate notes,
trade and notes receivable and accounts and drafts payables:
The carrying value equals fair value based on the short-term
nature of these accounts.
Debt, including current maturities: The fair value is
estimated based on discounted future cash flow analysis using
current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining
maturities. The carrying value of long-term debt was
$1,238 million at June 30, 2004, and the estimated
fair value was $1,279 million at June 30, 2004. The
carrying value of long-term debt was $1,282 million at
June 30, 2005, which approximated fair value.
Revenues include retail sales at Company-owned restaurants and
franchise and property revenues. Franchise and property revenues
include royalties, initial and renewal franchise fees, and
property revenues, which include rental income from operating
lease rentals and earned income on direct financing leases on
property leased to franchisees. Retail sales are recognized at
the point of sale.
Royalties are based on a percentage of sales by franchisees.
Royalties are recorded as earned and when collectibility is
reasonably assured. Initial franchise fees are recognized as
income when the related restaurant begins operations. Subject to
certain conditions, a franchisee may pay a renewal franchise fee
and renew its franchise for an additional term. Renewal
franchise fees are recognized as income upon receipt of the
non-refundable fee and execution of a new franchise agreement.
In accordance with SFAS No. 45, Accounting for
Franchise Fee Revenue (“SFAS No. 45”),
the cost recovery accounting method is used to recognize
revenues for certain franchisees for whom collectibility is not
reasonably assured.
Operating lease rentals and earned income on direct financing
leases are recognized as earned and when collectibility is
reasonably assured.
|
|
|
Advertising and Promotional Costs |
The Company expenses the production costs of advertising when
the advertisements are first aired or displayed. All other
advertising and promotional costs are expensed in the period
incurred, in accordance with Statement of Position
(“SOP”)
No. 93-7,
Reporting on Advertising Costs.
Franchised restaurants and Company-owned restaurants contribute
to advertising funds managed by the Company in the United States
and certain international markets where Company-owned
restaurants operate. Under the Company’s franchise
agreements, contributions received from franchisees must be spent
F-29
on advertising, marketing and related activities, and result in
no gross profit recognized by the Company. The Company
recognizes advertising expense based on the difference between
the total advertising and promotional expenditures, as accounted
for under SOP
No. 93-7, less the
amount contributed by franchisees during the year. Advertising
expense, net of franchisee contributions, totaled
$61 million for the period July 1, 2002 to
December 12, 2002, $49 million for the period
December 13, 2002 to June 30, 2003, $100 million
for the year ended June 30, 2004, and $87 million for
the year ended June 30, 2005.
To the extent that contributions received exceed advertising and
promotional expenditures, the excess contributions are accounted
for as deferred credits, in accordance with
SFAS No. 45, and are recorded in accrued advertising
in the accompanying consolidated balance sheets.
Franchisees in markets where no Company-owned restaurants
operate contribute to advertising funds not managed by the
Company. Such contributions and related fund expenditures are
not reflected in the Company’s results of operations or
financial position.
The Company files a consolidated U.S. federal income tax
return. Amounts in the financial statements related to income
taxes are calculated using the principles of
SFAS No. 109, Accounting for Income Taxes
(“SFAS No. 109”). Under
SFAS No. 109, deferred tax assets and liabilities
reflect the impact of temporary differences between the amounts
of assets and liabilities recognized for financial reporting
purposes and the amounts recognized for tax purposes, as well as
tax credit carryforwards and loss carryforwards. These deferred
taxes are measured by applying currently enacted tax rates. The
effects of changes in tax rates on deferred tax assets and
liabilities are recognized in income in the year in which the
law is enacted. A valuation allowance reduces deferred tax
assets when it is “more likely than not” that some
portion or all of the deferred tax assets will not be recognized.
Basic earnings per share is computed by dividing net income
attributable to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
Company.
The Company accounts for stock-based compensation in accordance
with Accounting Principles Board Opinion (“APB”)
No. 25, Accounting for Stock Issued to Employees
(“APB No. 25”), and related interpretations.
Pro forma information regarding net income and earnings per
share is required by SFAS No. 123, Accounting for
Stock Based Compensation, and has been determined as if the
Company had accounted for its stock options under the fair value
method of that Statement.
Compensation value for the fair value disclosure is estimated
for each option grant using a Black-Scholes option-pricing
model. The following weighted average assumptions were used for
option grants: weighted average risk-free interest rate of
3.48%; expected dividend yield of 0.0%; volatility factor of the
expected market price of the Company’s common stock of
0.0%; and an expected life of the options of five years.
The following table illustrates the effect on net income and
earnings per share had the Company applied the fair value
recognition provisions of SFAS No. 123, as amended by
SFAS No. 148, Accounting
F-30
for Stock-Based Compensation Transition and Disclosure,
to stock-based employee compensation (in millions, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Net income, as reported
|
|
$ |
5 |
|
|
$ |
47 |
|
|
plus: Stock-based compensation expense, net of related tax
effects
|
|
|
— |
|
|
|
— |
|
|
less: Stock-based compensation expense under fair value
method,
net of related tax effects
|
|
|
(1) |
|
|
|
(1) |
|
|
|
|
|
|
|
|
Net income, pro forma
|
|
$ |
4 |
|
|
$ |
46 |
|
|
|
|
|
|
|
|
Basic earnings per share, as reported
|
|
$ |
0.05 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
Basic earnings per share, pro forma
|
|
$ |
0.04 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
Diluted earnings per share, as reported
|
|
$ |
0.05 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
Diluted earnings per share, pro forma
|
|
$ |
0.04 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
New Accounting Pronouncements |
In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment
(“SFAS No. 123R”), which replaces
SFAS No. 123 and supersedes APB Opinion No. 25.
SFAS No. 123R requires all companies to measure
compensation costs for share-based payments to employees,
including stock options, at fair value and expense such payments
in the statement of operations over the service period. For
non-public entities, SFAS No. 123R is effective as of
the beginning of the first annual reporting period that begins
after December 15, 2005. The Company is currently
evaluating the impact that SFAS No. 123R will have on
its statements of operations and statements of financial
position.
|
|
Note 3. |
Acquisitions, Closures and Dispositions, and Franchise
Restructuring Program |
All acquisitions of franchised restaurant operations are
accounted for using the purchase method of accounting. The
operating results of acquired restaurants have been included in
the consolidated statements of operations since their respective
dates of acquisition. These acquisitions are summarized as
follows (in millions, except for number of restaurants):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
Successor | |
|
|
| |
|
| |
|
|
July 1, | |
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
June 30, | |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Number of restaurants acquired
|
|
|
29 |
|
|
|
2 |
|
|
|
38 |
|
|
|
101 |
|
Inventory
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1 |
|
Property and equipment, net
|
|
|
10 |
|
|
|
1 |
|
|
|
4 |
|
|
|
34 |
|
Goodwill and other intangible assets
|
|
|
3 |
|
|
|
— |
|
|
|
5 |
|
|
|
12 |
|
Assumed liabilities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
Non-capitalizable expenses
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$ |
14 |
|
|
$ |
1 |
|
|
$ |
9 |
|
|
$ |
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded settlement losses, in accordance with
EITF 04-1,
Accounting for Preexisting Relationships between the Parties
to a Business Combination, and other expenses of
$5 million for the year
F-31
ended June 30, 2005. These settlement losses and other
expenses are recorded in other operating expenses (income), net.
|
|
|
Closures and Dispositions |
Losses (gains) on asset and business disposals are
comprised primarily of lease termination costs relating to
restaurant closures and refranchising of Company-owned
restaurants, and are recorded in other operating expenses
(income), net in the accompanying consolidated statements of
operations. The closures and refranchisings are summarized as
follows (in millions, except for number of restaurants):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
Successor | |
|
|
| |
|
| |
|
|
July 1, | |
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
June 13, | |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Number of restaurants closures
|
|
|
5 |
|
|
|
8 |
|
|
|
20 |
|
|
|
23 |
|
Losses (gains) on restaurant closures
|
|
$ |
(5 |
) |
|
$ |
2 |
|
|
$ |
12 |
|
|
$ |
6 |
|
Number of refranchisings
|
|
|
1 |
|
|
|
2 |
|
|
|
21 |
|
|
|
11 |
|
Loss on refranchisings
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3 |
|
|
$ |
7 |
|
|
|
|
Franchisee Restructuring Program |
During 2003, the Company initiated a program designed to provide
assistance to franchisees experiencing financial difficulties.
Under this program, the Company worked with franchisees meeting
certain operational criteria, their lenders, and other creditors
to attempt to strengthen the franchisees’ financial
condition. As part of this program, the Company has agreed to
provide financial support to certain franchisees.
During 2004 and 2005, the Company converted $18 million in
past due franchisee receivables and deferred revenues to notes
receivable recoverable from excess cash flow (“Clawback
Notes”) and converted an additional $17 million of
past due receivables into long-term notes receivable
(“Franchisee Notes”). Clawback Notes are structured
whereby payments are made from excess cash flows of franchise
operations and do not accrue interest. Franchisee Notes bear
interest and typically have a
10-year term. Prior to
the conversion into these past due receivables, the Company had
fully reserved the receivables. Franchisee Notes continue to
remain fully reserved and the receivables and reserves related
to the Clawback Notes were written-off upon conversion.
Recoveries on Franchisee Notes are recorded as a reduction of
bad debt expense. The Company recognizes interest income on
Franchisee Notes upon receipt of interest from franchisees.
In order to assist certain franchisees in making capital
improvements to restaurants in need of remodeling, the Company
provided commitments to fund capital expenditure loans
(“Capex Loans”) and make capital expenditures related
to restaurant properties that the Company leases to franchisees.
Capex Loans are typically unsecured, bear interest, and have
10-year terms. Through
June 30, 2005 the Company has funded $3 million in
Capex Loans and improvements to restaurant properties that the
Company leases to franchisees. In addition, as of June 30,
2005, the Company has committed to provide future Capex Loans of
$19 million and improvements to properties that the Company
leases to franchisees of up to $13 million.
For the years ended June 30, 2004 and 2005, the Company
paid approximately $17 million and $24 million,
respectively, to acquire franchisee debt held by third parties.
Included in these purchases for the year ended June 30,
2005 is $20 million of debt acquired to facilitate asset
acquisitions, all of which was transferred to property and
equipment, net, upon acquisition of the assets. The Company also
recorded reserves against acquired debt of $12 million and
$4 million for the years ended June 30, 2004 and
June 30, 2005, respectively. Recoveries on fully reserved
acquired franchisee third-party debt are recorded in other
operating expenses (income), net. Unreserved franchisee
third-party debt totaled $4 million and $1 million at
June 30, 2004 and June 30, 2005, respectively.
F-32
Through June 30, 2005, the Company has provided
$2 million of temporary reductions in rent (“rent
relief”) for certain franchisees that leased restaurant
property from the Company. As of June 30, 2005, the Company
has also committed to provide future rent relief of up to
$8 million.
Contingent cash flow subsidies represent commitments by the
Company to provide future cash grants to certain franchisees for
limited periods in the event of a failure to achieve their debt
service coverage ratio. No contingent cash flow subsidy has been
provided through June 30, 2005. The maximum contingent cash
flow subsidy commitment for future periods as of June 30,
2005 is $8 million. Upon funding, in most instances, the
subsidies will be added to the franchisee’s existing
Clawback Note balance.
|
|
Note 4. |
Franchise and Property Revenues |
Franchise and property revenues are comprised of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
Successor | |
|
|
| |
|
| |
|
|
July 1, | |
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
June 30, | |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Franchise royalties
|
|
$ |
163 |
|
|
$ |
190 |
|
|
$ |
346 |
|
|
$ |
396 |
|
Property revenues
|
|
|
55 |
|
|
|
60 |
|
|
|
117 |
|
|
|
120 |
|
Initial franchise fees
|
|
|
4 |
|
|
|
5 |
|
|
|
7 |
|
|
|
9 |
|
Other
|
|
|
3 |
|
|
|
3 |
|
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
225 |
|
|
$ |
258 |
|
|
$ |
478 |
|
|
$ |
533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with SFAS No. 45, the Company deferred
the recognition of revenues totaling $22 million and
$1 million for the years ended June 30, 2004 and
June 30, 2005, respectively. The Company had no recoveries
or write-offs for the periods July 1, 2002 to
December 12, 2002 and December 13, 2002 to
June 30, 2003 and the year ended June 30, 2004. The
Company had recoveries of $4 million and write-offs of
$11 million for the year ended June 30, 2005. As of
June 30, 2004 and 2005, the Company had deferred revenue
balances of $22 million and $8 million, respectively.
|
|
Note 5. |
Trade and Notes Receivable, Net |
Trade and notes receivable, net, are comprised of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Trade accounts receivable
|
|
$ |
178 |
|
|
$ |
133 |
|
Notes receivable, current portion
|
|
|
12 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
190 |
|
|
|
139 |
|
Allowance for doubtful accounts and notes receivable, current
portion
|
|
|
(79 |
) |
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
$ |
111 |
|
|
$ |
110 |
|
|
|
|
|
|
|
|
Substantially all of the decrease in the allowance for doubtful
accounts and notes receivables during fiscal year 2005 is due to
the write-off of trade accounts receivable and amounts
transferred to long-term notes.
The Company recorded bad debt expense, net of recoveries, of
$23 million for the period July 1, 2002 to
December 12, 2002. The Company recorded bad debt expense,
net of recoveries, of $30 million for the period
December 13, 2002 to June 30, 2003, $11 million
for the year ended June 30, 2004, and $1 million for
the year ended June 30, 2005.
F-33
|
|
Note 6. |
Property and Equipment, Net |
Property and equipment, net, along with their estimated useful
lives, consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
200June | |
|
30,005 | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
| |
Land
|
|
|
|
|
|
$ |
371 |
|
|
$ |
384 |
|
Buildings and improvements
|
|
|
(up to 40 years |
) |
|
|
409 |
|
|
|
470 |
|
Machinery and equipment
|
|
|
(up to 18 years |
) |
|
|
203 |
|
|
|
234 |
|
Furniture, fixtures, and other
|
|
|
(up to 10 years |
) |
|
|
27 |
|
|
|
37 |
|
Construction in progress
|
|
|
|
|
|
|
30 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,040 |
|
|
$ |
1,151 |
|
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(160 |
) |
|
|
(252 |
) |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$ |
880 |
|
|
$ |
899 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense on property and equipment totaled
$43 million for the period July 1, 2002 to
December 12, 2002, $42 million for the period
December 13, 2002 to June 30, 2003, $112 million
for the year ended June 30, 2004, and $100 million for
the year ended June 30, 2005.
Property and equipment, net, includes assets under capital
leases, net of depreciation, of $38 million and
$39 million at June 30, 2004 and 2005, respectively.
|
|
Note 7. |
Intangible Assets, Net and Goodwill |
The Burger King brand of $909 million at
June 30, 2004 and 2005 and goodwill of $5 million and
$17 million at June 30, 2004 and 2005, respectively,
represent the Company’s indefinite useful lived intangible
assets.
Changes in the net carrying amount of goodwill for the periods
July 1, 2002 to December 12, 2002 and
December 13, 2002 to June 30, 2003, and for the years
ended June 30, 2004 and 2005 are as follows
(in millions):
|
|
|
|
|
Predecessor
|
|
|
|
|
Balance as of June 30, 2002
|
|
$ |
1,010 |
|
Goodwill acquired during the period
|
|
|
3 |
|
Impairment loss recorded during period
|
|
|
(875 |
) |
Currency translation impact
|
|
|
2 |
|
|
|
|
|
Balance as of December 12, 2002
|
|
$ |
140 |
|
Successor
|
|
|
|
|
Balance as of December 13, 2002
|
|
$ |
— |
|
Balance as of June 30, 2003
|
|
|
— |
|
Goodwill acquired during the period
|
|
|
5 |
|
|
|
|
|
Balance as of June 30, 2004
|
|
|
5 |
|
Goodwill acquired during the period
|
|
|
12 |
|
|
|
|
|
Balance as of June 30, 2005
|
|
$ |
17 |
|
|
|
|
|
F-34
The table below presents intangible assets subject to
amortization, along with their useful lives (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2June | |
|
30,05 | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
| |
Franchise agreements
|
|
26 years |
|
$ |
65 |
|
|
$ |
65 |
|
Favorable lease contracts
|
|
Up to 20 years |
|
|
36 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
101 |
|
|
$ |
101 |
|
Accumulated amortization
|
|
|
|
|
(9 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
|
|
$ |
92 |
|
|
$ |
86 |
|
|
|
|
|
|
|
|
|
|
Amortization expense on franchise agreements totaled
$1 million for the period December 13, 2002 to
June 30, 2003, $3 million for the year ended
June 30, 2004, and $3 million for the year ended
June 30, 2005. The Company did not incur any amortization
expense on franchise agreements for the period July 1, 2002
to December 12, 2002.
The amortization of favorable lease contracts totaled
$1 million for the period December 13, 2002 to
June 30, 2003, $5 million for the year ended
June 30, 2004, and $3 million for the year ended
June 30, 2005. The Company did not incur any amortization
of favorable lease contracts for the period July 1, 2002 to
December 12, 2002.
As of June 30, 2005, estimated future amortization expense
of intangible assets subject to amortization for each of the
years ended June 30 is $6 million in 2006;
$5 million in each of 2007, 2008, 2009, and 2010; and
$60 million thereafter.
|
|
Note 8. |
Earnings Per Share |
Basic and diluted earnings per share were calculated as follows
(in millions, except share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
Successor | |
|
|
| |
|
| |
|
|
July 1, | |
|
December 13, | |
|
|
|
|
2002 to | |
|
2002 to | |
|
Years Ended June 30, | |
|
|
December 12, | |
|
June 30, | |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(892 |
) |
|
$ |
24 |
|
|
$ |
5 |
|
|
$ |
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
105,754,800 |
|
|
|
104,692,735 |
|
|
|
106,061,888 |
|
|
|
106,499,866 |
|
Effective of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
410,261 |
|
|
Employee stock options
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share-adjusted weighted
average
|
|
|
105,754,800 |
|
|
|
104,692,735 |
|
|
|
106,061,888 |
|
|
|
106,910,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
(8.43 |
) |
|
$ |
0.23 |
|
|
$ |
0.05 |
|
|
$ |
0.44 |
|
Diluted earnings per share
|
|
$ |
(8.43 |
) |
|
$ |
0.23 |
|
|
$ |
0.05 |
|
|
$ |
0.44 |
|
Earnings per share for the Predecessor is not comparable to
earnings per share for the Successor, due to the significant
change in capital structure, as a result of the Transaction.
F-35
Unexercised employee stock options to
purchase 3.5 million shares of the Predecessor’s
Common Stock for the period July 1, 2002 to
December 12, 2002 were not included in the computation of
diluted earnings per share as their exercise prices were equal
to or greater than the average market price of the
Predecessor’s Common Stock during the respective period.
Unexercised employee stock options to purchase 6,818,155
and 9,009,121 shares of the Company’s Common Stock for
the years ended June 30, 2004 and 2005, respectively, were
not included in the computation of diluted earnings per share as
their exercise prices were equal to or greater than the average
market price of the Company’s Common Stock during those
respective periods.
Unaudited Pro Forma earnings
per share attributable to Common stockholders
Pro forma basic and diluted earnings per share for the year
ended June 30, 2005 has been computed to give effect to the
number of shares to be sold in the Company’s initial public
offering that would have been necessary to pay the portion of
the February 2006 dividend of $367 million in excess of
current period earnings.
|
|
Note 9. |
Other Accrued Liabilities |
Included in other accrued liabilities as of June 30, 2004
and 2005, were accrued payroll and employee-related benefit
costs totaling $69 million and $93 million,
respectively.
The $425 million in PIK Notes issued by BKH in conjunction
with the Transaction (see Note 1) is due in June 2013 with
interest added to the outstanding principal amount on
June 1 and December 1 of each year. The Sponsors
subsequently transferred $0.9 million in PIK Notes to four
of our directors. Through June 30, 2005, a total of
$103 million in interest has been added to the outstanding
principal resulting in an outstanding principal balance of
$528 million.
BKC also has a senior credit facility that includes term debt of
$750 million and a revolving credit facility of
$100 million. The senior credit facility is guaranteed by
Diageo and certain affiliates of Diageo. The principal
outstanding on the term debt is due and payable in December 2007
with interest payable quarterly at the rate of LIBOR plus an
applicable margin. The weighted average interest rates related
to the Company’s PIK Notes, term debt and other secured
installment notes payable was 4.4% and 5.4% at June 30,
2004 and June 30, 2005, respectively.
At June 30, 2005, there were no borrowings outstanding
under the revolving credit facility. At June 30, 2005,
there were $20 million in irrevocable standby letters of
credit outstanding, which are described further in note 16.
Accordingly, the availability of the revolving credit facility
was $80 million as of June 30, 2005. BKC incurs a
commitment fee on the unused revolving credit facility at the
rate of 40% of an applicable margin, based on Diageo’s
credit rating, not to exceed 0.30%. At June 30, 2005, the
applicable commitment fee rate was 0.21%.
The Company has agreements with foreign banks that provide lines
of credit in the amounts of $5 million and $4 million
at June 30, 2004 and June 30, 2005, respectively. At
June 30, 2004 and 2005, the Company had $2 million of
guarantees drawn against the lines of credit.
BKC agreed to reimburse Diageo for any and all payments Diageo
is required to pay as a result of the guarantee of the senior
credit agreement. BKC’s reimbursement obligation is secured
by all of the personal property owned by BKC and its
U.S. subsidiaries with certain limited exceptions. In
addition, BKC pledged to Diageo 100% of the shares of its
U.S. subsidiaries and 65% of the shares of certain foreign
subsidiaries.
Subsequent to year-end, the Company entered into a
$1.15 billion credit agreement. The term debt and PIK Notes
were paid off in July 2005 with the proceeds from the new credit
agreement and cash on hand. See note 20 for further details
of the new credit agreement.
F-36
|
|
Note 11. |
Interest Expense |
Interest expense is comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
Successor | |
|
|
| |
|
|
| |
|
|
July 1, | |
|
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
|
June 30, | |
|
| |
|
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
|
| |
|
| |
|
| |
Term debt and PIK Notes
|
|
$ |
1 |
|
|
|
$ |
33 |
|
|
$ |
61 |
|
|
$ |
74 |
|
Capital lease obligations
|
|
|
3 |
|
|
|
|
4 |
|
|
|
7 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4 |
|
|
|
$ |
37 |
|
|
$ |
68 |
|
|
$ |
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in note 1, the Company incurred
$28.8 million in deferred financing fees in conjunction
with the Transaction. These fees are classified in other assets,
net and were being amortized over five years into interest
expense on term debt under the effective interest method. On
July 13, 2005, the Company entered into a
$1.15 billion credit agreement, and as a result, the
remaining deferred financing fee balance was recorded as a loss
on early extinguishment of debt. See note 20 for further
details of the new credit agreement.
Income (loss) before income taxes, classified by source of
income, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
Successor | |
|
|
| |
|
|
| |
|
|
July 1, | |
|
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
|
June 30, | |
|
| |
|
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
|
| |
|
| |
|
| |
Domestic
|
|
$ |
(731 |
) |
|
|
$ |
39 |
|
|
$ |
(25 |
) |
|
$ |
93 |
|
Foreign
|
|
|
(195 |
) |
|
|
|
1 |
|
|
|
34 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(926 |
) |
|
|
$ |
40 |
|
|
$ |
9 |
|
|
$ |
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) attributable to income from
continuing operations consists of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
Successor | |
|
|
| |
|
|
| |
|
|
July 1, | |
|
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
|
June 30, | |
|
| |
|
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
|
| |
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
12 |
|
|
|
$ |
11 |
|
|
$ |
10 |
|
|
$ |
18 |
|
|
|
State, net of federal income tax benefit
|
|
|
2 |
|
|
|
|
3 |
|
|
|
5 |
|
|
|
2 |
|
|
Foreign
|
|
|
(2 |
) |
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
15 |
|
|
|
16 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(43 |
) |
|
|
|
2 |
|
|
|
(22 |
) |
|
|
13 |
|
|
|
State, net of federal income tax benefit
|
|
|
(4 |
) |
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
Foreign
|
|
|
1 |
|
|
|
|
(1 |
) |
|
|
10 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46 |
) |
|
|
|
1 |
|
|
|
(12 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(34 |
) |
|
|
$ |
16 |
|
|
$ |
4 |
|
|
$ |
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
The U.S. Federal tax statutory rate reconciles to the
effective tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
Successor | |
|
|
| |
|
|
| |
|
|
July 1, | |
|
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
|
June 30, | |
|
| |
|
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
|
| |
|
| |
|
| |
U.S. Federal income tax (benefit) rate
|
|
|
(35.0 |
)% |
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income taxes, net of federal income tax benefit
|
|
|
(0.1 |
) |
|
|
|
7.0 |
|
|
|
39.0 |
|
|
|
4.3 |
|
Benefit and taxes related to foreign operations
|
|
|
0.1 |
|
|
|
|
(0.2 |
) |
|
|
(11.6 |
) |
|
|
(9.6 |
) |
Foreign exchange differential on tax benefits
|
|
|
0.8 |
|
|
|
|
— |
|
|
|
(87.2 |
) |
|
|
4.8 |
|
Change in valuation allowance
|
|
|
(0.1 |
) |
|
|
|
(1.9 |
) |
|
|
80.5 |
|
|
|
10.1 |
|
Goodwill impairment
|
|
|
30.4 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other
|
|
|
0.3 |
|
|
|
|
0.1 |
|
|
|
(11.3 |
) |
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax (benefit) rate
|
|
|
(3.6 |
)% |
|
|
|
40.0 |
% |
|
|
44.4 |
% |
|
|
39.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period December 13, 2002 to June 30, 2003, the
valuation allowance decreased by $1 million, as it was
determined that it was more likely than not that deferred tax
assets in certain foreign jurisdictions would be realized. The
income tax expense includes an increase in valuation allowance
related to deferred tax assets in foreign countries of
$7 million and $12 million for the years ending
June 30, 2004 and 2005, respectively.
For the year ended June 30, 2004, the valuation allowance
increased by $1 million for certain state loss
carryforwards as their realization was not considered more
likely than not. The valuation allowance decreased by
$4 million in certain states for the year ended
June 30, 2005. This reduction was a result of determining
that it was more likely than not that certain state loss
carryforwards and other deferred tax assets would be realized.
The significant components of deferred income tax expense
(benefit) attributable to income from continuing operations are
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
Successor | |
|
|
| |
|
|
| |
|
|
July 1, | |
|
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
|
June 30, | |
|
| |
|
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
|
| |
|
| |
|
| |
Deferred income tax expense (benefit) (exclusive of the effects
of components listed below)
|
|
$ |
(45 |
) |
|
|
$ |
2 |
|
|
$ |
(20 |
) |
|
$ |
2 |
|
Change in valuation allowance, net of amounts allocated as
adjustments to purchase accounting
|
|
|
(1 |
) |
|
|
|
(1 |
) |
|
|
8 |
|
|
|
8 |
|
Change in effective state income tax rate
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(46 |
) |
|
|
$ |
1 |
|
|
$ |
(12 |
) |
|
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets at the date of the Transaction were recorded
based on management’s best estimate of the ultimate tax
basis that will be accepted by the tax authorities. At the date
of a change in management’s best estimate, deferred tax
assets and liabilities are adjusted to reflect the revised tax
basis. Pursuant to SFAS No. 109, certain adjustments
to deferred taxes and reductions of valuation allowances
established in purchase accounting would be applied as an
adjustment to the Company’s intangible assets. During the
year ended June 30, 2004, the Company recognized the effect
of benefits arising from these items by recording a deferred tax
asset of $41 million, which resulted in a related decrease
in the value of the Burger King brand recorded in
connection with the Transaction. Based on the provisions of
SFAS No. 109, as described above, approximately
$56 million of valuation allowance, if realized, will be
applied to reduce intangible assets.
F-38
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Trade and notes receivable, principally due to allowance for
doubtful accounts
|
|
$ |
63 |
|
|
$ |
36 |
|
|
Accrued employee benefits
|
|
|
42 |
|
|
|
29 |
|
|
Unfavorable leases
|
|
|
126 |
|
|
|
106 |
|
|
Liabilities not currently deductible for tax
|
|
|
66 |
|
|
|
70 |
|
|
Tax loss and credit carryforwards
|
|
|
29 |
|
|
|
79 |
|
|
Property and equipment, principally due to differences in
depreciation
|
|
|
47 |
|
|
|
49 |
|
|
Other
|
|
|
— |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
373 |
|
|
|
370 |
|
Valuation allowance
|
|
|
(65 |
) |
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
308 |
|
|
|
292 |
|
|
|
|
|
|
|
|
Less deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
330 |
|
|
|
328 |
|
|
Leases
|
|
|
56 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
386 |
|
|
|
377 |
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$ |
78 |
|
|
$ |
85 |
|
|
|
|
|
|
|
|
After considering the level of historical taxable income,
projections for future taxable income over the periods in which
the deferred tax assets are deductible, and the reversal of
deferred tax liabilities, management believes it is more likely
than not that the benefits of certain state and foreign net
operating loss carryforwards and other deferred tax assets will
not be realized. The Company increased the valuation allowance
by $13 million for the year ended June 30, 2005.
The Company has federal loss carryforwards in the U.S. of
$38 million, expiring in 2025, and state loss carryforwards
of $76 million, expiring between 2007 and 2025. In
addition, the Company has foreign loss carryforwards of
$49 million, expiring between 2006 and 2015, and foreign
loss carryforwards of $77 million that do not expire.
Deferred taxes have not been provided on basis difference
related to investments in foreign subsidiaries. These
differences consist primarily of undistributed earnings, which
are considered to be indefinitely reinvested in the operations
of such subsidiaries.
As a matter of course, the Company is regularly audited by
various tax authorities. From time to time, these audits result
in proposed assessments where the ultimate resolution may result
in the Company owing additional taxes. The Company believes that
its tax positions comply with applicable tax law and that it has
adequately provided for these matters.
|
|
Note 13. |
Related Party Transactions |
The Company is charged a management fee by the Sponsors equal to
0.5% of total current year revenues, which amount is limited to
0.5% of the prior year’s total revenues. Management fees
and expenses paid to the sponsors totaled $5 million for
the period December 13, 2002 to June 30, 2003,
$8 million for the year ended June 30, 2004, and
$9 million for the year ended June 30, 2005. At
June 30, 2004 and 2005, the Company had management fees
payable to the Sponsors of $2 million, which are included
within other current liabilities in the accompanying
consolidated balance sheets. These fees and
F-39
expenses were recorded within selling, general and
administrative expenses in the accompanying consolidated
statement of operations.
As of June 30, 2004 and 2005, BKH has PIK Notes outstanding
to affiliates of $264 million. Interest expense on these
PIK Notes totaled $11 million for the period
December 13, 2002 to June 30, 2003, $21 million
for the year ended June 30, 2004 and $23 million for
the year ended June 30, 2005.
At June 30, 2005, the Company leased 1,132 restaurant
properties to franchisees. The building portions of the capital
leases with franchisees are accounted for as direct financing
leases and recorded as a net investment in property leased to
franchisees, while the land portions are operating leases.
Property and equipment, net leased to franchisees under
operating leases as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Land
|
|
$ |
193 |
|
|
$ |
201 |
|
Buildings and improvements
|
|
|
66 |
|
|
|
67 |
|
Restaurant equipment
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
261 |
|
|
|
270 |
|
Accumulated depreciation
|
|
|
(12 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
$ |
249 |
|
|
$ |
252 |
|
|
|
|
|
|
|
|
Net investment in property leased to franchisees under direct
financing leases is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Future minimum rents to be received
|
|
$ |
378 |
|
|
$ |
373 |
|
Estimated unguaranteed residual value
|
|
|
4 |
|
|
|
4 |
|
Unearned income
|
|
|
(213 |
) |
|
|
(218 |
) |
Allowance on direct financing leases
|
|
|
— |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
169 |
|
|
|
157 |
|
Current portion included within trade receivables
|
|
|
(10 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
Net investment in property leased to franchisees
|
|
$ |
159 |
|
|
$ |
149 |
|
|
|
|
|
|
|
|
In addition, land, buildings, office space, and warehousing are
leased. At June 30, 2005, capital leases cover
204 restaurant buildings.
F-40
At June 30, 2005, future minimum lease receipts and
commitments for each of the years ended June 30 are as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Receipts | |
|
Lease Commitments | |
|
|
| |
|
| |
|
|
Direct | |
|
|
|
|
|
|
Financing | |
|
Operating | |
|
Capital | |
|
Operating | |
|
|
Leases | |
|
Leases | |
|
Leases | |
|
Leases | |
|
|
| |
|
| |
|
| |
|
| |
2006
|
|
$ |
30 |
|
|
$ |
70 |
|
|
$ |
11 |
|
|
$ |
143 |
|
2007
|
|
|
30 |
|
|
|
66 |
|
|
|
10 |
|
|
|
135 |
|
2008
|
|
|
30 |
|
|
|
62 |
|
|
|
10 |
|
|
|
131 |
|
2009
|
|
|
29 |
|
|
|
58 |
|
|
|
10 |
|
|
|
114 |
|
2010
|
|
|
29 |
|
|
|
53 |
|
|
|
9 |
|
|
|
106 |
|
Thereafter
|
|
|
225 |
|
|
|
348 |
|
|
|
62 |
|
|
|
730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
373 |
|
|
$ |
657 |
|
|
$ |
112 |
|
|
$ |
1,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total minimum obligations of the capital leases of
$112 million, reduced by an amount of $56 million
representing interest equals $56 million of capital leases
recorded in the consolidated balance sheet, of which
$3 million is classified as current capital lease
obligations and the remaining $53 million is classified as
long-term capital lease obligations.
Property revenues, which are classified within franchise and
property revenues, are comprised primarily of rental income from
operating leases and earned income on direct financing leases
with franchisees as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
Successor | |
|
|
| |
|
|
| |
|
|
July 1, | |
|
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
|
June 30, | |
|
| |
|
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
|
| |
|
| |
|
| |
Rental income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
$ |
32 |
|
|
|
$ |
39 |
|
|
$ |
78 |
|
|
$ |
78 |
|
|
Contingent
|
|
|
6 |
|
|
|
|
5 |
|
|
|
10 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
|
44 |
|
|
|
88 |
|
|
|
91 |
|
Earned income on direct financing leases
|
|
|
17 |
|
|
|
|
16 |
|
|
|
29 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
55 |
|
|
|
$ |
60 |
|
|
$ |
117 |
|
|
$ |
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense associated with the lease commitments is as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
Successor | |
|
|
| |
|
|
| |
|
|
July 1, | |
|
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
|
June 30, | |
|
| |
|
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
|
| |
|
| |
|
| |
Rental expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
$ |
58 |
|
|
|
$ |
67 |
|
|
$ |
137 |
|
|
$ |
145 |
|
|
Contingent
|
|
|
4 |
|
|
|
|
2 |
|
|
|
5 |
|
|
|
6 |
|
Amortization of favorable and unfavorable lease contracts, net
|
|
|
— |
|
|
|
|
(2 |
) |
|
|
(52 |
) |
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
62 |
|
|
|
$ |
67 |
|
|
$ |
90 |
|
|
$ |
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfavorable lease contracts are amortized over a period of up to
20 years as a reduction to occupancy and other operating
costs and property expenses. Amortization of unfavorable lease
contracts totaled
F-41
$3 million for the period December 13, 2002 to
June 30, 2003, $57 million for the year ended
June 30, 2004, and $32 million for the year ended
June 30, 2005.
Unfavorable leases, net of accumulated amortization totaled
$301 million and $261 million at June 30, 2004
and June 30, 2005, respectively. Unfavorable leases, net of
amortization are classified within other deferrals and
liabilities.
As of June 30, 2005, estimated future amortization expense
of unfavorable lease contracts subject to amortization for each
of the years ended June 30 is $29 million in 2006,
$26 million in 2007, $24 million in 2008,
$22 million in 2009, $21 million in 2010, and
$139 million thereafter.
|
|
Note 15. |
Stockholders’ equity |
The Company was initially capitalized on December 13, 2002
with $398 million in cash, as a limited liability company.
On June 27, 2003, the Company was converted to a
corporation and issued an aggregate 104,692,735 common shares to
the Sponsors.
No dividends were declared during the periods July 1, 2002
to December 12, 2002 and December 13, 2002 to
June 30, 2003, or the years ended June 30, 2004 and
2005.
|
|
|
Burger King Corporation Equity Incentive Plan |
For the year ended June 30, 2002, the Company established
the Burger King Corporation 2001 Omnibus Incentive Compensation
Plan (the “OIC Plan”), which provided for the grant of
options to purchase shares of the Company (“OIC
Options”). The Company had employment agreements with
certain key executives, which called for a cash payment in
exchange for their OIC Options, as well as specified severance
arrangements, in the event of a change in control. As a result
of the sale of the Company (see note 1), these key
executives exchanged all outstanding OIC Options for
approximately $7.0 million in cash. The $7.0 million
cash settlement was expensed and reflected in operating expenses
(income), net for the period July 1, 2002 to
December 12, 2002.
|
|
|
Burger King Holdings, Inc. Equity Incentive Plan |
In July 2003, the Company implemented the Burger King Holdings,
Inc. Equity Incentive Plan (the “Incentive Plan”). The
Incentive Plan provides for the possible issuance of up to
13,684,391 shares of BKH common stock through the sale of
common stock to certain officers of the Company and independent
members of the Board of Directors; grants of stock options to
certain officers, employees, and independent board members of
the Company; and grants of restricted stock units to certain
officers of the Company.
Through June 30, 2005, officers of the Company and
independent members of the Board of Directors have purchased
2,042,137 shares of BKH common stock, net of redemptions,
at fair market value.
Through June 30, 2005, certain officers, employees, and an
independent member of the Board of Directors of the Company have
been granted options to purchase an aggregate
9,009,121 shares of BKH common stock at fair market value.
These options generally vest over five years and have a
10-year life from the
date of grant.
F-42
The following table summarizes the status and activity of
options granted under the Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
Number of | |
|
Average Exercise | |
|
|
Options | |
|
Price | |
|
|
| |
|
| |
Outstanding at June 30, 2003
|
|
|
— |
|
|
$ |
— |
|
|
Options granted
|
|
|
8,787,366 |
|
|
|
4.86 |
|
|
Forfeited
|
|
|
(1,969,211 |
) |
|
|
5.16 |
|
Outstanding at June 30, 2004
|
|
|
6,818,155 |
|
|
|
4.78 |
|
|
Options granted
|
|
|
5,142,728 |
|
|
|
4.28 |
|
|
Exercised
|
|
|
(21,446 |
) |
|
|
3.80 |
|
|
Forfeited
|
|
|
(2,930,316 |
) |
|
|
4.62 |
|
|
|
|
|
|
|
|
Outstanding at June 30, 2005
|
|
|
9,009,121 |
|
|
$ |
4.55 |
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding at June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
Exercise |
|
Number of |
|
Average Remaining |
|
Average Exercise |
Price |
|
Options |
|
Contractual Life |
|
Price |
|
|
|
|
|
|
|
|
$3.80 |
|
|
|
7,788,850 |
|
|
|
8.79 |
|
|
$ |
3.80 |
|
|
7.59 |
|
|
|
658,178 |
|
|
|
9.08 |
|
|
|
7.59 |
|
|
11.39 |
|
|
|
562,093 |
|
|
|
8.54 |
|
|
|
11.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,009,121 |
|
|
|
8.80 |
|
|
$ |
119.78 |
|
Pursuant to the Incentive Plan, through June 30, 2005, the
Company granted 482,212 restricted stock units at fair market
value to certain officers of the Company. The unearned
compensation associated with these restricted stock units is
being amortized over a period of up to four years. The Company
is recognizing compensation expense on the BKH restricted stock
units granted to its employees.
|
|
Note 16. |
Retirement Plan and Other Postretirement Benefits |
BKC has noncontributory defined benefit plans for its salaried
employees in the United States and certain employees in the
United Kingdom and Germany. These plans are collectively
referred to as the “Pension Plans.” In addition, BKC
has the Burger King Savings Plan (the “Savings Plan”),
a defined contribution plan that is provided to all employees
who meet the eligibility requirements. Eligible employees may
contribute up to 50% of pay on a pre-tax basis, subject to IRS
limitations.
Effective August 1, 2003, BKC implemented the Executive
Retirement Plan (“ERP”) for all officers and senior
management. Officers and senior management may elect to defer up
to 50% of base pay and up to 100% of incentive pay on a
before-tax basis under the ERP. BKC provides a dollar-for-dollar
match on up to the first 6% of base pay.
Expenses incurred for the Savings Plan and ERP totaled
$2.9 million for the period July 1, 2002 to
December 31, 2002. Expenses incurred for the Savings Plan
and ERP totaled $2 million for the period December 13,
2002 to June 30, 2003, $5 million for the year ended
June 30, 2004, and $5 million for the year ended
June 30, 2005.
BKC accrues postretirement benefits in accordance with
SFAS No. 106, Employers’ Accounting for
Postretirement Benefits Other Than Pensions, for its retiree
benefit plans (“Postretirement Plans”). Under
SFAS No. 106, the estimated cost of retiree benefit
payments, principally health and life insurance benefits, is
accrued during the employees’ active service periods.
BKC uses a measurement date of March 31 for substantially
all Pension and Postretirement Plans.
F-43
|
|
|
Obligations and Funded Status |
The following table sets forth the change in benefit
obligations, fair value of plan assets and amounts recognized in
the balance sheets for the Pension Plans and Postretirement
Plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$ |
146 |
|
|
$ |
167 |
|
|
$ |
20 |
|
|
$ |
21 |
|
Service cost
|
|
|
6 |
|
|
|
6 |
|
|
|
1 |
|
|
|
1 |
|
Interest cost
|
|
|
9 |
|
|
|
10 |
|
|
|
1 |
|
|
|
1 |
|
Actuarial losses (gains)
|
|
|
9 |
|
|
|
3 |
|
|
|
(1 |
) |
|
|
(1 |
) |
Benefits paid
|
|
|
(3 |
) |
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
167 |
|
|
|
181 |
|
|
|
21 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
73 |
|
|
|
86 |
|
|
|
— |
|
|
|
— |
|
Actual return on plan assets
|
|
|
14 |
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
Company contributions
|
|
|
2 |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
Benefits paid
|
|
|
(3 |
) |
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
86 |
|
|
|
93 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of plan
|
|
|
(81 |
) |
|
|
(88 |
) |
|
|
(21 |
) |
|
|
(22 |
) |
Unrecognized net actuarial loss (gain)
|
|
|
18 |
|
|
|
23 |
|
|
|
— |
|
|
|
(1 |
) |
Minimum pension liability adjustment
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
Other
|
|
|
1 |
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net accrued benefit cost
|
|
|
(62 |
) |
|
|
(60 |
) |
|
|
(21 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in Statement of Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
|
(62 |
) |
|
|
(55 |
) |
|
|
(21 |
) |
|
|
(23 |
) |
Accumulated other comprehensive loss
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net accrued benefit cost
|
|
$ |
(62 |
) |
|
$ |
(60 |
) |
|
$ |
(21 |
) |
|
$ |
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for the Pension Plans was
$153 million and $134 million at June 30, 2005
and 2004, respectively.
|
|
|
Additional year-end information for Pension Plans with
accumulated benefit obligations in excess of plan assets |
The following sets forth the projected benefit obligation,
accumulated benefit obligation, and fair value of plan assets
for the Pension Plans with accumulated benefit obligations in
excess of plan assets (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Projected benefit obligation
|
|
$ |
167 |
|
|
$ |
181 |
|
Accumulated benefit obligation
|
|
|
134 |
|
|
|
153 |
|
Fair value of plan assets
|
|
|
86 |
|
|
|
93 |
|
F-44
|
|
|
Components of Net Periodic Benefit Cost |
A summary of the components of net periodic benefit cost for the
Pension Plans (retirement benefits) and Postretirement Plans
(other benefits) is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
Predecessor | |
|
Successor | |
|
Predecessor | |
|
Successor | |
|
|
| |
|
| |
|
| |
|
| |
|
|
July 1, | |
|
December 13, | |
|
Years Ended | |
|
July 1, | |
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
2002 to | |
|
June 30, | |
|
2002 to | |
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
June 30, | |
|
| |
|
December 12, | |
|
June 30, | |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Service cost-benefits earned during the period
|
|
$ |
2 |
|
|
$ |
3 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
1 |
|
Interest costs on projected benefit obligations
|
|
|
3 |
|
|
|
4 |
|
|
|
9 |
|
|
|
10 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Expected return on plan assets
|
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(6 |
) |
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Recognized net actuarial loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net periodic benefit cost and total annual pension cost
|
|
$ |
1 |
|
|
$ |
4 |
|
|
$ |
9 |
|
|
$ |
10 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
2 |
|
The weighted-average assumptions used in computing the benefit
obligations of the Pension Plans (retirement benefits) and
Postretirement Plans (other benefits) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
Predecessor | |
|
Successor | |
|
Predecessor | |
|
Successor | |
|
|
| |
|
| |
|
| |
|
| |
|
|
July 1, | |
|
December 13, | |
|
Years Ended | |
|
July 1, | |
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
2002 to | |
|
June 30, | |
|
2002 to | |
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
June 30, | |
|
| |
|
December 12, | |
|
June 30, | |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Discount rate as of year-end
|
|
|
6.75 |
% |
|
|
6.25 |
% |
|
|
6.00 |
% |
|
|
5.86 |
% |
|
|
6.75 |
% |
|
|
6.25 |
% |
|
|
6.00 |
% |
|
|
5.86 |
% |
Range of compensation rate increase
|
|
|
4.75 |
|
|
|
4.75 |
|
|
|
4.75 |
|
|
|
4.75 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
The weighted-average assumptions used in computing the net
periodic benefit cost of the Pension Plans (retirement benefits)
and Postretirement Plans (other benefits) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Benefits | |
|
|
|
Other Benefits | |
|
|
| |
|
|
|
| |
|
|
Predecessor | |
|
Successor | |
|
Predecessor | |
|
Successor | |
|
|
| |
|
| |
|
| |
|
| |
|
|
July 1, | |
|
December 13, | |
|
Years Ended | |
|
July 1, | |
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
2002 to | |
|
June 30, | |
|
2002 to | |
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
June 30, | |
|
| |
|
December 12, | |
|
June 30, | |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Discount rate as of year-end
|
|
|
7.50 |
% |
|
|
6.75 |
% |
|
|
6.25 |
% |
|
|
6.00 |
% |
|
|
7.50 |
% |
|
|
6.75 |
% |
|
|
6.25 |
% |
|
|
6.00 |
% |
Range of compensation rate increase
|
|
|
5.50 |
|
|
|
4.75 |
|
|
|
4.75 |
|
|
|
4.75 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Expected long-term rate of return on plan assets
|
|
|
9.50 |
|
|
|
8.75 |
|
|
|
8.75 |
|
|
|
8.75 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
The expected long-term rate of return on plan assets is
determined by expected future returns on the asset categories in
target investment allocation. These expected returns are based
on historical returns for each assets category adjusted for an
assessment of current market conditions.
F-45
The assumed healthcare cost trend rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
Successor | |
|
|
| |
|
| |
|
|
July 1, | |
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
June 30, | |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Healthcare cost trend rate assumed for next year
|
|
|
10.0 |
% |
|
|
10.0 |
% |
|
|
9.5 |
% |
|
|
9.0 |
% |
Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate)
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Year that the rate reaches the ultimate trend rate
|
|
|
2013 |
|
|
|
2013 |
|
|
|
2013 |
|
|
|
2013 |
|
Assumed healthcare cost trend rates do not have a significant
effect on the amounts reported for the postretirement healthcare
plans, since a one-percentage point change in the assumed
healthcare cost trend rate would have very minimal effects on
service and interest cost and the postretirement obligation.
The fair value of plan assets for BKC’s U.S. pension
benefit plans as of March 31, 2004 and 2005 was
$78 million and $82 million, respectively. The fair
value of plan assets for BKC’s pension benefit plans
outside the U.S. was $8 million and $11 million
at April 30, 2004 and 2005, respectively.
The following table sets forth the asset allocation for
BKC’s U.S. pension plans’ assets:
|
|
|
|
|
|
|
|
|
|
|
Retirement | |
|
|
Benefits | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Equity securities
|
|
|
71 |
% |
|
|
71 |
% |
Debt securities
|
|
|
28 |
|
|
|
28 |
|
Short-term investments
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
The investment objective for the U.S. pension plans is to
secure the benefit obligations to participants while minimizing
costs to the Company. The goal is to optimize the long-term
return on plan assets at an average level of risk. The target
investment allocation is 65% equity and 35% fixed income
securities. The portfolio of equity securities includes
primarily large-capitalization U.S. companies with a mix of
some small-capitalization U.S. companies and international
entities.
|
|
|
Estimated Future Cash Flows |
Total contributions to the Pension Plans and Postretirement
Plans were $1 million and $17 million, respectively,
and $1 million and $3 million, respectively, for the
years ended June 30, 2004 and 2005, respectively. Of the
2005 contributions, $10 million was contributed during the
quarter ended June 30, 2005.
F-46
The Pension Plans’ expected contributions to be paid in the
next fiscal year, the projected benefit payments for each of the
next five fiscal years, and the total aggregate amount for the
subsequent four fiscal years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Benefits | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
Qualified | |
|
Excess | |
|
Total | |
|
Other Benefits | |
|
|
|
|
| |
|
| |
|
| |
|
| |
Estimated net employer contributions during fiscal 2006
|
|
|
|
|
|
$ |
1 |
|
|
$ |
0.4 |
|
|
$ |
1.4 |
|
|
$ |
0.7 |
|
Estimated future fiscal year benefit payments during fiscal:
|
|
|
2006 |
|
|
$ |
4 |
|
|
$ |
0.4 |
|
|
$ |
4.4 |
|
|
$ |
0.7 |
|
|
|
|
2007 |
|
|
|
4 |
|
|
|
0.5 |
|
|
|
4.5 |
|
|
|
0.8 |
|
|
|
|
2008 |
|
|
|
4 |
|
|
|
0.5 |
|
|
|
4.5 |
|
|
|
0.9 |
|
|
|
|
2009 |
|
|
|
5 |
|
|
|
0.6 |
|
|
|
5.6 |
|
|
|
1.0 |
|
|
|
|
2010 |
|
|
|
5 |
|
|
|
0.7 |
|
|
|
5.7 |
|
|
|
1.1 |
|
|
|
|
2011-2014 |
|
|
|
38 |
|
|
|
4.8 |
|
|
|
42.8 |
|
|
|
7.6 |
|
|
|
Note 17. |
Other Operating Expenses (Income), Net |
Other operating expenses (income), net, consist of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
Successor | |
|
|
| |
|
| |
|
|
July 1, | |
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
2002 to | |
|
June 30, | |
|
|
December 12, | |
|
June 30, | |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Losses (gains) on asset disposals
|
|
$ |
(5 |
) |
|
$ |
2 |
|
|
$ |
15 |
|
|
$ |
13 |
|
Impairment of long-lived assets
|
|
|
52 |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
Litigation settlements and reserves
|
|
|
(5 |
) |
|
|
— |
|
|
|
4 |
|
|
|
2 |
|
Impairment of debt investments
|
|
|
— |
|
|
|
— |
|
|
|
19 |
|
|
|
4 |
|
Impairment of investments in unconsolidated companies and joint
ventures
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
Other, net
|
|
|
4 |
|
|
|
(9 |
) |
|
|
12 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses (income), net
|
|
$ |
46 |
|
|
$ |
(7 |
) |
|
$ |
54 |
|
|
$ |
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses on Asset and Business Disposals |
Losses on asset and business disposals are primarily related to
restaurant closures and refranchising of Company-owned
restaurants. See note 3 for further details.
|
|
|
Impairment of Long-Lived Assets |
Due to a decrease in the sales price of the Company (see
Note 1), the Company recorded an impairment charge related
to the Burger King brand of $35 million for the
period July 1, 2002 to December 12, 2002.
For the period July 1, 2002 to December 12, 2002, the
Company recorded impairment charges of $17 million on
long-lived assets in Europe due to deterioration in economic
performance.
|
|
|
Litigation Settlements and Reserves |
The Company is a party to legal proceedings arising in the
ordinary course of business, some of which are covered by
insurance. In the opinion of management, disposition of these
matters will not materially affect the Company’s financial
condition and statements of operations.
For the year ended June 30, 2004, the Company recognized a
charge of $3 million for settlement of a claim in Australia
by BKC’s joint venture partner. Under the terms of a
settlement agreement, BKC paid
F-47
$3 million to terminate certain development rights granted
to the joint venture in June 2002. BKC’s joint venture
partner also has the option to buy BKC’s interest in the
joint venture for a period of two years for approximately
$6 million. In addition, BKC agreed to forgive the note
receivable from the joint venture plus accrued interest and
accordingly, the Company recognized an impairment loss of
$7 million for the year ended June 30, 2004.
|
|
|
Impairment of Debt Investments |
For the year ended June 30, 2004, the Company assessed the
collectibility of certain acquired franchisee third-party debt,
and recorded an impairment charge of $12 million. As noted
above, for the year ended June 30, 2004, the Company agreed
to forgive the note receivable from the Australia joint venture
partner plus accrued interest and thus the Company recognized an
impairment loss of $7 million.
Items included within Other, net primarily represent income and
losses from joint ventures, realized gains and losses from
foreign exchange forward contracts and transactions denominated
in foreign currencies, franchise restructuring program costs,
refranchising costs, lease termination costs, gain or loss on
write-offs of favorable and unfavorable leases,
non-capitalizable expenses related to acquisitions of franchisee
operations, and other miscellaneous items. For the period
December 13, 2002 to June 30, 2003, the Company
recorded $13 million of gains from foreign exchange forward
contracts and transactions denominated in foreign currencies.
|
|
Note 18. |
Commitments and Contingencies |
Other commitments, arising out of normal business operations,
were $4 million as of June 30, 2005 and 2004. These
commitments consist primarily of guarantees covering foreign
franchisees’ obligations to third-party suppliers.
The Company guarantees certain lease payments of franchisees
arising from leases assigned in connection with sales of company
restaurants to franchisees, by remaining secondarily liable
under the assigned leases of varying terms, for base and
contingent rents. The maximum contingent rent amount is not
determinable as the amount is based on future revenues. In the
event of default by the franchisees, the Company has typically
retained the right to acquire possession of the related
restaurants, subject to landlord consent. The aggregate
contingent obligation arising from these assigned lease
guarantees was $126 million at June 30, 2005, expiring
over an average period of 10 years.
At June 30, 2005, there were $20 million in
irrevocable standby letters of credit outstanding, which were
issued to certain insurance carriers to guarantee payment for
various insurance programs such as health and commercial
liability insurance. These standby letters of credit were
against the Company’s $100 million revolving credit
facility. As of June 30, 2005, none of these irrevocable
standby letters of credit had been drawn on.
At June 30, 2005, Diageo had posted $19 million in
standby letters of credit on behalf of BKC relating to open
casualty claim matters. As part of the July 2005 refinancing,
these letters of credit were replaced by standby letters of
credit issued by the Company totaling $18 million. See
Note 20.
As of June 30, 2005, the Company had posted bonds totaling
$13 million, which related to certain promotional
activities.
F-48
In fiscal 2000, the Company entered into long-term, exclusive
contracts with the Coca-Cola Company and with Dr Pepper/
Seven Up, Inc. to supply Company and franchise restaurants with
their products and obligating Burger King restaurants in
the United States to purchase a specified number of gallons of
soft drink syrup. These volume commitments are not subject to
any time limit. As of June 30, 2005, the Company estimates
that it will take approximately 17 years and 19 years
to complete the Coca-Cola and Dr Pepper/ Seven Up, Inc.
purchase commitments, respectively. In the event of early
termination of these arrangements, the Company may be required
to make termination payments that could be material to the
Company’s results of operations and financial position.
Additionally, in connection with these contracts, the Company
has received upfront fees, which are being amortized over the
term of the contracts. At June 30, 2004 and 2005, the
deferred amounts totaled $28 million and $26 million,
respectively. These deferred amounts are amortized as a
reduction to food, paper and product costs in the accompanying
consolidated statements of operations.
The Company also enters into commitments to purchase advertising
for periods up to twelve months. At June 30, 2005,
commitments to purchase advertising totaled $60 million.
In May 2005, the Company entered into an agreement to lease a
building, to serve as the Company’s global headquarters.
The estimated annual rent for the
15-year initial term is
approximately $5 million, to be finalized upon the
completion of the building’s construction, expected in
2008. The Company will receive a tenant improvement allowance,
estimated at approximately $8 million to be finalized upon
the completion of the building’s construction.
The Company is self-insured for most domestic workers’
compensation, general liability, and automotive liability losses
subject to per occurrence and aggregate annual liability
limitations. The Company is also self-insured for healthcare
claims for eligible participating employees subject to certain
deductibles and limitations. The Company determines its
liability for claims incurred but not reported on an actuarial
basis.
|
|
Note 19. |
Segment Reporting |
The Company operates in the fast food hamburger restaurant
industry. Revenues include retail sales at Company-owned
restaurants and franchise revenues. The business is managed as
distinct geographic segments: United States and Canada, Europe,
Middle East and Africa and Asia Pacific (“EMEA/
APAC”), and Latin America.
Unallocated includes corporate support costs in areas such as
facilities, finance, human resources, information technology,
legal, marketing, and supply chain management.
F-49
The following tables present revenues, operating (loss) income,
depreciation and amortization, total assets, long-lived assets
and capital expenditures information by geographic segment (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
Successor | |
|
|
| |
|
|
| |
|
|
July 1, | |
|
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
|
2002 to | |
|
June 30, | |
|
|
December, 12, | |
|
|
June 30, | |
|
| |
|
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
512 |
|
|
|
$ |
601 |
|
|
$ |
1,117 |
|
|
$ |
1,275 |
|
EMEA/ APAC
|
|
|
210 |
|
|
|
|
267 |
|
|
|
566 |
|
|
|
586 |
|
Latin America
|
|
|
29 |
|
|
|
|
38 |
|
|
|
71 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
751 |
|
|
|
$ |
906 |
|
|
$ |
1,754 |
|
|
$ |
1,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other than the United States and Germany, no other individual
country represented 10% or more of the Company’s total
revenues. For the period July 1, 2002 to December 12,
2002, revenues in the United States totaled $462 million
and revenues in Germany totaled $80 million. Revenues in
the United States totaled $541 million for the period
December 13, 2002 to June 30, 2003, $997 million
for the year ended June 30, 2004, and $1,146 million
for the year ended June 30, 2005. Revenues in Germany
totaled $106 million for the period December 13, 2002
to June 30, 2003, $236 million for the year ended
June 30, 2004, and $262 million for the year ended
June 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
Successor | |
|
|
| |
|
|
| |
|
|
July 1, | |
|
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
|
2002 to | |
|
June 30, | |
|
|
December, 12, | |
|
|
June 30, | |
|
| |
|
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
|
| |
|
| |
|
| |
Operating (Loss) Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
(643 |
) |
|
|
$ |
92 |
|
|
$ |
115 |
|
|
$ |
255 |
|
EMEA/ APAC
|
|
|
(167 |
) |
|
|
|
24 |
|
|
|
95 |
|
|
|
36 |
|
Latin America
|
|
|
9 |
|
|
|
|
13 |
|
|
|
26 |
|
|
|
25 |
|
Unallocated
|
|
|
(79 |
) |
|
|
|
(54 |
) |
|
|
(163 |
) |
|
|
(165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating (loss) income
|
|
$ |
(880 |
) |
|
|
$ |
75 |
|
|
$ |
73 |
|
|
$ |
151 |
|
|
Interest expense, net
|
|
|
46 |
|
|
|
|
35 |
|
|
|
64 |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$ |
(926 |
) |
|
|
$ |
40 |
|
|
$ |
9 |
|
|
$ |
78 |
|
|
Income tax (benefit) expense
|
|
|
(34 |
) |
|
|
|
16 |
|
|
|
4 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(892 |
) |
|
|
$ |
24 |
|
|
$ |
5 |
|
|
$ |
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
Successor | |
|
|
| |
|
|
| |
|
|
July 1, | |
|
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
|
2002 to | |
|
June 30, | |
|
|
December 13, | |
|
|
June 30, | |
|
| |
|
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
|
| |
|
| |
|
| |
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
28 |
|
|
|
$ |
29 |
|
|
$ |
56 |
|
|
$ |
52 |
|
EMEA/ APAC
|
|
|
9 |
|
|
|
|
6 |
|
|
|
(13 |
) |
|
|
4 |
|
Latin America
|
|
|
1 |
|
|
|
|
1 |
|
|
|
(1 |
) |
|
|
2 |
|
Unallocated
|
|
|
5 |
|
|
|
|
7 |
|
|
|
21 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$ |
43 |
|
|
|
$ |
43 |
|
|
$ |
63 |
|
|
$ |
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
Depreciation and amortization expense for the year ended
June 30, 2004 reflects the initial period of amortization
of unfavorable leases recorded as part of the Transaction.
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
June 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Assets:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
2,382 |
|
|
$ |
2,433 |
|
EMEA/ APAC
|
|
|
208 |
|
|
|
220 |
|
Latin America
|
|
|
39 |
|
|
|
47 |
|
Unallocated
|
|
|
36 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,665 |
|
|
$ |
2,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
June 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Long-Lived Assets:
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
888 |
|
|
$ |
892 |
|
EMEA/ APAC
|
|
|
91 |
|
|
|
102 |
|
Latin America
|
|
|
24 |
|
|
|
31 |
|
Unallocated
|
|
|
36 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$ |
1,039 |
|
|
$ |
1,048 |
|
|
|
|
|
|
|
|
Long-lived assets include property and equipment, net, and net
investment in property leased to franchisees. Other than the
United States, no other individual country represented 10% or
more of the Company’s total long-lived assets. Long-lived
assets in the United States totaled $845 million and
$852 million at June 30, 2005 and 2004, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
Successor | |
|
|
| |
|
|
| |
|
|
July 1, | |
|
|
December 13, | |
|
Years Ended | |
|
|
2002 to | |
|
|
2002 to | |
|
June 30, | |
|
|
December, 12, | |
|
|
June 30, | |
|
| |
|
|
2002 | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
|
| |
|
| |
|
| |
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States and Canada
|
|
$ |
81 |
|
|
|
$ |
33 |
|
|
$ |
36 |
|
|
$ |
40 |
|
EMEA/ APAC
|
|
|
11 |
|
|
|
|
11 |
|
|
|
28 |
|
|
|
27 |
|
Latin America
|
|
|
3 |
|
|
|
|
3 |
|
|
|
6 |
|
|
|
8 |
|
Unallocated
|
|
|
— |
|
|
|
|
— |
|
|
|
11 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$ |
95 |
|
|
|
$ |
47 |
|
|
$ |
81 |
|
|
$ |
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 20. |
Subsequent Event |
On July 13, 2005, BKC and BKH entered into a
$1.15 billion credit agreement, which consists of a
$150 million revolving credit facility, a $250 million
term loan (“Term Loan A”), and a
$750 million term loan (“Term Loan B”). The
interest rate for Term Loan A, Term Loan B, and the
revolving credit facility, as selected by the Company, is either
(a) the greater of the prime rate or the federal funds
effective rate plus 0.5% plus a rate not to exceed 0.75%, which
varies according to the Company’s leverage ratio or
(b) LIBOR plus a rate not to exceed 1.75%, which varies
according to the Company’s leverage ratio.
The quarterly principal payments for Term Loan A and Term
Loan B begin on September 30, 2006 and
September 30, 2005, respectively, and the amounts of
required principal payments increase over time.
F-51
The maturity dates of Term Loan A, Term Loan B, and
amounts drawn under the revolving credit facility are June 2011,
June 2012, and June 2011, respectively. The aggregate amounts of
future maturities for the new term debt for each of the years
ending June 30 are as follows (in millions):
|
|
|
|
|
|
|
2006
|
|
$ |
8 |
|
|
|
2007
|
|
|
32 |
|
|
|
2008
|
|
|
33 |
|
|
|
2009
|
|
|
57 |
|
|
|
2010
|
|
|
70 |
|
|
|
Thereafter
|
|
|
847 |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,047 |
|
|
|
|
|
|
|
|
|
The new credit agreement contains certain customary financial
and other covenants. These covenants impose restrictions on
additional indebtedness, liens, investments, advances,
guarantees, and acquisitions. These covenants also place
restrictions on asset sales, sale and leaseback transactions,
dividends, payments between BKC and BKH, and certain
transactions with affiliates. The financial covenants include a
requirement to maintain a certain interest expense coverage
ratio and leverage ratio and limit the maximum amount of capital
expenditures in a year. Following the end of each fiscal year,
the Company is required to prepay the term debt in an amount
equal to 50% of excess cash flow (as defined in the credit
agreement). This prepayment requirement is not applicable if the
Company’s leverage ratio is less than a predetermined
amount. There are other events and transactions such as sale and
leaseback transactions, proceeds from casualty events, and
incurrence of debt that may trigger additional mandatory
prepayments.
BKC is the borrower under the credit agreement and BKH and
certain subsidiaries have jointly and severally unconditionally
guaranteed the payment of the amounts due under the new credit
agreement. BKH, BKC, and certain subsidiaries have pledged, as
collateral, a 100% equity interest in the domestic subsidiaries
of BKH and BKC with some exceptions. Furthermore, BKC has
pledged as collateral a 65% equity interest in certain foreign
subsidiaries.
The Company utilized $1 billion in proceeds from Term Loans
A and B, $47 million of the revolving credit facility, and
cash on hand to repay BKC’s existing term debt and the PIK
Notes held by BKH (see note 10). The remaining deferred
financing fee balance of $13 million from the existing term
debt was expensed and the Company recorded the deferred
financing costs of $16 million in connection with the
refinancing.
F-52
The following table presents the unaudited consolidated balance
sheet as of June 30, 2005, as if the debt refinancing
described above had occurred on June 30, 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma | |
|
|
June 30, 2005 | |
|
|
|
Consolidated | |
|
|
(as reported) | |
|
Adjustments | |
|
Balance Sheet | |
|
|
| |
|
| |
|
| |
Cash and cash equivalents
|
|
$ |
432 |
|
|
$ |
(254 |
)(1) |
|
$ |
178 |
|
Other current assets, net
|
|
|
202 |
|
|
|
— |
|
|
|
202 |
|
Long-term assets, net
|
|
|
2,089 |
|
|
|
3 |
(2) |
|
|
2,092 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
2,723 |
|
|
|
(251 |
) |
|
|
2,472 |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
394 |
|
|
|
(11 |
)(3) |
|
|
383 |
|
Term debt
|
|
|
1,282 |
|
|
|
(232 |
)(4) |
|
|
1,050 |
|
Capital leases
|
|
|
53 |
|
|
|
— |
|
|
|
53 |
|
Other deferrals and liabilities
|
|
|
375 |
|
|
|
— |
|
|
|
375 |
|
Deferred income taxes, net
|
|
|
142 |
|
|
|
— |
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,246 |
|
|
|
(243 |
) |
|
|
2,003 |
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
477 |
|
|
|
(8 |
)(5) |
|
|
469 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
2,723 |
|
|
$ |
(251 |
) |
|
$ |
2,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Amount represents proceeds from the debt refinancing of
approximately $1.05 billion offset by repayment of
BKC’s existing term debt of $750 million, repayment of
BKH’s PIK Notes and accrued interest of $534 million,
and deferred financing costs of $16 million. |
|
(2) |
Deferred financing costs associated with the debt refinancing of
approximately $16 million offset by reduction of
$13 million of deferred financing costs associated with the
repayment of term debt. |
|
(3) |
Tax benefit of approximately $6 million associated with the
deferred financing cost charge of $13 million and reversal
of accrued interest on PIK Notes of $5 million. |
|
(4) |
Debt refinancing obligation of approximately $1.05 billion
offset by repayment of BKC’s existing term debt of
$750 million and repayment of BKH’s PIK Notes of
$528 million. |
|
(5) |
$8 million, net of tax, charge associated with deferred
financing cost. |
F-53
25,000,000 Shares
Burger King Holdings, Inc.
Common Stock
PROSPECTUS
,
2006
JPMorgan
Morgan Stanley
Wachovia Securities
Loop Capital Markets, LLC
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
are offering to sell, and seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of the
common stock.
No action is being taken in any jurisdiction outside the United
States to permit a public offering of the common stock or
possession or distribution of this prospectus in that
jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are
required to inform themselves about and observe any restrictions
as to this offering and the distribution of this prospectus
applicable to that jurisdiction.
Through and
including ,
2006 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers’ obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
Item 13. |
Other Expenses of Issuance and Distribution. |
The following table sets forth the expenses (other than
compensation to the underwriters) expected to be incurred in
connection with this offering. All such amounts (except the SEC
registration fee, the NASD filing fee and the New York Stock
Exchange listing fee) are estimated.
|
|
|
|
|
|
SEC registration fee
|
|
$ |
52,296.25 |
|
NASD filing fee
|
|
|
49,375.00 |
|
New York Stock Exchange listing fee
|
|
|
250,000.00 |
|
Printing and engraving expenses
|
|
|
350,000.00 |
|
Legal fees and expenses
|
|
|
2,200,000.00 |
|
Accounting fees and expenses
|
|
|
350,000.00 |
|
Blue Sky fees and expenses
|
|
|
25,000.00 |
|
Transfer Agent and Registrar fees
|
|
|
20,000.00 |
|
Miscellaneous
|
|
|
703,328.75 |
|
|
|
|
|
|
Total
|
|
$ |
4,000,000.00 |
|
|
|
|
|
|
|
Item 14. |
Indemnification of Directors and Officers. |
Section 145 of the Delaware General Corporation Law
provides that a corporation may indemnify directors and officers
as well as other employees and individuals against expenses
(including attorneys’ fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such
person in connection with any threatened, pending or completed
actions, suits or proceedings in which such person is made a
party by reason of such person being or having been a director,
officer, employee or agent to the Registrant. The Delaware
General Corporation Law provides that Section 145 is not
exclusive of other rights to which those seeking indemnification
may be entitled under any bylaw, agreement, vote of stockholders
or disinterested directors or otherwise. The Registrant’s
Certificate of Incorporation provides for indemnification by the
Registrant of its directors, officers and employees to the
fullest extent permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law
permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the
director’s duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law, (iii) for unlawful payments of dividends or
unlawful stock repurchases, redemptions or other distributions,
or (iv) for any transaction from which the director derived
an improper personal benefit. The Registrant’s Certificate
of Incorporation provides for such limitation of liability to
the fullest extent permitted by the Delaware General Corporation
Law.
The Registrant maintains standard policies of insurance under
which coverage is provided (a) to its directors and
officers against loss rising from claims made by reason of
breach of duty or other wrongful act, while acting in their
capacity as directors and officers of the Registrant, and
(b) to the Registrant with respect to payments which may be
made by the Registrant to such officers and directors pursuant
to any indemnification provision contained in the
Registrant’s Certificate of Incorporation or otherwise as a
matter of law.
The proposed form of underwriting agreement filed as
Exhibit 1.1 to this Registration Statement provides for
indemnification of directors and certain officers of the
Registrant by the underwriters against certain liabilities.
II-1
|
|
Item 15. |
Recent Sales of Unregistered Securities. |
During the three years preceding the filing of this registration
statement, Burger King Holdings, Inc. issued the following
securities which were not registered under the Securities Act of
1933, as amended:
Between August 2003 and April 2006, Burger King Holdings, Inc.
issued an aggregate of 2,687,485 shares of its common stock
to directors and employees for an aggregate of $11,025,080 in
consideration of services rendered or in private placements and
(ii) an aggregate of 1,259,422 shares of its common
stock to employees pursuant to the exercise of outstanding
options for an aggregate of $6,128,300 in consideration of
services rendered.
The issuances listed above were deemed exempt from registration
under the Securities Act of 1933, as amended, pursuant to
Section 4(2) of the Securities Act or Rule 701
thereunder. In accordance with Rule 701, the shares were
issued pursuant to a written compensatory benefit plan and the
issuances did not, during any consecutive
12-month period, exceed
15% of the outstanding shares of Burger King Holdings,
Inc.’s common stock, calculated in accordance with the
provisions of Rule 701.
|
|
Item 16. |
Exhibits and Financial Statement Schedules. |
(a) Exhibits
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
1 |
.1** |
|
Form of Underwriting Agreement |
|
3 |
.1 |
|
Form of Certificate of Incorporation |
|
3 |
.2 |
|
Form of By-Laws |
|
4 |
.1** |
|
Form of Common Stock Certificate |
|
5 |
.1 |
|
Opinion of Davis Polk & Wardwell |
|
10 |
.1** |
|
Amended and Restated Credit Agreement, dated February 15,
2006, among Burger King Corporation, Burger King Holdings, Inc.,
the lenders party thereto, JPMorgan Chase Bank, N.A., as
administrative agent, Citicorp North America, Inc., as
syndication agent, and Bank of America, N.A., RBC Capital
Markets and Wachovia Bank, National Association, as
documentation agents |
|
10 |
.2 |
|
Form of Amended and Restated Shareholders’ Agreement by and
among Burger King Holdings, Inc., Burger King Corporation, TPG
BK Holdco LLC, GS Capital Partners 2000, L.P., GS Capital
Partners 2000 Offshore, L.P., GS Capital Partners 2000
GmbH & Co. Beteiligungs KG, GS Capital Partners 2000
Employee Fund, L.P., Bridge Street Special Opportunities
Fund 2000, L.P., Stone Street Fund 2000, L.P., Goldman
Sachs Direct Investment Fund 2000, L.P., GS Private Equity
Partners 2000, L.P., GS Private Equity Partners 2000 Offshore
Holdings, L.P., GS Private Equity Partners 2000-Direct
Investment Fund, L.P., Bain Capital Integral Investors, LLC,
Bain Capital VII Coinvestment Fund, LLC and BCIP TCV, LLC |
|
10 |
.3** |
|
Form of Management Subscription and Shareholders’ Agreement
among Burger King Holdings, Inc., Burger King Corporation and
its officers |
|
10 |
.4** |
|
Form of Board Member Subscription and Shareholders’
Agreement among Burger King Holdings, Inc., Burger King
Corporation and its directors |
|
10 |
.5** |
|
Amendment to the Management Subscription and Shareholders’
Agreement among Burger King Holdings, Inc., Burger King
Corporation and John W. Chidsey |
|
10 |
.6** |
|
Management Subscription and Shareholders’ Agreement among
Burger King Holdings, Inc., Burger King Corporation and Gregory
D. Brenneman |
II-2
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
10 |
.7** |
|
Management Agreement, dated December 13, 2002, among Burger
King Corporation, Bain Capital Partners, LLC, Bain Capital
Integral Investors, LLC, Bain Capital VII Coinvestment Fund,
LLC, BCIP TCV, LLC, Goldman, Sachs & Co., Goldman Sachs
Capital Partners 2000, L.P., GS Capital Partners 2000 Offshore,
L.P., GS Capital Partners 2000 GmbH & Co. Beteiligungs
KG, GS Capital Partners 2000 Employee Fund, L.P., Bridge Street
Special Opportunities Fund 2000, L.P., Stone Street
Fund 2000, L.P., Goldman Sachs Direct Investment
Fund 2000, L.P., GS Private Equity Partners 2000, L.P., GS
Private Equity Partners 2000 Offshore Holdings, L.P., GS Private
Equity Partners 2000—Direct Investment Fund, L.P., TPG
GenPar III, L.P. and TPG BK Holdco LLC |
|
10 |
.8** |
|
Letter Agreement Terminating the Management Agreement, dated as
of February 3, 2006, among Burger King Corporation, Bain
Capital Partners, LLC, Bain Capital Integral Investors, LLC,
Bain Capital VII Coinvestment Fund, LLC, BCIP TCV, LLC, Goldman,
Sachs & Co., Goldman Sachs Capital Partners 2000, L.P.,
GS Capital Partners 2000 Offshore, L.P., GS Capital Partners
2000 GmbH & Co. Beteiligungs KG, GS Capital Partners
2000 Employee Fund, L.P., Bridge Street Special Opportunities
Fund 2000, L.P., GS Private Equity Partners 2000, L.P., GS
Private Equity Partners 2000 Offshore Holdings, L.P., GS Private
Equity Partners 2000—Direct Investment Fund, L.P., TPG
GenPar III, L.P. and TPG BK Holdco LLC |
|
10 |
.9** |
|
Lease Agreement, dated as of May 10, 2005, between CM
Lejeune, Inc. and Burger King Corporation |
|
10 |
.10** |
|
Burger King Holdings, Inc. Equity Incentive Plan |
|
10 |
.11** |
|
Burger King Holdings, Inc. 2006 Omnibus Incentive Plan |
|
10 |
.12** |
|
Burger King Corporation Fiscal Year 2006 Executive Team
Restaurant Support Incentive Plan |
|
10 |
.13** |
|
Form of Management Restricted Unit Agreement |
|
10 |
.14** |
|
Form of Amendment to Management Restricted Unit Agreement |
|
10 |
.15** |
|
Management Restricted Unit Agreement among John W. Chidsey,
Burger King Holdings, Inc. and Burger King Corporation, dated as
of October 8, 2004 |
|
10 |
.16 |
|
Special Management Restricted Unit Agreement among Peter C.
Smith, Burger King Holdings, Inc. and Burger King Corporation,
dated as of December 1, 2003 |
|
10 |
.17** |
|
Form of 2003 Management Stock Option Agreement |
|
10 |
.18** |
|
Form of 2005 Management Stock Option Agreement |
|
10 |
.19** |
|
Form of Board Member Stock Option Agreement |
|
10 |
.20** |
|
Form of Special Management Stock Option Agreement among John W.
Chidsey, Burger King Holdings, Inc. and Burger King Corporation |
|
10 |
.21** |
|
Management Stock Option Agreement among Gregory D. Brenneman,
Burger King Holdings, Inc. and Burger King Corporation, dated as
of August 1, 2004 |
|
10 |
.22** |
|
Stock Option Agreement among Armando Codina, Burger King
Holdings, Inc. and Burger King Corporation, dated as of
February 14, 2006 |
|
10 |
.23** |
|
Employment Agreement between John W. Chidsey and Burger King
Corporation, dated as of April 7, 2006 |
|
10 |
.24** |
|
Employment Agreement between Russell B. Klein and Burger King
Corporation, dated as of April 20, 2006 |
|
10 |
.25** |
|
Employment Agreement between Ben K. Wells, and Burger King
Corporation, dated as of April 7, 2006 |
|
10 |
.26** |
|
Employment Agreement between James F. Hyatt and Burger King
Corporation, dated as of April 20, 2006 |
|
10 |
.27** |
|
Employment Agreement between Peter C. Smith and Burger King
Corporation, dated as of April 20, 2006 |
|
10 |
.28** |
|
Separation and Consulting Services Agreement between Gregory D.
Brenneman and Burger King Corporation, dated as of April 6,
2006 |
II-3
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
10 |
.29** |
|
Separation Agreement between Bradley Blum and Burger King
Corporation, dated as of July 30, 2004 |
|
21 |
.1** |
|
List of Subsidiaries of the Registrant |
|
23 |
.1 |
|
Consent of Independent Registered Public Accounting Firm |
|
23 |
.2 |
|
Consent of Davis Polk & Wardwell (included in
Exhibit 5.1) |
|
24 |
.1** |
|
Power of Attorney (included on signature page of the initial
filing) |
(a) The undersigned Registrant hereby undertakes to provide
to the underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant pursuant to
the provisions referenced in Item 14 of this Registration
Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
|
|
|
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective. |
|
|
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
Registration Statement relating to the securities offered
therein, and this offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof. |
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Miami, State of
Florida, on the 2nd day of May, 2006.
|
|
|
BURGER KING HOLDINGS, INC. |
|
|
|
|
|
Name: John W. Chidsey |
|
Title: Chief Executive Officer and
Director |
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ JOHN W. CHIDSEY
John W. Chidsey |
|
Chief Executive Officer and Director (principal executive
officer) |
|
May 2, 2006 |
|
/s/ BEN K. WELLS
Ben K. Wells |
|
Chief Financial Officer and Treasurer (principal financial
and
accounting officer) |
|
May 2, 2006 |
|
*
Brian Thomas Swette |
|
Non-Executive Chairman |
|
May 2, 2006 |
|
*
Andrew B. Balson |
|
Director |
|
May 2, 2006 |
|
*
David Bonderman |
|
Director |
|
May 2, 2006 |
|
*
Richard W. Boyce |
|
Director |
|
May 2, 2006 |
|
*
David A. Brandon |
|
Director |
|
May 2, 2006 |
|
*
Armando Codina |
|
Director |
|
May 2, 2006 |
|
*
Peter Raemin Formanek |
|
Director |
|
May 2, 2006 |
|
*
Manny Garcia |
|
Director |
|
May 2, 2006 |
II-5
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
*
Adrian Jones |
|
Director |
|
May 2, 2006 |
|
*
Sanjeev K. Mehra |
|
Director |
|
May 2, 2006 |
|
*
Stephen G. Pagliuca |
|
Director |
|
May 2, 2006 |
|
*
Kneeland C. Youngblood |
|
Director |
|
May 2, 2006 |
|
*By: |
|
/s/ JOHN W. CHIDSEY
John W. Chidsey
Attorney-in-fact |
|
|
|
|
II-6
Exhibit Index
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
1 |
.1** |
|
Form of Underwriting Agreement |
|
3 |
.1 |
|
Form of Certificate of Incorporation |
|
3 |
.2 |
|
Form of By-Laws |
|
4 |
.1** |
|
Form of Common Stock Certificate |
|
5 |
.1 |
|
Opinion of Davis Polk & Wardwell |
|
10 |
.1** |
|
Amended and Restated Credit Agreement, dated February 15,
2006, among Burger King Corporation, Burger King Holdings, Inc.,
the lenders party thereto, JPMorgan Chase Bank, N.A., as
administrative agent, Citicorp North America, Inc., as
syndication agent, and Bank of America, N.A., RBC Capital
Markets and Wachovia Bank, National Association, as
documentation agents |
|
10 |
.2 |
|
Form of Amended and Restated Shareholders’ Agreement by and
among Burger King Holdings, Inc., Burger King Corporation, TPG
BK Holdco LLC, GS Capital Partners 2000, L.P., GS Capital
Partners 2000 Offshore, L.P., GS Capital Partners 2000
GmbH & Co. Beteiligungs KG, GS Capital Partners 2000
Employee Fund, L.P., Bridge Street Special Opportunities
Fund 2000, L.P., Stone Street Fund 2000, L.P., Goldman
Sachs Direct Investment Fund 2000, L.P., GS Private Equity
Partners 2000, L.P., GS Private Equity Partners 2000 Offshore
Holdings, L.P., GS Private Equity Partners 2000-Direct
Investment Fund, L.P., Bain Capital Integral Investors, LLC,
Bain Capital VII Coinvestment Fund, LLC and BCIP TCV, LLC |
|
10 |
.3** |
|
Form of Management Subscription and Shareholders’ Agreement
among Burger King Holdings, Inc., Burger King Corporation and
its officers |
|
10 |
.4** |
|
Form of Board Member Subscription and Shareholders’
Agreement among Burger King Holdings, Inc., Burger King
Corporation and its directors |
|
10 |
.5** |
|
Amendment to the Management Subscription and Shareholders’
Agreement among Burger King Holdings, Inc., Burger King
Corporation and John W. Chidsey |
|
10 |
.6** |
|
Management Subscription and Shareholders’ Agreement among
Burger King Holdings, Inc., Burger King Corporation and Gregory
D. Brenneman |
|
10 |
.7** |
|
Management Agreement, dated December 13, 2002, among Burger
King Corporation, Bain Capital Partners, LLC, Bain Capital
Integral Investors, LLC, Bain Capital VII Coinvestment Fund,
LLC, BCIP TCV, LLC, Goldman, Sachs & Co., Goldman Sachs
Capital Partners 2000, L.P., GS Capital Partners 2000 Offshore,
L.P., GS Capital Partners 2000 GmbH & Co. Beteiligungs
KG, GS Capital Partners 2000 Employee Fund, L.P., Bridge Street
Special Opportunities Fund 2000, L.P., Stone Street
Fund 2000, L.P., Goldman Sachs Direct Investment
Fund 2000, L.P., GS Private Equity Partners 2000, L.P., GS
Private Equity Partners 2000 Offshore Holdings, L.P., GS Private
Equity Partners 2000—Direct Investment Fund, L.P., TPG
GenPar III, L.P. and TPG BK Holdco LLC |
|
10 |
.8** |
|
Letter Agreement Terminating the Management Agreement, dated as
of February 3, 2006, among Burger King Corporation, Bain
Capital Partners, LLC, Bain Capital Integral Investors, LLC,
Bain Capital VII Coinvestment Fund, LLC, BCIP TCV, LLC, Goldman,
Sachs & Co., Goldman Sachs Capital Partners 2000, L.P.,
GS Capital Partners 2000 Offshore, L.P., GS Capital Partners
2000 GmbH & Co. Beteiligungs KG, GS Capital Partners
2000 Employee Fund, L.P., Bridge Street Special Opportunities
Fund 2000, L.P., GS Private Equity Partners 2000, L.P., GS
Private Equity Partners 2000 Offshore Holdings, L.P., GS Private
Equity Partners 2000—Direct Investment Fund, L.P., TPG
GenPar III, L.P. and TPG BK Holdco LLC |
|
10 |
.9** |
|
Lease Agreement, dated as of May 10, 2005, between CM
Lejeune, Inc. and Burger King Corporation |
|
10 |
.10** |
|
Burger King Holdings, Inc. Equity Incentive Plan |
|
10 |
.11** |
|
Burger King Holdings, Inc. 2006 Omnibus Incentive Plan |
|
10 |
.12** |
|
Burger King Corporation Fiscal Year 2006 Executive Team
Restaurant Support Incentive Plan |
|
10 |
.13** |
|
Form of Management Restricted Unit Agreement |
|
10 |
.14** |
|
Form of Amendment to Management Restricted Unit Agreement |
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
10 |
.15** |
|
Management Restricted Unit Agreement among John W. Chidsey,
Burger King Holdings, Inc. and Burger King Corporation, dated as
of October 8, 2004 |
|
10 |
.16 |
|
Special Management Restricted Unit Agreement among Peter C.
Smith, Burger King Holdings, Inc. and Burger King Corporation,
dated as of December 1, 2003 |
|
10 |
.17** |
|
Form of 2003 Management Stock Option Agreement |
|
10 |
.18** |
|
Form of 2005 Management Stock Option Agreement |
|
10 |
.19** |
|
Form of Board Member Stock Option Agreement |
|
10 |
.20** |
|
Form of Special Management Stock Option Agreement among John W.
Chidsey, Burger King Holdings, Inc. and Burger King Corporation |
|
10 |
.21** |
|
Management Stock Option Agreement among Gregory D. Brenneman,
Burger King Holdings, Inc. and Burger King Corporation, dated as
of August 1, 2004 |
|
10 |
.22** |
|
Stock Option Agreement among Armando Codina, Burger King
Holdings, Inc. and Burger King Corporation, dated as of
February 14, 2006 |
|
10 |
.23** |
|
Employment Agreement between John W. Chidsey and Burger King
Corporation, dated as of April 7, 2006 |
|
10 |
.24** |
|
Employment Agreement between Russell B. Klein and Burger King
Corporation, dated as of April 20, 2006 |
|
10 |
.25** |
|
Employment Agreement between Ben K. Wells, and Burger King
Corporation, dated as of April 7, 2006 |
|
10 |
.26** |
|
Employment Agreement between James F. Hyatt and Burger King
Corporation, dated as of April 20, 2006 |
|
10 |
.27** |
|
Employment Agreement between Peter C. Smith and Burger King
Corporation, dated as of April 20, 2006 |
|
10 |
.28** |
|
Separation and Consulting Services Agreement between Gregory D.
Brenneman and Burger King Corporation, dated as of April 6,
2006 |
|
10 |
.29** |
|
Separation Agreement between Bradley Blum and Burger King
Corporation, dated as of July 30, 2004 |
|
21 |
.1** |
|
List of Subsidiaries of the Registrant |
|
23 |
.1 |
|
Consent of Independent Registered Public Accounting Firm |
|
23 |
.2 |
|
Consent of Davis Polk & Wardwell (included in
Exhibit 5.1) |
|
24 |
.1** |
|
Power of Attorney (included on signature page of the initial
filing) |