S-1 1 bk-s1.htm
As filed with the Securities and Exchange Commission on February 16, 2006
Registration No. 333-________


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 

 
BURGER KING HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware 5812 75-3095469
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)

5505 Blue Lagoon Drive
Miami, Florida 33126
(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:  
JEFFREY SMALL
DEANNA KIRKPATRICK
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
  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
 


Title of Each Class
of Securities To Be Registered
Proposed
Maximum Aggregate Offering Price (1)
Amount of
Registration Fee
Common Stock, par value $0.01 per share $400,000,000 $42,800
(1)    Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
   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.

Subject to Completion. Dated                   , 2006 .
 
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            shares of common stock to be sold in this offering. The selling stockholders named in this prospectus are offering an additional            shares. We will not receive any of the proceeds from the sale of the shares by the selling stockholders.

     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 $            and $            per share.

     We intend to list our common stock on the New York Stock Exchange under the symbol “BKC.”

     See “Risk Factors” beginning on page 10 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.

    Price to
Public
  Underwriting
Discounts and
Commissions
  Proceeds to
Us
  Proceeds to
the Selling
Stockholders
 

 

Per Share    $    $    $    $
Total    $    $    $    $

     To the extent that the underwriters sell more than            shares of common stock, the underwriters have an option to purchase up to an additional            shares of common stock from us and an additional            shares of common stock from the selling stockholders at the initial public offering price less the underwriting discount.

The underwriters expect to deliver the shares against payment in New York, New York on            , 2006.

JPMorgan    
  Citigroup  
    Goldman, Sachs &  Co.
      Morgan Stanley


 
Prospectus dated          , 2006





TABLE OF CONTENTS

    Page
     
Prospectus Summary   1
Risk Factors   10
Special Note Regarding Forward-Looking Statements   24
Use of Proceeds   26
Dividend Policy   26
Capitalization   27
Dilution   28
Selected Consolidated Financial and Other Data   30
Management’s Discussion and Analysis of Financial Condition and Results of Operations   34
Business   58
Management   76
Principal and Selling Stockholders   86
Certain Relationships and Related Transactions   89
Description of Capital Stock   91
Description of Our Credit Facility   93
Material United States Federal Tax Consequences for Non-United States Holders of Common Stock   95
Shares Eligible for Future Sale   97
Underwriting   99
Legal Matters   104
Experts   104
Where You Can Find More Information   104
Index to Consolidated Financial Statements   F-1

     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. Although we believe this information is reliable, we cannot guarantee the accuracy and completeness of the information and have not independently verified it. All industry and market data that are not cited as being from a specified source are from internal analyses based upon data available from noted sources or other proprietary research and analysis.






PROSPECTUS SUMMARY

     This summary highlights information contained elsewhere in this prospectus. This summary does not contain all 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 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 and one of the three largest quick service restaurant companies. We own or franchise 11,141 restaurants in 67 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 Met plc, which, in turn, was acquired by 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 Met plc acquired Burger King Corporation, to 2002, we experienced eight CEOs, which led 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

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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.


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. In August 2004, Greg Brenneman, an executive with extensive experience in successfully turning around distressed businesses, such as Continental Airlines and Pricewaterhouse Coopers Consulting, joined the company as Chief Executive Officer. He inherited the core of an experienced management team, including John Chidsey, our President and Chief Financial Officer, who has valuable experience in working with franchised businesses through his long tenure at Cendant. Mr. Brenneman then 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, Continental Airlines, 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:

seven 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;
   
increasing average restaurant sales in the United States by 11% over the past two fiscal years and continued growth in the first six months of fiscal 2006;
   
improving the financial health of our franchise system in the United States and Canada as demonstrated by the significant reduction in the number of franchise restaurants in our franchisee financial restructuring program, which declined from over 2,540 in February 2003 to approximately 150 as of December 31, 2005, and by improved royalty collections;
   
launching an award-winning advertising and promotion program focused on our core customers;
   
implementing operational initiatives that enhanced restaurant-level economics in the United States;
   
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 restaurant model that lowered the average cost to build a new restaurant by over 25%, making building new restaurants more attractive;
   
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;
   
increasing our international restaurant base by over 130 restaurants in 2005 and by 121 in the first six months of fiscal 2006 (net of closures); and
   
increasing EBITDA by 65%, from $136 million in fiscal 2004 to $225 million in fiscal 2005, with income from operations increasing from $73 million to $151 million in the corresponding period. EBITDA grew 28% from $144 million in the first six months of fiscal 2005 to $184 million in the first six months of fiscal 2006, with income from operations increasing from $110 million to $142 million in the corresponding period.


Why We Are “The King”

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 200 brands in the United States.
   
Attractive business model: Approximately 90% of our restaurants are franchised, which is a higher percentage than our major competitors. 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.
   
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.
   
Experienced management team with significant ownership: We have a seasoned management team with significant experience in turning around and growing companies. Following this offering, our executive officers will own approximately       % of our common stock, on a fully-diluted basis, which we believe aligns their interests with those of our other shareholders.


Our Way Going Forward

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 is leading to increased restaurant development in our U.S. business.
   
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.

3






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 to dedicate resources toward the creation of a cohesive organization that is focused on supporting the Burger King brand globally.
   
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

     On February 21, 2006, we paid a cash dividend of $367 million, which we refer to as the February 2006 dividend, to holders of record of our common stock on February 9, 2006, including the private equity funds controlled by the sponsors which owned approximately 95% of the outstanding shares of our common stock at that time. At the same time, we paid $33 million to holders of our options and restricted stock unit awards, primarily members of senior management, which we refer to as a compensatory make-whole payment. This compensatory make-whole payment will be recorded as compensation expense in the third quarter of fiscal 2006.

     On February 3, 2006, we agreed to pay a one-time $30 million fee to terminate our management agreement with the sponsors 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.

     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. See “Description of Our Credit Facility,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Certain Relationships and Related Transactions—Management Agreement.”

     On February 14, 2006, we granted options to purchase            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.


Ownership by Sponsors

     Our principal stockholders are the private equity funds controlled by the sponsors. As of February 15, 2006, these funds beneficially owned approximately 95% of our outstanding common stock. Following completion of this offering, these funds will beneficially own approximately        % of our common stock, or        % 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.

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     Burger King®, Whopper®, Whopper Jr.®, Have It Your Way®, Burger King Bun Halves and Crescent Logo, Wake Up with the King™, TenderCrisp™, BK Joe™, BK™ Chicken Fries and BK™ 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.

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The Offering

Common stock offered by us           shares(1)
   
Common stock offered by the selling stockholders           shares(2)
   
Total common stock offered hereby           shares(3)
   
Common stock to be outstanding after this offering           shares(4)
   
Voting Rights One vote per share.
   
Use of Proceeds We will receive net proceeds from this offering of approximately $            million, assuming an initial public offering price of $            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 the net proceeds to repay amounts outstanding under our senior secured credit facility. A $1.00 change in the per share offering price would change net proceeds by approximately $            million.
   
  We will not receive any of the net proceeds from the sale of shares of common stock by the selling stockholders.
   
Dividend Policy We do not currently intend to pay cash dividends on shares of our common stock.
   
New York Stock Exchange Symbol BKC
   
Risk Factors 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.


(1)   Excludes            shares that may be sold by us upon exercise of the underwriters’ option to purchase additional shares.
   
(2) Excludes            shares that may be sold by the selling stockholders upon exercise of the underwriters’ option to purchase additional shares.
   
(3) Excludes            shares that may be offered upon exercise of the underwriters’ option to purchase additional shares.
   
(4) Excludes (i) 333,302 shares of our common stock issuable upon the exercise of options outstanding as of December 31, 2005, of which options to purchase 95,556 shares were exercisable as of December 31, 2005, (ii) 50,682 additional shares of our common stock issuable under the Burger King Holdings, Inc. Equity Incentive Plan, (iii) 35,572 options issued by us to employees and directors since December 31, 2005 and (iv)            shares that may be sold by us upon exercise of the underwriters’ option to purchase additional shares.

     Unless we specifically state otherwise, the information in this prospectus does not take into account the sale of up to       shares of common stock which the underwriters have the option to purchase from us and 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.

  Predecessor   Burger King
Holdings, Inc.
      Burger King Holdings, Inc.
 
 
     
  For the fiscal year
ended June 30,
  For the
period
from July 1,
2002 to
December
12,
  For the period
from
December 13,
2002 to
June 30,
  Combined
twelve
months ended
June 30,
  For the fiscal year
ended June 30,
  For the six
months ended
December 31,
 
 
 
 
 
 
  2001   2002   2002   2003   2003   2004   2005   2004   2005
 


 


 


 


 


 


 


 


 


                                    (unaudited)                   (unaudited)
  (in millions, except per share data)
Income Statement Data:                                                                        
                                                                         
Total revenues   $ 1,541     $ 1,646     $ 751     $ 906     $ 1,657     $ 1,754     $ 1,940     $ 969     $ 1,020  
Total company restaurant                                                                        
   expenses     894       987       465       557       1,022       1,087       1,195       590       640  
Selling, general and                                                                        
   administrative expenses (1)     400       429       225       253       478       482       496       236       213  
Property expenses     59       58       27       28       55       58       64       30       28  
Impairment of goodwill (2)     43       5       875       -       875       -       -       -       -  
Other operating expenses                                                                        
   (income), net (2)     114       45       39       (7 )     32       54       34       3       (3 )
 


 


 


 


 


 


 


 


 


Total operating costs and                                                                        
   expenses   $ 1,510     $ 1,524     $ 1,631     $ 831     $ 2,462     $ 1,681     $ 1,789     $ 859     $ 878  
Income (loss) from operations     31       122       (880 )     75       (805 )     73       151       110       142  
Interest expense, net     48       105       46       35       81       64       73       34       34  
Loss on early extinguishment                                                                        
   of debt     -       -       -       -       -       -       -       -       13  
 


 


 


 


 


 


 


 


 


(Loss) income before income                                                                        
   taxes   $ (17 )   $ 17     $ (926 )   $ 40     $ (886 )   $ 9     $ 78     $ 76     $ 95  
Income tax expense (benefit)     21       54       (34 )     16       (18 )     4       31       31       46  
 


 


 


 


 


 


 


 


 


Net (loss) income   $ (38 )   $ (37 )   $ (892 )   $ 24     $ (868 )   $ 5     $ 47     $ 45     $ 49  
 


 


 


 


 


 


 


 


 


                                                                         
Per common share:                                                                        
   Net income basic                                                                        
   Net income diluted                                                                        
   Shares outstanding, basic                                                                        
   Shares outstanding, diluted                                                                        

7






  Predecessor   Burger King
Holdings, Inc.
      Burger King Holdings, Inc.
 
 
     
  For the fiscal year
ended June 30,
  For the
period
from July 1,
2002 to
December
12,
  For the period
from
December 13,
2002 to
June 30,
  Combined
twelve
months ended
June 30,
  For the fiscal year
ended June 30,
  For the six
months ended
December 31,
 
 
 
 
 
 
  2001   2002   2002   2003   2003   2004   2005   2004   2005
 


 


 


 


 


 


 


 


 


                                    (unaudited)                   (unaudited)
                                                                       
Other Financial Data:                                                                        
Cash provided by operating                                                                        
     activities   $ 324     $ 212     $ 1     $ 81     $ 82     $ 199     $ 218     $ 62     $ 105  
Capital expenditures     199       325       95       47     $ 142       81       93       29       30  
EBITDA (2) (3)   $ 182     $ 283     $ (837 )   $ 118     $ (719 )   $ 136     $ 225     $ 144     $ 184  

    As of December 31, 2005
   
    Actual   As adjusted (4)
   


 


            (unaudited)
    (in millions)
Balance Sheet Data:                
Cash and cash equivalents   $ 207     $    
Total assets     2,476          
Total debt and capital lease obligations     1,066          
Total liabilities     1,946          
Total stockholders’ equity   $ 530     $    


    Combined
twelve
months ended
June 30,
2003
  Burger King Holdings, Inc.

For the fiscal year
ended June 30,
 

For the six months ended
December 31,


 
             
2004   2005   2004   2005
   


 


 


 


 


    (unaudited)
(in constant currencies)
                                         
Other System-Wide Operating Data:                                        
Comparable sales growth (5) (6)     (5.9 )%     1.0 %     5.6 %     7.0 %     1.3 %
Average restaurant sales (in thousands) (5)   $ 972     $ 994     $ 1,066     $ 534     $ 549  
System-wide sales growth (5)     (4.7 )%     1.2 %     6.1 %     7.6 %     1.8 %
Restaurants (at end of period):                                        
   Company     1,061       1,087       1,187       1,058       1,228  
   Franchise     10,274       10,140       9,917       10,130       9,913  
 


 


 


 


 


         Total restaurants     11,335       11,227       11,104       11,188       11,141  
 


 


 


 


 


                                         
Segment Data:                                        
Revenues (in millions):                                        
   United States and Canada   $ 1,114     $ 1,117     $ 1,275     $ 632     $ 682  
   EMEA/APAC (7)     477       566       586       298       294  
   Latin America (8)     66       71       79       39       44  
 


 


 


 


 


         Total revenues   $ 1,657     $ 1,754     $ 1,940     $ 969     $ 1,020  
 


 


 


 


 


System-wide restaurants (at end of period):                                        
   United States and Canada     8,264       7,976       7,720       7,891       7,634  
   EMEA/APAC (7)     2,459       2,585       2,656       2,600       2,738  
   Latin America (8)     612       666       728       697       769  
 


 


 


 


 


         Total restaurants     11,335       11,227       11,104       11,188       11,141  
 


 


 


 


 


8







(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)    EBITDA is defined as net income before interest, taxes, depreciation and amortization, and is used by management as a performance measure. While EBITDA is not a recognized measure under GAAP, we believe that EBITDA is useful to investors because it is frequently used by securities analysts, investors, our lenders and other interested parties to evaluate companies in our industry and us. EBITDA is not intended to be a measure of free cash flow or indicator of operating performance 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:

  Predecessor  

Burger King
Holdings, Inc.

      Burger King Holdings, Inc.
 
 
     
      For the
period
from July 1,
2002 to
December
12,

2002
 

For the period
from
December 13,
2002 to
June 30,
2003

  Combined
twelve
months
ended
June 30,
2003
       
  For the fiscal year
ended June 30,
        For the fiscal year
ended June 30,
 

For the six
months ended
December 31,

 
       
 
  2001   2002         2004   2005   2004   2005
 


 


 


 


 


 


 


 


 


                                    (unaudited)                   (unaudited)
(in millions)
Net (loss) income   $ (38 )   $ (37 )   $ (892 )   $ 24     $ (868 )   $ 5     $ 47     $ 45     $ 49  
Interest expense, net     48       105       46       35       81       64       73       34       47 (9)
Income tax expense (benefit)     21       54       (34 )     16       (18 )     4       31       31       46  
 


 


 


 


 


 


 


 


 


Income (loss) from operations   $ 31     $ 122     $ (880 )   $ 75     $ (805 )   $ 73     $ 151     $ 110     $ 142  
Depreciation, and amortization     151       161       43       43       86       63       74       34       42  
 


 


 


 


 


 


 


 


 


EBITDA   $ 182     $ 283     $ (837 )   $ 118     $ (719 )   $ 136     $ 225     $ 144     $ 184  
 


 


 


 


 


 


 


 


 



(4)   As adjusted amounts give effect to (a) the February 2006 financing and related expenses, (b) the February 2006 dividend, (c) the compensatory make-whole payment, (d) the sponsor management termination fee and (e) the issuance and sale of            shares of common stock by us in this offering at an assumed initial public offering price of $        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.”
(5) 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Measures.”
(6) Comparable sales growth refers to the change in restaurant sales in one period from a comparable period for restaurants that have been open for thirteen months or longer.
(7) Refers to our operations in Europe, the Middle East, Africa, Asia and Australia and includes Guam.
(8)  Refers to our operations in Mexico, Central and South America and the Caribbean and includes Puerto Rico.
(9) Includes $13 million recorded as a loss on early extinguishment of debt in connection with our July 2005 refinancing as defined in this prospectus.

9






RISK FACTORS

     You should carefully consider the following risks and all of the other information set forth in this prospectus before deciding to invest in shares of our common stock. The following risks comprise all the material risks of which we are aware; however, these risks and uncertainties may not be the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business or financial performance. If any of the events or developments described below actually occurred, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock would likely decline, and you would lose all or part of your investment in our common stock.


Risks Related to Our Business

Our 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 industry 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

10






markets or offers financial incentives to personnel, franchisees or prospective sellers of real estate in excess of what we offer, it could have a material adverse effect on our financial condition and results of operations. We also compete with other restaurant chains and other retail businesses for quality site locations and hourly employees.

Our 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 the last 18 months 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 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 will continue 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.

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:

the selection and availability of suitable restaurant locations;
   
the negotiation of acceptable lease terms;  
   
the ability of franchisees to obtain acceptable financing terms;
   
securing required foreign governmental permits and approvals;
   
securing acceptable suppliers; and
   
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 in certain foreign markets, such as the United Kingdom, due in part to 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

11






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 are closely tied to the success of our franchisees. Over the last several years, many franchisees in the United States and Canada 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 of our franchisees. In December 2002, over one-third of our franchisees in the United States and Canada were facing financial distress primarily due to over-leverage. Our largest franchisee, with over 350 restaurants, declared bankruptcy in December 2002 and a number of our other large franchisees defaulted on their indebtedness. This distress impacted 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 Franchise 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 $106 million in the United States in uncollectible accounts receivable (principally royalties, advertising charges and rents). 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.” In addition, lenders to our franchisees were affected by the financial distress of our franchisees and there can be no assurance that current or prospective franchisees can obtain financing from these financing sources or from others in light of the history of those past problems.

     We have introduced a similar program on a smaller scale in the United Kingdom. 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 such future franchisee financial difficulties, if possible, could be difficult and would likely result in additional costs to us and might result in a decrease in our revenues and earnings.

Our reputation depends in large part on the success of our franchisees, and we could be harmed by actions taken by our franchisees that are outside of our control.

     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. 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. We provide training and support to franchisees, but the quality of franchise restaurant operations may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other restaurant personnel. While we ultimately can take action to replace franchisees that are violating our standards, 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.

12






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. Although we believe that our relationship with our franchisees is generally good, there can be no assurance that our franchisees will continue to support our marketing programs and strategic initiatives. The failure of our franchisees to support our marketing programs and strategic initiatives would adversely affect our ability to implement our business strategy and could materially harm our business, results of operations and financial condition.

Loss of key management personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.

     The success of our business to date has been, and our continuing success will be, dependent to a large degree on the continued services of our executive officers, including our Chairman and Chief Executive Officer, Greg Brenneman; President and Chief Financial Officer, John Chidsey; Chief Marketing Officer, Russell Klein; Chief Operations Officer, Jim Hyatt; and other key personnel who have extensive experience in the franchising industry, the food industry and in turning around under-performing companies. If we lost 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

13






health concerns or negative publicity could materially harm our business, results of operations and financial condition.

Our business is affected by changes in consumer preferences and consumer discretionary spending.

     The food service 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 be hurt.

     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. 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 agreement with us, then our business, results of operations and financial condition could 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 cost of sales. 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 increased demand in beef resulted in shortages, requiring 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

14






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 conditions.

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 business, results of operation and financial condition.

Labor shortages or increases in labor costs could slow our growth or harm our business.

     Our success depends in part upon our ability to continue to attract, motivate and retain regional operational and restaurant general managers with the qualifications to succeed in our industry and the motivation to apply our core service philosophy. If we are unable to continue to recruit and retain sufficiently qualified managers or to motivate our employees to 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 regulation 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 66 foreign countries and U.S. territories (Guam and Puerto Rico, which are considered part of our international business). During fiscal 2005 and the six months ended December 31, 2005, our revenues from international operations were approximately $794 million and $409 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:

economic recessions;
   
changing labor conditions and difficulties in staffing and managing our foreign operations;
   
increases in the taxes we pay and other changes in applicable tax laws;  
   
legal and regulatory changes and the burdens and costs of our compliance with a variety of foreign laws;  
   
changes in inflation rates;  
   
changes in exchange rates;

15






difficulty in collecting our royalties and longer payment cycles;
   
expropriation of private enterprises;
   
political and economic instability and anti-American sentiment; and
   
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 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 substantially. 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 71 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.

16






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 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 36% 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.

     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 affect 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 February 15, 2006, we had total debt under our senior secured credit facility of $1.35 billion. While we expect to pay down some of this debt with the proceeds of this offering, our substantial indebtedness could have important consequences to you.

     For example, it could:

increase our vulnerability to general adverse economic and industry conditions;
   
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
   
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 debt.

     In addition, our senior secured credit facility permits us to incur substantial additional indebtedness in the future. As of February 15, 2006, we had $107 million available to us for additional borrowing under our $150 million revolving credit facility portion of our senior secured credit facility (net of $43 million in letters of credit issued under the revolving credit facility). If a substantial amount of new indebtedness is added to our current debt levels, the risks described above would intensify.

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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:

incur additional indebtedness;    
   
make capital expenditures and other investments above a certain level;
   
merge, consolidate or dispose of our assets or the capital stock or assets of any subsidiary;
   
pay dividends, make distributions or redeem capital stock in certain circumstances;
   
enter into transactions with our affiliates;    
   
grant liens on our assets or the assets of our subsidiaries;    
   
enter into the sale and subsequent lease-back of real property; and
   
make or repay intercompany loans.

     Our senior secured credit facility requires us to maintain specified financial ratios. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we may not meet those ratios. A breach of any of these restrictive covenants or our inability to comply with the required financial ratios would result in a default under our senior secured credit facility or require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness. If the banks accelerate amounts owing under our senior secured credit facility because of a default and we are unable to pay such amounts, the banks have the right to foreclose on the stock of BKC and certain of its subsidiaries.

We face risks of litigation and pressure tactics, such as strikes, boycotts and negative publicity from 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.

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     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 regulation 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:

the preparation and sale of food; 
   
building and zoning requirements;
   
environmental protection and litter removal;
   
minimum wage, overtime, immigration and other labor requirements;
   
the taxation of our business;    
   
compliance with the Americans with Disabilities Act (ADA); and   
   
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.

     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

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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 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:

variations in our or our competitors’ actual or anticipated operating results;
   
our or our competitors’ growth rates;  
   
our or our competitors’ introduction of new locations, menu items, concepts, or pricing policies;  
   
recruitment or departure of key personnel;
   
changes in the estimates of our operating performance or changes in recommendations by any securities analysts that follow our stock;
   
changes in the conditions in the restaurant industry, the financial markets or the economy as a whole;
   
substantial sales of our common stock;
   
announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us; and
   
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

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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       % of our outstanding common stock. 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 the initial public offering, each sponsor will retain the right to nominate two directors, subject to reduction based on the stock ownership percentage of the private equity funds controlled by it. 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, 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:

that a majority of the board of directors consists of independent directors;
   
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;
   
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
   
for an annual performance evaluation of the nominating and governance committee and compensation committee.  

     As a result of our use of these 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.

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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            additional shares of common stock may be eligible for sale in the public market without restriction, and up to approximately            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            shares of our common stock by us and the selling stockholders at an assumed initial public offering price of $            per share, the midpoint of the price range set forth on the cover page of this prospectus, you will incur immediate dilution of $            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.

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 controls for financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls 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, financial condition and operating results. 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            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”.

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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.

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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:

Our ability to compete domestically and internationally in an intensely competitive industry;
   
Risks related to price discounting;
   
Our ability to successfully implement our international growth strategy;
   
Our continued relationship with and the success of our franchisees;
   
The effectiveness of our marketing and advertising programs and franchise support of these programs;
   
Our ability to retain or replace our executive officers and other key members of management with qualified personnel;
   
Changes in consumer perceptions of dietary health and food safety;
   
Changes in consumer preferences and consumer discretionary spending;
   
Increases in our operating costs, including food and paper products, energy costs and labor costs;
   
Interruptions in the supply of necessary products to us;
   
Risks related to our international operations;
   
Fluctuations in international currency exchange rates;
   
Our continued ability, and the ability of our franchisees, to obtain suitable locations and financing for new restaurant development;
   
Changes in demographic patterns of current restaurant locations;
   
Our ability to adequately protect our intellectual property;
   
Adverse legal judgments, settlements or pressure tactics; and
   
Adverse legislation or regulation.

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     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.

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USE OF PROCEEDS

     We will receive net proceeds from this offering of approximately $       million, or approximately $       million if the underwriters exercise their option to purchase additional shares in full, assuming an initial public offering price of $       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 $       per share would increase (decrease) the net proceeds to us from this offering by $       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 the net proceeds to repay $            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 part, the February 2006 dividend. 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 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 the sale of common stock by the selling stockholders, which are estimated to be approximately $       million, or $       million if the underwriters exercise their option to purchase additional shares in full.


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 will be 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 this 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.

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CAPITALIZATION

     The following table sets forth our capitalization as of December 31, 2005:

on a historical basis; and 
   
on an as adjusted basis to reflect:
     
  the February 2006 financing and related expenses;
     
  the February 2006 dividend and the compensatory make-whole payment;
     
  the payment of the sponsor management termination fee; and
     
  the sale by us of       shares of common stock in this offering, assuming an initial public offering price of $       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”.

     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.

    December 31, 2005 (unaudited)
   
    Historical   As Adjusted



 


Cash and cash equivalents   $ 207     $    



 


Short-term debt   $ 20     $    
Long-term debt     980          
Stockholders’ equity:                
Common stock, $0.01 par value per share,            shares authorized,                
                           shares issued and outstanding as adjusted for this offering(1)              
Restricted stock units     4          
Additional paid-in capital     407          
Retained earnings     125          
Accumulated other comprehensive loss     (4 )        
Treasury stock, at cost     (2 )        



 


Total stockholders’ equity   $ 530     $    



 


Total capitalization(2)   $ 1,530     $    



 



(1)    Excludes (i) 333,302 shares of our common stock issuable upon the exercise of options outstanding as of December 31, 2005, of which options to purchase 95,556 shares were exercisable as of December 31, 2005, (ii) 50,682 shares of our common stock issuable under the Burger King Holdings, Inc. Equity Incentive Plan and (iii) 35,572 options issued by us to employees and directors since December 31, 2005.
   
(2) A $1.00 increase (decrease) in the assumed initial public offering price of $       per share would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $       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.

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`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 December 31, 2005 was approximately $       , or approximately $       per share of common stock, as adjusted to reflect the February 2006 financing and related expenses, the February 2006 dividend, the compensatory make-whole payment and the payment of the sponsor management termination fee. The number of shares outstanding excludes (i) 333,302 shares of our common stock issuable upon the exercise of options outstanding as of December 31, 2005, of which options to purchase 95,556 shares were exercisable as of December 31, 2005, (ii) 50,682 shares of our common stock issuable under the Burger King Holdings, Inc. Equity Incentive Plan and (iii) 35,572 options issued by us to employees and directors since December 31, 2005. 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. After giving effect to the sale by us of the            shares of common stock in this offering, at an assumed initial public offering price of $       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 December 31, 2005 would have been approximately $       , or approximately $       per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $       per share and an immediate dilution to new investors of $       per share. The following table illustrates this per share dilution:

Assumed initial public offering price per share   $    
     Adjusted net tangible book value per share as of December 31, 2005 (excluding this offering)        
     Increase in net tangible book value per share attributable to new investors        
Pro forma net tangible book value per share after offering  


Dilution per share to new investors   $    

 

 


     A $1.00 increase (decrease) in the assumed initial public offering price of $       per share would increase (decrease) our pro forma net tangible book value by $       million, the pro forma net tangible book value per share after this offering by $       and the dilution per share to new investors by $       , 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.

     If the underwriters exercise their option to purchase additional shares in full, the pro forma net tangible book value per share after this offering would be $       , the increase in pro forma net tangible book value per share to existing stockholders would be $       per share and the dilution per share to new investors would be $       .

     The following table summarizes as of December 31, 2005 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 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 $       per share, as specified above, and deducts underwriting discounts and commissions and estimated offering expenses payable by us:

    Shares Purchased   Total Consideration   Average
Price Per
Share
   
 
 
    Number   Percentage   Amount   Percentage  
 


 


 


 


 


Existing stockholders               %   $           %   $    
New investors               %   $           %   $    
 


 


 


 


     Total             100.0 %   $         100.0 %   $    
 


 


 


 


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     The number of shares outstanding excludes (i) 333,302 shares of our common stock issuable upon the exercise of options outstanding as of December 31, 2005, of which options to purchase 95,556 shares were exercisable as of December 31, 2005, and (ii) 50,682 shares of our common stock issuable under the Burger King Holdings, Inc. Equity Incentive Plan, and (iii) 35,572 options issued by us to employees and directors since December 31, 2005.

     If these outstanding options are exercised, new investors will experience further dilution.

29






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 operating 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 December 31, 2004 and 2005 and for the six months ended December 31, 2004 and 2005 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 six months ended December 31, 2004 and 2005 have been derived from our internal records.

     The selected consolidated financial and other operating data presented below contain all normal recurring adjustments that, in the opinion of management, are necessary to present fairly our financial position and results of operations as of and for the periods presented. The selected historical consolidated financial and other operating data included below and elsewhere in this prospectus are not necessarily indicative of future results. The information presented below should be read in conjunction with “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.

30






  Predecessor  

Burger King
Holdings, Inc.

      Burger King Holdings, Inc.
 
 
     
  For the fiscal year
ended June 30,
  For the
period
from July 1,
2002 to
December
12,

2002
 

For the period
from
December 13,
2002 to
June 30,
2003

  Combined
twelve
months ended
June 30,
2003
  For the fiscal year
ended June 30,
 

For the six
months ended
December 31,

 
       
 
                             
  2001   2002         2004   2005   2004   2005
 


 


 


 


 


 


 


 


 


                                    (unaudited)                   (unaudited)
(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     $ 704     $ 754  
   Franchise revenues     395       392       170       198       368       361       413       206       209  
   Property revenues     127       124       55       60       115       117       120       59       57  
 


 


 


 


 


 


 


 


 


Total revenues   $ 1,541     $ 1,646     $ 751     $ 906     $ 1,657     $ 1,754     $ 1,940     $ 969     $ 1,020  
Company restaurant expenses:                                                                        
   Food, paper and product costs     330       354       162       197       359       391       437       218       237  
   Payroll and employee benefits     298       335       157       192       349       382       415       204       219  
   Occupancy and other                                                                        
operating costs     266       298       146       168       314       314       343       168       184  
 


 


 


 


 


 

   

   

   


Total company restaurant                                                                        
   expenses   $ 894     $ 987     $ 465     $ 557     $ 1,022     $ 1,087     $ 1,195     $ 590     $ 640  
Selling, general and                                                                        
   administrative expenses (1)     400       429       225       253       478       482       496       236       213  
Property expenses     59       58       27       28       55       58       64       30       28  
Impairment of goodwill (2)     43       5       875       -       875       -       -       -       -  
Other operating expenses                                                                        
   (income), net (2)     114       45       39       (7 )     32       54       34       3       (3 )
 


 


 


 


 


 


 


 


 


Total operating costs and                                                                        
   expenses   $ 1,510     $ 1,524     $ 1,631     $ 831     $ 2,462     $ 1,681     $ 1,789     $ 859     $ 878  
Income (loss) from operations     31       122       (880 )     75       (805 )     73       151       110       142  
Interest expense, net     48       105       46       35       81       64       73       34       34  
Loss on early extinguishment of                                                                        
   debt     -       -       -       -       -       -       -       -       13  
 


 


 


 


 


 


 


 


 


(Loss) income before income                                                                        
   taxes   $ (17 )   $ 17     $ (926 )   $ 40     $ (886 )   $ 9     $ 78     $ 76     $ 95  
Income tax expense (benefit)     21       54       (34 )     16       (18 )     4       31       31       46  
 


 


 


 


 


 


 


 


 


                                                                         
Net (loss) income   $ (38 )   $ (37 )   $ (892 )   $ 24     $ (868 )   $ 5     $ 47     $ 45     $ 49  
 


 


 


 


 


 


 


 


 


                                                                         
Per common share:                                                                        
   Net income basic                                                                        
   Net income diluted                                                                        
   Shares outstanding, basic                                                                        
   Shares outstanding, diluted                                                                        
                                                                         
Other Financial Data:                                                                        
Cash provided by operating                                                                        
   activities   $ 324     $ 212     $ 1     $ 81     $ 82     $ 199     $ 218     $ 62     $ 105  
Capital expenditures     199       325       95       47       142       81       93       29       30  
EBITDA (2) (3)   $ 182     $ 283     $ (837 )   $ 118     $ (719 )   $ 136     $ 225     $ 144     $ 184  

31






    Predecessor   Burger King Holdings, Inc.
   
 
    As of June 30,   As of June 30,   As of December 31,
   
 
 
    2001   2002   2003   2004   2005   2004   2005
   


 


 


 


 


 


 


                                            (unaudited)
    (in millions)
Balance Sheet Data:                                                        
Cash and cash equivalents   $ 36     $ 54     $ 203     $ 221     $ 432     $ 349     $ 207  
Total assets     3,237       3,329       2,457       2,665       2,723       2,699       2,476  
Total debt and capital lease obligations     1,120       1,323       1,251       1,294       1,339       1,315       1,066  
Total liabilities     2,193       2,186       2,026       2,241       2,246       2,219       1,946  
Total stockholders’ equity   $ 1,044     $ 1,143     $ 431     $ 424     $ 477     $ 480     $ 530  


    Combined
twelve
months ended
June 30,
2003
  Burger King Holdings, Inc.

For the fiscal year
ended June 30,
 

For the six months ended
December 31,


 
2004   2005   2004   2005
   


 


 


 


 


    (unaudited)
(in constant currencies)
                                         
Other System-Wide Operating Data:                                        
Comparable sales growth (4) (5)     (5.9 )%     1.0 %     5.6 %     7.0 %     1.3 %
Average restaurant sales (in thousands) (4)   $ 972     $ 994     $ 1,066     $ 534     $ 549  
System-wide sales growth (4)     (4.7 )%     1.2 %     6.1 %     7.6 %     1.8 %
Restaurants (at end of period):                                        
   Company     1,061       1,087       1,187       1,058       1,228  
   Franchise     10,274       10,140       9,917       10,130       9,913  
 


 


 


 


 


         Total restaurants     11,335       11,227       11,104       11,188       11,141  
 


 


 


 


 


                                         
Segment Data:                                        
Revenues (in millions):                                        
   United States and Canada   $ 1,114     $ 1,117     $ 1,275     $ 632     $ 682  
   EMEA/APAC (6)     477       566       586       298       294  
   Latin America (7)     66       71       79       39       44  
 


 


 


 


 


         Total revenues   $ 1,657     $ 1,754     $ 1,940     $ 969     $ 1,020  
 


 


 


 


 


System-wide restaurants (at end of period):                                        
   United States and Canada     8,264       7,976       7,720       7,891       7,634  
   EMEA/APAC (6)     2,459       2,585       2,656       2,600       2,738  
   Latin America (7)     612       666       728       697       769  
 


 


 


 


 


         Total restaurants     11,335       11,227       11,104       11,188       11,141  
 


 


 


 


 



(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) EBITDA is defined as net income before interest, taxes, depreciation and amortization, and is used by management as a performance measure. While EBITDA is not a recognized measure under GAAP, we believe that EBITDA is useful to investors because it is frequently used by securities analysts, investors, our lenders and other interested parties to evaluate companies in our industry and us. EBITDA is not intended to be a measure of free cash flow or indicator of operating performance as it does not consider certain requirements such as capital expenditures and related depreciation, interest payments, tax payments and debt service requirements.

32






  Predecessor   Burger King
Holdings, Inc.
      Burger King Holdings, Inc.
 
 
     
  For the fiscal year
ended June 30,
  For the
period
from July 1,
2002 to
December 12,
2002
  For the period
from
December 13,
2002 to
June 30,
2003
  Combined
twelve
months
ended
June 30,
2003
  For the fiscal year
ended June 30,
  For the six
months ended
December 31,
 
       
 
  2001   2002         2004   2005   2004   2005
 


 


 


 


 


 


 


 


 


                                    (unaudited)                   (unaudited)
  (in millions)
Net (loss) income   $ (38 )   $ (37 )   $ (892 )   $ 24     $ (868 )   $ 5     $ 47     $ 45     $ 49  
Interest expense, net     48       105       46       35       81       64       73       34       47 (8)
Income tax expense (benefit)     21       54       (34 )     16       (18 )     4       31       31       46  
 


 


 


 


 


 


 


 


 


Income (loss) from operations   $ 31     $ 122     $ (880 )   $ 75     $ (805 )   $ 73     $ 151     $ 110     $ 142  
Depreciation and amortization     151       161       43       43       86       63       74       34       42  
 


 


 


 


 


 


 


 


 


EBITDA   $ 182     $ 283     $ (837 )   $ 118     $ (719 )   $ 136     $ 225     $ 144     $ 184  
 


 


 


 


 


 


 


 


 



  (4)    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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Measures”.
  (5) 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.
  (6) Refers to our operations in Europe, the Middle East, Africa, Asia and Australia and includes Guam.
  (7) Refers to our operations in Mexico, Central and South America and the Caribbean and includes Puerto Rico.
  (8) Includes $13 million recorded as a loss on early extinguishment of debt in connection with our July 2005 refinancing as defined in this prospectus.

33






     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 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. 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, and one of the three largest quick service restaurant companies. As of December 31, 2005, we owned or franchised a total of 11,141 restaurants in 67 countries and U.S. territories, of which 7,634 were located in the United States and Canada. At that date, 1,228 restaurants were company-owned and 9,913 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:

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 were derived from property income.

     We have a higher percentage of franchise restaurants to company restaurants than our major competitors. We believe that this restaurant mix provides us with a strategic advantage because the capital required to grow and maintain our system is funded primarily by franchisees while giving us a sizable base of company restaurants to demonstrate credibility with our franchisees in launching new initiatives. As a result of the high percentage of

34






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.

     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, our menu and marketing strategies did not resonate with customers, relationships with our franchisees 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:

launching an award-winning advertising and promotion program focused on our core customers;
   
implementing a new product development process aimed at improving our menu and generating a pipeline of new products;
   
improving restaurant operations through our operational excellence programs as measured by objective criteria;
   
improving our communication and relationship with our franchisees;
   
providing assistance to franchisees in the United States and Canada that were in financial distress primarily due to over-leverage through our Franchise Financial Restructuring Program, or the FFRP program;
   
integrating our domestic and international operations and support functions to provide the foundation on which to operate as a global brand;
   
expanding our international presence and entering new international markets;
   
improving restaurant profitability by introducing cost reduction and profit improvement programs for our franchisees in the United States through arrangements with strategic vendors; and
   
developing a new restaurant design to make Burger King a more attractive investment to existing and potential franchisees by lowering the non-real estate costs associated with building a new restaurant.

     Our achievements to date include:

seven 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;
   
an 11% increase in average restaurant sales in the United States over the past two fiscal years and continued growth in the first six months of fiscal 2006;
   
a significant reduction in the number of franchise restaurants in the United States and Canada in our franchisee financial restructuring program which declined from over 2,540 in February 2003 to approximately 150 as of December 31, 2005, demonstrating the improved financial health of our franchise system;

35






  • 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 half of fiscal 2006; and

  • a 65% increase in EBITDA, from $136 million in fiscal 2004 to $225 million in fiscal 2005, with income from operations increasing from $73 million to $151 million in the corresponding period. EBITDA grew 28% from $144 million in the first six months of fiscal 2005 to $184 million in the first six months of fiscal 2006, with income from operations increasing from $110 million to $142 million in the corresponding period.

Our Business

   Revenues

     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.

   Costs and Expenses

      Company restaurants incur three types of operating expenses:

  • food, paper and other product costs, which represent the costs of the food and beverages that we sell to consumers in company restaurants;

  • payroll and employee benefits costs, which represent the wages paid to company restaurant managers and staff, as well as the cost of their health insurance, other benefits and training; and

  • occupancy and other operating costs, which represent all other direct costs of operating our company restaurants, including the cost of rent or real estate depreciation (for restaurant properties owned by us), depreciation on equipment, repairs and maintenance, insurance and utilities.

     As average restaurant sales increase, we can leverage payroll and employee benefits costs and occupancy and other costs, resulting in a direct improvement in restaurant profitability. As a result, we believe our continued focus on increasing average restaurant sales will result in improved profitability to our system-wide restaurants.

     Our 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, gains and losses on foreign currency transactions and other miscellaneous items.

36






   Advertising Funds

     We promote our brand and products by advertising in all the countries and territories in which we operate. In countries where we have company restaurants, such as the United States, Canada, the United Kingdom and Germany, we manage an advertising fund for that country by collecting required advertising contributions from company and franchise restaurants and purchasing advertising and other marketing initiatives on behalf of all Burger King restaurants in that country. These advertising contributions are based on a percentage of sales at company and franchise restaurants. We do not record advertising contributions collected from franchisees as revenues or expenditures of these contributions as expenses. Amounts which are contributed to the advertising funds by company restaurants are recorded as selling expenses. In countries where we manage an advertising fund, we plan the marketing calendar in advance based on expected contributions 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 six 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.

   Comparable Sales Growth

     Comparable sales growth refers to the change in restaurant sales in one period from a comparable period for restaurants that have been open for thirteen months or longer. We believe comparable sales growth is a key indicator of our performance, as influenced by our initiatives and those of our competitors.

For the fiscal year ended June 30,   For the six months ended
December 31,

 
2003   2004   2005   2004   2005










(in constant currencies)
Comparable Sales Growth:        
United States and Canada (7.0 )%   (0.5 )%   6.6 %   8.4 %   1.6 %
EMEA/APAC (3.4 )   5.4   2.8   2.9   0.3
Latin America 3.6   4.0   5.5   7.3   1.6
   Total System-Wide (5.9 )%   1.0 %   5.6 %   7.0 %   1.3 %

     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. 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. Comparable sales growth continued to increase in the first six months of fiscal 2006 after significant increases in fiscal 2005.

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   Average Restaurant Sales

     Average restaurant sales is an important measure of the financial performance of our restaurants and changes in the overall direction and trends of sales. Average restaurant sales is influenced by comparable sales performance and restaurant openings and closings.

For the fiscal year ended June 30,   For the six months ended
December 31,

 
2003     2004     2005     2004     2005















    (in thousands)
(in constant currencies)
   
Average Restaurant Sales $ 972     $ 994     $ 1,066     $ 534     $ 549  

     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 closing 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 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 180 new restaurants in the United States between fiscal 2003 and 2005, of which 59 were open for at least 12 months as of December 31, 2005. The average restaurant sales of these new restaurants was approximately $1.3 million for the 12 months ended December 31, 2005. We expect these closings 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 Growth

     System-wide sales refer to sales at all company and franchise restaurants. System-wide sales and system-wide sales growth are important indicators of:

  • the overall direction and trends of sales and operating income on a system-wide basis; and

  • the effectiveness of our advertising and marketing initiatives.
For the fiscal year ended June 30,   For the six months ended
December 31,

 
2003   2004   2005   2004   2005










(in constant currencies)
System-Wide Sales Growth:        
United States and Canada (8.0 )%   (2.2 )%   4.9 %   7.0 %   (0.6 )%
EMEA/APAC 7.4   11.5   7.9   8.0   6.5
Latin America 1.6   8.4   14.5   14.6   12.9
   Total System-Wide (4.7 )%   1.2 %   6.1 %   7.6 %   1.8 %

     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 six months ended December 31, 2005, when comparable sales continued to increase on a system-wide basis coupled with 172 restaurant openings during the period, partially offset by 137 restaurant closings during the same period. We expect restaurant closures to continue to decline and that restaurant openings will gradually accelerate.

     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

38






advertising, our menu and our operational excellence programs. Our system-wide sales in the United States and Canada decreased slightly in the first six months of fiscal 2006, primarily as a result of restaurant closings partially offset by positive comparable sales growth. We had 6,758 franchise restaurants in the United States and Canada at December 31, 2005, compared to 7,128 franchise restaurants at December 31, 2004.

     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 83 (net of closures) during the first six months of fiscal 2006, increasing our total system restaurant count in this segment to 2,738 at December 31, 2005.

     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 41 (net of closures) during the first six months of fiscal 2006, increasing our total system restaurant count in this segment to 769 at December 31, 2005.

Factors Affecting Comparability of Results

   Purchase Accounting

     The acquisition of BKC was accounted for using the purchase method of accounting, or purchase accounting, in accordance with 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 rent payments from certain franchisees in the United States and Canada. In February 2003, we initiated the FFRP program designed to proactively assist franchisees experiencing financial

39






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 $36 million to fund certain loans to renovate franchise restaurants, to make renovations to certain restaurants that we lease or sublease to franchisees, and to provide rent relief and/or contingent cash flow subsidies to certain franchisees.

Franchisee system distress had a significant impact on our results of operations during these periods:

For the fiscal year ended June 30,   For the six months ended
December 31,

 
2003     2004     2005     2004     2005















(in millions)
Revenues:        
       Revenue not recognized $     $ 22     $ (3 )1   $ 1     $  
Selling, general and administrative:          
       Bad debt expense 53   11    1   2    
       Incremental advertising        
               contributions 49   41   15   9   1  
       Internal and external costs of        
FFRP program administration 3   11   12   6    















Total effect on selling, general and        
       administrative $ 105     $ 63     $ 28     $ 18     $ 1  
Other operating expenses (income),          
   net:        
       Reserves on acquired debt, net   19    4   1        
       Other, net   1    5     1  















Total effect on other operating        
       expenses (income), net   20    9   1   1  















Total effect on income from        
   operations $ 105     $ 105     $ 34     $ 20     $ 2  















(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. 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 six 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

40






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 half of fiscal 2006, our collections have remained at 100%, consistent with fiscal 2005.

     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 this review and the resulting corporate restructuring, we incurred costs of $22 million and $17 million in fiscal 2004 and fiscal 2005, respectively, consisting primarily of consulting and severance-related costs. The following table presents, for the periods indicated, such costs.

For the fiscal year ended June 30,   For the six months ended
December 31,

 
2003     2004     2005     2004     2005















  (in millions)    
Consulting fees $ 1     $ 14     $ 2     $ 2     $  
Severance-related costs of the global              
     reorganization 9   8     15     4      



 










 
       Total $ 10     $ 22     $ 17     $ 6     $  



 










 

Results of Operations

The following table presents, for the periods indicated, our results of operations.

For the fiscal year ended June 30, For the six months ended December 31,


  2003     2004   2005   2004     2005



 
 



 
Amount   Amount   Increase/
(Decrease)
  Amount     Increase/
(Decrease)
  Amount     Amount   Increase/
(Decrease)
















 




(unaudited)                   (unaudited)  
(in millions, except percentages)
Revenues:                
Company restaurant revenues $ 1,174   $ 1,276   9 %   $ 1,407     10 %   $ 704     $ 754   7 %
         Franchise revenues 368   361   (2 )%   413     14 %   206   209   1 %
         Property revenues 115   117   2 %   120     3 %   59   57   (3 )%
















 




Total revenues $ 1,657   $ 1,754   6 %   $ 1,940     11 %   $ 969     $ 1,020   5 %
Company restaurant expenses 1,022   1,087   6 %   1,195     10 %   590   640   8 %
Selling, general and                
   administrative expenses 478   482   1 %   496     3 %   236   213   (10 )%
Property expenses 55   58   5 %   64     10 %   30   28   (7 )%
Impairment of goodwill 875     *       *      
Other operating expenses                
   (income), net 32   54   69 %   34     (37 )%   3   (3 )   (200 )%
















 




Total operating costs and expenses $ 2,462   $ 1,681   (32 )%     1,789     6 %   $ 859     $ 878   2 %
                                                         
(Loss) income from operations (805 )   73   *   151     107 %   110   142   29 %
Interest expense, net 81   64   (21 )%   73     14 %   34   34  
Loss on early extinguishment of debt               13   *
















 




(Loss) income before income taxes $ (886 )   $ 9   *   $ 78     *   $ 76     $ 95   25 %
Income tax (benefit) expense (18 )   4   *   31     *   31   46   48 %
















 




Net (loss) income $ (868 )   $ 5     *   $ 47     *   $ 45     $ 49   9 %
















 





41







*   Not meaningful.

Six Months Ended December 31, 2005 Compared to Six Months Ended December 31, 2004

  Revenues

     Company restaurant revenues increased 7% to $754 million in the first six months of fiscal 2006 compared to the same period in fiscal 2005, primarily as a result of the acquisition of 133 franchise restaurants, partially offset by a 0.2% decrease in comparable sales, driven primarily by negative results in Germany and the United Kingdom where 18% of our company restaurants were located at December 31, 2005.

     Franchise revenues increased 1% to $209 million in the first six months of fiscal 2006 compared to the same period in fiscal 2005. Comparable sales growth at franchise restaurants was 1.5% during the first six months of fiscal 2006, and 163 new franchise restaurants were opened, including 141 new international franchise restaurants. Offsetting these factors was the elimination of royalties from 509 franchise restaurants that were closed or acquired, primarily in the United States and Canada.

     Property revenues declined by $2 million to $57 million in the first six months of fiscal 2006 as a result of a decrease in the number of properties that we lease or sublease to franchisees, primarily due to restaurant closures and our acquisition of franchise restaurants.

   Operating Costs and Expenses

      Company restaurant expenses

     Food, paper and product costs increased primarily as a result of increased company restaurant sales volumes. As a percentage of company restaurant revenues, food, paper and product costs increased 0.4% to 31.4% during the first six months of fiscal 2006 compared to the same period in fiscal 2005, primarily due to increases in beef prices in Europe. The price of beef has not increased significantly in the United States in the first six months of fiscal 2006.

     Payroll and employee benefits costs as a percentage of company restaurant revenues was 29.0% during the first six months of fiscal 2006 and fiscal 2005. Payroll and employee benefits costs have continued to increase in fiscal 2006 as a result of increases in wages and other costs of labor, particularly health insurance. Partially offsetting these increased costs was a reduction in the cost of labor required to operate our restaurants, due to our operational excellence programs.

     Occupancy and other operating costs include amortization of unfavorable and favorable leases from our acquisition of BKC, which resulted in a reduction to occupancy and other operating expenses. The net reduction in occupancy and other operating costs resulting from amortization of unfavorable and favorable leases was $7.9 million during the first six months of fiscal 2006 compared to $10.6 million in the same period in fiscal 2005, primarily as a result of the termination of certain unfavorable leases. Excluding the net reduction of favorable and unfavorable lease amortization, occupancy and other operating costs increased 7% to $192 million in the first six months of fiscal 2006, primarily as a result of acquisitions of franchise restaurants and new company restaurants, as well as increased costs, such as utilities in the United States and rents in the United Kingdom. Excluding the net reduction of favorable and unfavorable lease amortization, occupancy and other operating costs increased slightly as a percentage of company restaurant revenues to 25.5% in the first six months of fiscal 2006 compared to 25.4% in the same period of fiscal 2005.

      Selling, general and administrative expenses

     Selling, general and administrative expenses decreased 10% to $213 million during the first six months of fiscal 2006 compared to the same period in fiscal 2005, primarily as a result of the absence of $23 million in expenses related to franchise system distress and our global reorganization costs in the first six months of fiscal 2006

42






compared to the comparable period in fiscal 2005. Partially offsetting this were increases in general and administrative expenses resulting from our acquisition of franchise restaurants.

     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 $4 million in both six-month periods. We have agreed with the sponsors that the management agreement will terminate following the completion of this offering and the sponsors will no longer charge us a management fee. We will incur a one-time fee in connection with the termination of the management agreement equal to $30 million which will be reflected in our results for fiscal 2006. In addition, the compensatory make-whole payment of $33 million will also be reflected as compensation expense in the third quarter of fiscal 2006.

      Property expenses

     Property expenses decreased by $2 million to $28 million in the first six 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.

      Other operating expenses (income), net

     Other operating income, net was $3 million in the first six months of fiscal 2006 compared to operating expenses, net of $3 million in the same period in fiscal 2005. Other operating expenses (income), net was comprised primarily of gains and losses on property disposals and other miscellaneous items in both six-month periods.

      Interest expense, net

      Interest expense, net was $34 million in the first six months of fiscal 2006 and in fiscal 2005.

      Loss on early extinguishment of debt

     In connection with our July 2005 refinancing, $13 million of deferred financing fees recorded in connection with the financing of our acquisition of BKC in fiscal 2003 were recorded as a loss on early extinguishment of debt. In connection with the February 2006 financing, we expect to incur $5 million in financing fees in fiscal 2006.

      Income tax expense

     Income tax expense increased $15 million to $46 million in the first six months of fiscal 2006 from the same period in fiscal 2005, primarily due to the $19 million increase in income before income taxes in the first six months of fiscal 2006 as compared to the prior period. In addition, our effective tax rate increased by 7.6% for the first six months of fiscal 2006 to 48.4% . 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.

Fiscal Year Ended June 30, 2005 Compared to Fiscal Year Ended June 30, 2004

   Revenues

     Company restaurant revenues increased 10% to $1,407 million in fiscal 2005 as a result of strong comparable sales in the United States and Canada and Latin America segments, where approximately 76% of our company restaurants are located, primarily due to the implementation of strategic initiatives related to our menu, advertising and our operational excellence programs, as well as the acquisition of 101 franchise restaurants.

43






     Franchise revenues increased 14% to $413 million in the first six months of fiscal 2006 compared to the same period in fiscal 2005, as a result of improved sales at franchise restaurants in all segments due primarily to the implementation of our menu, marketing and operational excellence programs, the improved financial condition of our franchise system in the United States, and the opening of new franchise restaurants in international markets. In addition to increased royalties from improved franchise restaurant sales, we recognized $3 million of franchise revenues not previously recognized in fiscal 2005, compared to $17 million of franchise revenues not recognized in fiscal 2004. In addition, our franchisees opened 233 new franchise restaurants in international locations in fiscal 2005, contributing to a 4% net increase in the number of international franchise restaurants from fiscal 2004. Partially offsetting these factors was the elimination of royalties from 318 franchise restaurants that were closed and 99 franchise restaurants that were acquired in the United States and Canada during fiscal 2005.

     Property revenues increased 3% to $120 million in fiscal 2005. Our fiscal 2004 property revenues excluded $5 million of property revenues not recognized, partially offset by $3 million of revenue 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, principally as a result of increases in company restaurant sales volumes. Food, paper and product costs as a percentage of company restaurant revenues increased 0.5% to 31.1% in fiscal 2005 compared to fiscal 2004, primarily as a result of increases in the price of beef in the United States.

     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 101 franchise restaurants in fiscal 2005. Payroll and employee benefits decreased 0.4% to 29.5% of company restaurant revenues in fiscal 2005 as higher costs of wages and health insurance benefits were more than offset by increasing restaurant sales and efficiency gains from our operational excellence programs to reduce the labor required to operate our restaurants.

     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 utilities in the United States and rent in the United Kingdom. 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.

      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 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.

44






     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.

      Property expenses

     The net reduction to property expenses resulting from the amortization of unfavorable and favorable leases was $9 million in fiscal 2005, compared to $14 million in fiscal 2004. Excluding this net reduction 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 this net reduction and the other adjustments, property expenses as a percentage of property income increased to 60.8% in fiscal 2005 from 60.5% in fiscal 2004.

      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.

     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. The remaining fiscal 2004 impairment of debt investments was recorded in connection with the forgiveness of a note receivable from an unconsolidated affiliate in Australia.

     Other, net included $5 million of settlement losses recorded in connection with the acquisition of franchise restaurants and $5 million of costs associated with the FFRP program in fiscal 2005. In fiscal 2004, other, net included $3 million of losses from unconsolidated investments 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.

      Interest expense, net

     Interest expense, net increased 21% to $82 million in fiscal 2005 due to higher interest rates related to term debt and debt payable 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.

45






      Income tax expense

     Income tax expense increased $27 million to $31 million in fiscal 2005 primarily due to the $69 million increase in income before income taxes in fiscal 2005. Our effective tax rate declined by 4.7% for fiscal 2005 to 39.7%, partially offsetting the effect of the increase in income before income taxes. The majority of the change in our effective tax rate is attributable to adjustments to our valuation allowances related to deferred tax assets in foreign countries and certain state income taxes in fiscal 2005. See Note 12 to our audited consolidated financial statements for further information regarding our effective tax rate and valuation allowances.

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.

   Revenues

     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.

     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 during fiscal 2004. A total of 392 under-performing franchise restaurants closed in fiscal 2004, compared to 275 new franchise restaurants that opened, resulting in a net decrease of 147 franchise restaurants. 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. Property revenues increased 2% to $117 million in fiscal 2004. Our fiscal 2004 property revenues excluded $5 million of property revenues not recognized, partially offset by $3 million of revenue recognized in connection with finalizing our purchase accounting allocations.

     Partially offsetting the impact of the franchise system distress in the United States and Canada were increases in franchise and property revenues in EMEA/APAC and Latin America of $24 million.

   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 introduction of premium products and a strategic shift in our menu strategy to discontinue lower margin products and Whopper discounting during fiscal 2004.

     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 2005 as higher costs of

46






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.

     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.

      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

     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.

      Impairment of goodwill

     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. 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.

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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 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, 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.

Interest expense, net

     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.

Income tax expense

We recorded an income tax benefit of $18 million in fiscal 2003 related to our loss before income taxes.

Quarterly Financial Data

     The following table presents unaudited consolidated income statement data for each of the ten fiscal quarters in the period ended December 31, 2005. 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,
2003
  December 31,
2003
  March 31,
2004
  June 30,
2004
  September 30,
2004
December 31,
2004
March 31,
2005
June 30,
2005
September 30,
2005
December 31,
2005



 


























                            (unaudited)
(in millions)
                         
Total revenues $ 434     $ 418     $ 426     $ 476     $ 481     $ 488     $ 468     $ 503     $ 508     $ 512  



 


























Company restaurant                                                                              
   expenses   266       265       268       288       298       292       296       309       319       321  
Selling, general and                                                                              
   administrative expenses   125       110       108       139       112       125       126       133       101       110  

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Three months ended

September 30,
2003
  December 31,
2003
  March 31,
2004
  June 30,
2004
  September 30,
2004
December 31,
2004
March 31,
2005
June 30,
2005
September 30,
2005
December 31,
2005



 


























Property expenses 16     6     20     16     14   15     14     21   14     14
Other operating expenses                                
   (income), net 3     8     20     23     1   2     15     16   2     (3 )






























Total operating costs and                                
   expenses 410     389     416     466     425   434     451     479   436     442






























Income (loss) from                                
   operations 24     29     10     10     56   54     17     24   72     70






























                                                                               
Net income (loss) $ 4     $ 9     $ (5 )   $ (3 )   $ 21     $ 23     $ 1     $ 2     $ 22     $ 27






























     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.

     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 133 franchise restaurants in the third and fourth quarters of fiscal 2005, which resulted in increased revenues and operating expenses in the first two 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 $13 million loss on the early extinguishment of debt, recorded in connection with our July 2005 refinancing.

Liquidity and Capital Resources

   Overview

     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. We had cash and cash equivalents of $207 million and $432 million at December 31, 2005 and June 30, 2005, respectively. In addition, we currently have a borrowing capacity of $107 million under our $150 million revolving credit facility (net of $43 million in letters of credit issued under the revolving credit facility). We do not expect to need to borrow funds to meet our expected capital expenditures for the foreseeable future.

     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.

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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 borrow an additional $350 million and obtain certain amendments to permit us to declare and pay the February 2006 dividend and pay the compensatory make-whole payment and the sponsor management termination fee. This 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 the net proceeds from this offering to repay, in part, amounts outstanding under our senior secured credit facility. We also expect to pay the one-time $30 million sponsor management termination fee upon completion of this offering.

   Other Debt Facilities

     As of December 31, 2005, 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 December 31, 2005.

   Comparative Cash Flows

     Operating Activities. Cash flows from operating activities were $105 million and $62 million in the first six months of fiscal 2006 and fiscal 2005, respectively. The $43 million increase was due primarily to 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 $29 million in the first six months of fiscal 2006 and cash provided by investing activities was $61 million in the first six months of fiscal 2005. The $90 million decrease was due primarily to the sale of securities available for sale in the first six months of fiscal 2005, offset by reduced spending on acquisitions of franchisee operations and debt in the first six 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, 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

50






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 fiscal year ended
June 30,
  For the six months ended
December 31,

 
2003     2004     2005     2004     2005















  (in millions)    
New restaurants $ 23     $ 22     $ 26     $ 7     $ 6  
Real estate purchases 4     5     5     2     7  
Maintenance capital 81     43     44     15     11  
Other, including corporate 34     11     18     5     6  















     Total $ 142     $ 81     $ 93     $ 29     $ 30  















     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 $100 million in fiscal 2006, of which $30 million was spent and $5 million was contractually committed as of December 31, 2005. 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 December 31, 2005.

     Financing Activities. Financing activities used cash of $301 million and no cash in the first six months of fiscal 2006 and fiscal 2005, respectively. The $301 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.

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 includes our debt arising from the July 2005 refinancing and February 2006 financing.

    Payment due by period
   
Contractual Obligations   Total     Less than
1 year
     1-3 years     3-5 years       More
than
5 years
 
















      (in millions)      
Capital lease obligations   $ 112     $ 11     $    20     $ 19     $ 62  
Operating lease obligations(1)   1,359     143     266     220       730  

51






    Payment due by period
   
Contractual Obligations   Total     Less than
1 year
     1-3 years     3-5 years       More
than
5 years
 
















      (in millions)      
Long-term debt, including current portion and interest(2)   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 intend to use the net proceeds of this offering to repay certain long term debt. See “Use of Proceeds.”

     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. 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 December 31, 2005, our advertising commitments totaled $135 million and $99 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 rents for the two facilities to be replaced. 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”.

52






Other Commercial Commitments and Off-Balance Sheet Arrangements

   Guarantees

     We guarantee certain lease payments of franchisees, arising from leases assigned in connection with sales of company restaurants to franchisees, by remaining secondarily liable under the assigned leases of varying terms, for base and contingent rents. The maximum contingent rent amount payable is not determinable as the amount is based on future revenues. In the event of default by the franchisees, we have typically retained the right to acquire possession of the related restaurants, subject to landlord consent. The aggregate contingent obligation arising from these assigned lease guarantees was $115 million at December 31, 2005, expiring over an average period of seven years.

     Other commitments, arising out of normal business operations, were $9 million as of December 31, 2005. These commitments consist primarily of guarantees covering foreign franchisees’ obligations, obligations to suppliers, and acquisition-related guarantees.

   Letters of Credit

     At December 31, 2005, we had $44 million in irrevocable standby letters of credit outstanding, of which $43 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 December 31, 2005, none of these irrevocable standby letters of credit had been drawn.

     As of December 31, 2005, we had posted bonds totaling $13 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 December 31, 2005 our remaining commitments under the FFRP program totaled $36 million, the majority of which are scheduled to expire over the next five years.

   Vendor Relationships

     In fiscal 2000, we entered into long-term, exclusive contracts with The Coca-Cola Company and with Dr Pepper/Seven Up, Inc. to supply company and franchise restaurants with their products and obligating Burger King restaurants in the United States to purchase a specified number of gallons of soft drink syrup. These volume commitments are not subject to any time limit. As of 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.

   Other

      We expect to pay the $30 million sponsor management termination fee upon the completion of this offering.

53






     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 2003, fiscal 2004, fiscal 2005 or the six months ended December 31, 2005. 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 Financial Accounting Standard Board (FASB) Statement of Financial Accounting Standards (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 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

     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. Restaurant assets are grouped together for impairment testing at a market-level in the United States or at a market or country level, internationally. 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);

54






  • 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 December 31, 2005. 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. 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 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.

   Self-Insurance Programs

     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.

55






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.

     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 un-vested 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 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

   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.

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   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.

   Interest Rate Risk

     We have a market risk exposure to changes in interest rates, principally in the United States. We attempt to minimize this risk and lower our overall borrowing costs through the utilization of derivative financial instruments, primarily interest rate swaps. These swaps are entered into with financial institutions and have reset dates and critical terms that match those of 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.

   Commodity Price Risk

     We purchase certain products, particularly beef, which are subject to price volatility that is caused by weather, market conditions and other factors that are not considered predictable or within our control. Additionally, our ability to recover increased costs is typically limited by the competitive environment in which we operate. We do not utilize commodity option or future contracts to hedge commodity prices and do not have long-term pricing arrangements. As a result, we purchase beef and other commodities at market prices, which fluctuate on a daily basis.

     The estimated change in company restaurant food, paper and product costs from a hypothetical 10% change in average beef prices would have been approximately $8 million and $5 million in fiscal 2005 and the first six 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.

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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 and one of the three largest quick service restaurant, or QSR, companies. As of December 31, 2005, we owned or franchised a total of 11,141 restaurants in 67 countries and U.S. territories, of which 1,228 restaurants were company-owned and 9,913 were owned by our franchisees. Of these restaurants, 7,301 or 66% were located in the United States and 3,840 or 34% 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 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. We believe that this restaurant 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.

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 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.

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Our Industry

     We operate in the FFHR category of the 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:

  • an increasing percentage of meals being eaten out of the home;

  • growing disposable incomes;

  • favorable demographic trends in the Echo Boomer generation (those born between the late 1970s and early 1990s), who are typically inclined toward QSR dining;

  • new marketing vehicles such as the internet and video games, which lend themselves to marketing QSR concepts; and

  • 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:

  • 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 200 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. 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.

  • 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.

  • Experienced management team with significant ownership. Led by Greg Brenneman, our Chairman and Chief Executive Officer, we have assembled a seasoned management team with significant experience in turning around and growing companies. Mr. Brenneman has extensive turn-around experience, and served as President and Chief Operating Officer of Continental Airlines and Chief Executive Officer of PriceWaterhouseCoopers Consulting. John Chidsey, our President and Chief Financial Officer, has extensive experience in managing franchise businesses, including the Avis Rent-A-Car and Budget Rent-A- Car systems and Jackson Hewitt Tax Services. Russ Klein, our Chief Marketing Officer, has 26 years of retail and consumer marketing experience. 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. Nine out of 13 members of our management team are new to BKC in the last three years. Following this offering, our executive officers will own approximately % shares 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:

  • Drive sales growth and profitability of our U.S. business. Although we have achieved seven 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 is leading to increased restaurant development in the United States.

    We intend to continue to meet our customers’ needs and drive sales growth and profitability by implementing the following strategic initiatives:

  • 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.

  • 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, such as

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    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.

  • 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.

  • 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 December 2005, and we were rated ahead of McDonald’s and Wendy’s in the overall rankings of the annual speed of drive-thru service survey published by QSR Magazine, a leading industry publication.

  • 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. 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.

  • 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.

  • 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 restaurant model that allows us and our franchisees to reduce the average non-real estate costs to build a new restaurant from approximately $1.1 million to approximately $800,000. We have opened five new restaurants in this format to date, with an additional eight to 12 scheduled to open in fiscal 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 effort and other cost saving initiatives, we have identified and recommended over $115,000 worth of savings for standard remodels.
  • 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 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. 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.

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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, with the second global franchisee convention scheduled for April 2006 in Orlando, Florida. We will continue to dedicate resources toward the creation of a cohesive organization that is focused on supporting the Burger King brand globally.

  • 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. We organize our lines of business in each segment into three categories: (1) company restaurant operations, (2) franchise operations and (3) property operations.

   United States and Canada

      Restaurant Operations

     Our restaurants are limited-service restaurants of distinctive design and are generally located in high-traffic areas throughout the United States and Canada. At December 31, 2005, 876 company restaurants and 6,758 franchise restaurants were operating in the United States and Canada, which generated system-wide sales in fiscal 2005 of 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 11:00 p.m. We have recently implemented a program to encourage franchisees to be open for extended hours, particularly at the drive-thru. 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

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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 average non-real estate costs associated with constructing a new building by 27% from approximately $1.1 million to approximately $800,000. 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 five new restaurants in this format to date, with an additional eight to 12 scheduled to open in fiscal 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 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 180 new restaurants in the United States between fiscal 2003 and fiscal 2005, of which 59 were open for at least 12 months as of December 31, 2005. The average restaurant sales of these new restaurants was approximately $1.3 million for the 12 months ended December 31, 2005. 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 low levels of franchisees renewing their expiring franchise agreements. 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 over 450 restaurants in the United States with

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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.

      Company Restaurants

     As of December 31, 2005, we owned and operated 876 restaurants in the United States and Canada, representing 11% 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 we have acquired 139 franchise restaurants, principally from distressed franchisees. We do not expect to acquire a significant number of franchise restaurants in the future.

     The following table details the locations of our company restaurants in the United States and Canada at December 31, 2005.

Rank   State/Province   Company
Restaurant Count
  % of Total U.S. and
Canada Company Restaurants




 

1   Florida   227     25.9 %
2   Ontario   68     7.7 %
3   Indiana   60     6.8 %
4   North Carolina   57     6.5 %
5   Georgia   47     5.3 %
6   Virginia   44     5.0 %
7   Massachusetts   41     4.6 %
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   27     3.1 %
14     New Jersey   25     2.9 %
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   876     100.0 %

     Of these 876 company restaurants, we own the properties for 343 restaurants and we lease the remaining 533 properties from third-party landlords.

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      Franchise Operations

     General. We grant franchises to operate restaurants using Burger King trademarks, trade dress and other intellectual property, uniform operating procedures, consistent quality of products and services and standard procedures for inventory control and management.

     Our growth and success have been built in significant part upon our substantial franchise operations. We franchised our first restaurant in 1961, and as of December 31, 2005 there were approximately 6,758 franchise restaurants, owned by approximately 874 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 15% of U.S. and Canadian Burger King restaurants at December 31, 2005.

     The following is a list of the five largest franchisees in terms of restaurant count in the United States and Canada at December 31, 2005.

Rank   Name   Restaurant Count   Location





1   Carrols Corporation   336     Northeast and Midwest
2   Heartland Food Corp.   234     Mid South and Northwest
3   Strategic Restaurants Corp.   224     Midwest and Southeast
4   Bravokilo Corporation   124     Midwest
5   Army Air Force Exchange Services   123     Across the United States


  Total   1,041    

     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.

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      Property Operations

     Our property operations consist of restaurants where we lease the land and often the building to the franchisee. Our real estate operations in the United States and Canada generated $83 million of our revenues in fiscal 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 880 properties that we lease or sublease to franchisees in the United States and Canada, we own 470 properties and lease either the land or the land and building from third-party landlords on the remaining 410 properties.

   Europe, Middle East and Africa/Asia Pacific (EMEA/APAC) Regions

      Restaurant Operations

     These regions, and the markets within these regions, differ substantially in many respects, including customer taste preferences, consumer disposable income, occupancy costs, food costs, operating margins and the level of competitive activity. The following discussion is intended as a summary of our EMEA/APAC business as a whole. However, some of the information discussed below may not be applicable to individual countries within our EMEA/APAC operations.

     EMEA. EMEA is the second largest geographic area in the Burger King system behind the United States. At December 31, 2005, EMEA had 2,115 restaurants in 27 countries and territories, including 287 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 648 restaurants at December 31, 2005. Between fiscal 1999 and fiscal 2005, the number of restaurants in EMEA grew 57% from 1,304 to 2,041. In the first six 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 small number of our franchisees in the United Kingdom to assist them with their financial difficulties.

     APAC. At December 31, 2005, APAC had 623 restaurants in 12 countries and territories, including China, Malaysia, Thailand, Australia, Philippines, Taiwan, Singapore, New Zealand, Japan and South Korea, with total APAC sales of approximately $650 million for fiscal 2005. All of the restaurants in the region other than our two restaurants in China are franchised. Australia is the largest market in APAC, with 295 restaurants at December 31, 2005, all of which operate 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

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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.

     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.

      Company Restaurants

     Over the past several years, we have concentrated on developing company restaurants, primarily in Germany and Spain. We have invested approximately $25 million in new restaurant development in these countries over the last three years, and a total of approximately $34 million across EMEA. At December 31, 2005, 287 (or 14%) of the restaurants in EMEA were company restaurants. There are two company restaurants in APAC, all of which are located in China, and we are planning to open six additional company restaurants in China by the end of fiscal 2006. The following table details company restaurant locations in EMEA at December 31, 2005:

Rank   Country   Company
Restaurant Count
  % of Total
EMEA
Company
Restaurants






1   Germany   148     52 %
2   United Kingdom   73     25 %
3   Spain   42     15 %
4   The Netherlands   24     8 %




  Total   287     100 %





      Franchise Operations

     At December 31, 2005, 2,449 or 89% 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.

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     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.

     The following is a list of the five largest franchisees in terms of restaurant count in EMEA/APAC at December 31, 2005:

Rank   Name   Restaurant Count   Location





1   Hungry Jack’s Pty Ltd.   242     Australia
2   Army Air Force Exchange Services   124     Various
3   Tab Gida Sanayl Ve Ticaret AS   105     Turkey
4   Granada Hospitality Limited (Compass Group)   104     United Kingdom
5   Doosan Corporation   92     South Korea


    667    


      Property Operations

     Our property operations in EMEA primarily consist of franchise restaurants located in the United Kingdom, Germany and Spain, which we lease or sublease to franchisees. We have no property operations in APAC. Of the 143 properties that we lease or sublease to franchisees, we own five properties and lease the land and building from third party landlords on the remaining 138 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.

   Latin America

     At December 31, 2005, we had 769 restaurants in 26 countries and territories in Latin America, with total system sales in fiscal 2005 of approximately $669 million. There were 63 company restaurants in Latin America, all located in Mexico, and 706 franchise restaurants in the region at December 31, 2005. The Mexican market is the largest in the region, with a total of 277 restaurants at December 31, 2005, or 36% of the region. In fiscal 2005, we opened 45 new restaurants in Mexico, of which nine were company restaurants and 36 franchise restaurants, and we are the market leader in 13 of our 26 markets in Latin America, including Puerto Rico, in terms of number of restaurants.

     We have experienced significant growth in Mexico over the past three years. We plan to significantly increase our restaurant count in Mexico and the rest of Latin America. Between fiscal 1999 and fiscal 2005, the number of restaurants in Latin America grew by 67% from 437 to 728. We have recently opened 11 restaurants in Brazil and have entered into agreements with franchisees for the development of over 100 new restaurants during the next five years. In the first six months of fiscal 2006, 41 restaurants were opened (net of closures).

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     The following is a list of the five largest franchisees in terms of restaurant count in Latin America at December 31, 2005:

Rank   Name   Restaurant
Count
  Location





1   Caribbean Restaurants   170     Puerto Rico
2   West Alimentos S.A. de C.V.   78     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.   32     Mexico


    355    


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 Coca-Cola, the development of innovative products (such as Whopper, Angus Steak Burger, TenderCrisp, 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 “Wake up with the King” and “Office Lunch Break” commercials garnered numerous awards, including the 2005 Grand Clio, Gold Lion at Cannes and Point of Purchase Awards. 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.

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Property

The following table presents information regarding our properties as of December 31, 2005.

Owned(1 )       Leased     Total












    Land     Land &
  Building
    Leases  






United States and Canada:        
   Company restaurants 343   188   345   533   876
   Franchisee-operated properties 470   245   165   410   880
   Non-operating restaurant locations 51   23   16   39   90
   Offices     6   6   6










         Total 864   456   532   988   1,852










                             
International:        
   Company restaurants 17   26   309