10-K 1 g14915e10vk.htm BURGER KING HOLDINGS, INC. Burger King Holdings, Inc.
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Fiscal Year Ended June 30, 2008
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to
 
Commission file number: 001-32875
 
 
BURGER KING HOLDINGS, INC.
(Exact name of Registrant as Specified in Its Charter)
 
     
Delaware   75-3095469
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification Number)
     
5505 Blue Lagoon Drive, Miami, Florida
(Address of Principal Executive Offices)
  33126
(Zip Code)
 
Registrant’s telephone number, including area code
(305) 378-3000
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, par value $0.01 per share
  New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting Company o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The aggregate market value of the Common Stock held by non-affiliates of the registrant as of December 31, 2007 was $2.2 billion.
 
The number of shares outstanding of the Registrant’s Common Stock as of August 25, 2008 was 135,287,760.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
Part III incorporates certain information by reference from Registrant’s definitive proxy statement for the 2008 annual meeting of stockholders, which proxy will be filed no later than 120 days after the close of the Registrant’s fiscal year ended June 30, 2008.
 


 

 
BURGER KING HOLDINGS, INC.
 
2008 FORM 10-K ANNUAL REPORT
 
TABLE OF CONTENTS
 
                 
      Business     3  
      Risk Factors     18  
      Unresolved Staff Comments     34  
      Properties     34  
      Legal Proceedings     34  
      Submission of Matters to a Vote of Security Holders     35  
 
PART II
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     35  
      Selected Financial Data     37  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     42  
      Quantitative and Qualitative Disclosures About Market Risk     65  
      Financial Statements and Supplementary Data     67  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     110  
      Controls and Procedures     110  
      Other Information     110  
 
PART III
      Directors, Executive Officers and Corporate Governance     111  
      Executive Compensation     111  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     111  
      Certain Relationships and Related Transactions, and Director Independence     111  
      Principal Accounting Fees and Services     111  
 
      Exhibits and Financial Statement Schedules     111  
 EX-21.1 List of Subsidiaries
 EX-23.1 Consent of KPMG LLP
 EX-31.1 Section 302 CEO Certification
 EX-31.2 Section 302 CFO Certification
 EX-32.1 Section 906 CEO Certification
 EX-32.2 Section 906 CFO Certification
 
Burger King®, Whopper®, Double Whopper®, Have It Your Way®, Tendercrisp®, Burger King Bun Halves and Crescent Logo, Spicy Chick’N Crisp®, BKtm Value Menu, BKtm Breakfast Value Menu, BK Wrappertm, BK Fusiontm and BKtm Stacker are trademarks of Burger King Brands, Inc., a wholly-owned subsidiary of Burger King Holdings, Inc. References to fiscal 2008, fiscal 2007 and fiscal 2006 in this Form 10-K are to the fiscal years ended June 30, 2008, 2007 and 2006, respectively.
 
In this document, we rely on and refer to information regarding the restaurant industry, the quick service restaurant segment and the fast food hamburger restaurant category that has been prepared by the industry research firm The NPD Group, Inc. (which prepares and disseminates Consumer Reported Eating Share Trends, or CREST data) or compiled from market research reports, analyst reports and other publicly available information. All industry and market data that are not cited as being from a specified source are from internal analyses based upon data available from known sources or other proprietary research and analysis.


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Part I
 
Item 1.   Business
 
Overview
 
Burger King Holdings, Inc. (“we” or the “Company”) is a Delaware corporation formed on July 23, 2002. Our restaurant system includes restaurants owned by the Company and by franchisees. We are the world’s second largest fast food hamburger restaurant, or FFHR, chain as measured by the total number of restaurants and system-wide sales. As of June 30, 2008, we owned or franchised a total of 11,565 restaurants in 71 countries and U.S. territories, of which 1,360 restaurants were Company restaurants and 10,205 were owned by our franchisees. Of these restaurants, 7,207 or 62% were located in the United States and 4,358 or 38% were located in our international markets. Our restaurants feature flame-broiled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks and other reasonably-priced food items. During our more than 50 years of operating history, we have developed a scalable and cost-efficient quick service hamburger restaurant model that offers customers fast food at modest prices.
 
We generate revenues from three sources: retail sales at Company restaurants; franchise revenues, consisting of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid to us by our franchisees; and property income from restaurants that we lease or sublease to franchisees. Approximately 90% of our restaurants are franchised and we have a higher percentage of franchise restaurants to Company restaurants than our major competitors in the FFHR category. We believe that this restaurant ownership mix provides us with a strategic advantage because the capital required to grow and maintain the Burger King® system is funded primarily by franchisees, while still giving us a sizeable base of Company restaurants to demonstrate credibility with franchisees in launching new initiatives. As a result of the high percentage of franchise restaurants in our system, we have lower capital requirements compared to our major competitors.
 
Our History
 
Burger King Corporation, which we refer to as BKC, was founded in 1954 when James McLamore and David Edgerton opened the first Burger King restaurant in Miami, Florida. The Whopper® sandwich was introduced in 1957. BKC opened its first international restaurant in the Bahamas in 1966. BKC also established its brand identity with the introduction of the “bun halves” logo in 1969 and the launch of the first Have It Your Way® campaign in 1974. BKC introduced drive-thru service, designed to satisfy customers “on-the-go” in 1975.
 
In 1967, Mr. McLamore and Mr. Edgerton sold BKC to Minneapolis-based The Pillsbury Company, taking it from a small privately-held franchised chain to a subsidiary of a large food conglomerate. The Pillsbury Company was purchased by Grand Metropolitan plc which, in turn, merged with Guinness plc to form Diageo plc, a British spirits company. In December 2002, BKC was acquired by private equity funds controlled by TPG Capital, Bain Capital Partners and the Goldman Sachs Funds, which we refer to as our “Sponsors.” In May 2006, we consummated our initial public offering and issued and sold 25 million shares of common stock at a price of $17.00 per share. Upon completion of the offering, our common stock became listed on the NYSE under the symbol “BKC.” Subsequent to our initial public offering, the private equity funds controlled by the Sponsors sold 22 million shares of common stock at a price of $22.00 per share in February/March 2007; 20.7 million shares of common stock at a price of $25.00 per share in November 2007; and 15 million shares of common stock at a price of $27.41 per share in May 2008. The private equity funds currently own approximately 32% of our outstanding common stock.
 
Our Industry
 
We operate in the FFHR category of the quick service restaurant, or QSR, segment of the restaurant industry. In the United States, the QSR segment is the largest segment of the restaurant industry and has demonstrated steady growth over a long period of time. According to The NPD Group, Inc., which prepares and disseminates CREST data, QSR sales have grown at an annual rate of 4% over the past 10 years, totaling approximately $228 billion for the 12-month period ended June 30, 2008. According to The NPD Group, Inc., QSR sales are projected to increase at an annual rate of 4% between 2008 and 2012.


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Furthermore, we believe the QSR segment is generally less vulnerable to economic downturns and increases in energy prices than the casual dining segment, due to the value that QSRs deliver to consumers, as well as some “trading to value” by customers from other restaurant industry segments during adverse economic conditions, as they seek to preserve the “away from home” dining experience on tighter budgets. However, significant economic downturns or sharp increases in energy prices may adversely impact FFHR chains, including us.
 
According to The NPD Group, Inc., the FFHR category is the largest category in the QSR segment, generating sales of over $61 billion in the United States for the 12-month period ended June 30, 2008 representing 27% of total QSR sales. The FFHR category grew 3% in terms of sales during the same period and, according to The NPD Group, Inc., is expected to increase at an average rate of 3.5% per year over the next five years. For the 12-month period ended June 30, 2008, the top three FFHR chains (McDonald’s, Burger King and Wendy’s) accounted for 73% of the category’s total sales, with approximately 15% attributable to Burger King.
 
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. We have one of the largest restaurant networks in the world, with 11,565 restaurants operating in 71 countries and U.S. territories, of which 4,358 are located in our international markets. During fiscal 2007 and 2008, our franchisees opened restaurants in eight new international markets: Japan, Indonesia, Poland, Egypt, Colombia, Bulgaria, Romania and Curaçao. We believe that the demand for new international franchise restaurants is growing and that our global platform will allow us to leverage our established infrastructure to significantly increase our international restaurant count with limited incremental investment or expense.
 
  •  Attractive business model.  Approximately 90% of our restaurants are franchised, which is a higher percentage than that of our major competitors in the FFHR category. We believe that our franchise restaurants will generate a consistent, profitable royalty stream to us, with minimal ongoing capital expenditures or incremental expense by us. We also believe this will provide us with significant cash flow to reinvest in growing our brand and enhancing shareholder value. Although we believe that this restaurant ownership mix is beneficial to us, it also presents a number of drawbacks, such as our limited control over franchisees and limited ability to facilitate changes in restaurant ownership.
 
  •  Innovative marketing campaigns, creative advertising and strategic sponsorships.  We utilize our successful marketing, advertising and sponsorships to drive sales and generate restaurant traffic. In the first quarter of fiscal 2008, our U.S. television advertisements were among both the top five best recalled and the top five best liked new restaurant ads airing nationally, according to advertising industry researcher Nielson IAG. In addition, our television advertising made IAG’s monthly “Top 10 New Ads” list (published by the magazine Ad Age) a total of five times in calendar year 2007, one of less than a dozen national advertisers across all categories to have that many mentions. We are also reaching out to a broad spectrum of restaurant guests with mass appeal entertainment sponsorships, such as Microsoft’s popular videogame franchise, Halo 3tm and movie tie-ins such as The Simpsonstm Movie, Iron Mantm, The Incredible Hulktm and Indiana Jonestm and the Kingdom of the Crystal Skulltm. Additionally, as evidence of the popular relevance of our brand and products, our Whopper Freakout campaign became its own pop culture content, with the most popular YouTube user-generated parody attracting over 1.2 million views, together with over 120 other videos emulating Burger King commercial content. The strong appeal of this campaign, and its commensurate media coverage, made these ads some of the best-recalled ever according to IAG.
 
  •  Experienced management team.  We have a seasoned management team with significant experience. John Chidsey, our Chairman and Chief Executive Officer, has extensive experience in managing franchised and branded businesses, including the Avis Rent-A-Car and Budget Rent-A-Car systems, Jackson Hewitt Tax Services and PepsiCo. Russell Klein, our President, Global Marketing, Strategy and Innovation, has more than 29 years of retail and consumer marketing experience, including at 7-Eleven Inc. Ben Wells, our Chief Financial Officer, has over 30 years of finance experience, including at Compaq Computer Corporation and British Petroleum. In addition, other members of our management team have worked at Frito Lay,


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  McDonald’s, Jack-in-the Box, PepsiCo, Pillsbury and Wendy’s. The core of our management team has been working together since 2004.
 
Our Business Strategy
 
We intend to grow and strengthen our competitive position through the continued focus on our strategic global growth pillars — marketing, products, operations and development — and the implementation of the following key elements of our business strategy:
 
  •  Drive further sales growth:  We remain focused on achieving our comparable sales and average restaurant sales potential. Essential components of this strategy are:
 
  •  Enhancing the guest experience — our key guest satisfaction and operations metrics showed continued improvement in fiscal 2008 and we intend to further improve these metrics.
 
  •  Reducing hours of operation gap — we have implemented initiatives to reduce the gap between our hours of operation and those of our competitors, which we believe will increase comparable sales and average restaurant sales in U.S. restaurants.
 
  •  Increasing emphasis on our restaurant reimaging program — we believe that increased capital expenditures dedicated to our restaurant reimaging program in the United States and Canada will result in higher sales and traffic in these restaurants and yield strong cash on cash returns.
 
  •  Enhance restaurant profitability:  We believe that opportunities exist to enhance restaurant profitability by better utilizing our fixed cost base and exploring ways to mitigate escalating commodity and energy costs in the current macroeconomic environment. We are focused on leveraging our fixed cost structure by introducing higher margin products and creating efficiencies through improved speed of service and new equipment, such as headsets which we believe will further improve speed of service. In the United States and Canada, the recent installation of the flexible batch broiler has reduced energy consumption in Company restaurants, and we expect to further mitigate our escalating operating costs by utilizing our market based pricing model to achieve optimal pricing in our markets.
 
  •  Expand our large international platform:  We intend to leverage our substantial international infrastructure to expand our franchise network and restaurant base. Internationally we are much smaller than our largest competitor, and, therefore, we believe we have significant growth opportunities. We have developed a detailed global development plan to accelerate growth over the next five years. We expect to focus our expansion plans on (1) under-penetrated markets where we already have an established presence, such as Germany, Spain and Mexico; (2) markets in which we have a small presence, but which we believe offer significant opportunities for development, such as Brazil, China, Japan, Indonesia and Italy; and (3) financially attractive new markets in the Middle East, Eastern Europe and the Mediterranean region. We believe that our successful entry into Brazil where in approximately four years we have recruited eight new franchisees and opened 56 restaurants in 26 cities validates the opportunities that exist for us in rapidly developing international markets.
 
  •  Accelerate our new restaurant development and expansion:  The expansion of our restaurant network and an increase in the number of new restaurants are key components in our growth plan. We expect that most of our new restaurant growth will come from franchisees. Consequently, our development strategy focuses on ensuring that franchisees in each of our markets have the resources and incentives to grow. First, we have focused on providing our franchisees with a development process that we believe is streamlined, financially flexible and capital-efficient. As part of this strategy, we developed new, smaller restaurant designs that reduce the level of capital investment required, while also addressing a change in consumer preference from dine-in to drive-thru (62% of U.S. Company restaurant sales are currently made in the drive-thru). These smaller restaurant models reduce average building costs by approximately 25%. We are also actively pursuing co-branding and site sharing programs to reduce initial investment expense and have begun testing a turn-key program that reduces the time and uncertainty associated with new builds.


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  •  Use proactive portfolio management to drive growth:  We intend to use proactive portfolio management to drive growth and optimize our Company restaurant portfolio and franchisee participation in new and existing markets. As part of this ongoing strategy, we will focus on (1) attracting new franchisees to acquire restaurants from existing franchisees; (2) leveraging our existing infrastructure through the acquisition of franchise restaurants in our current or targeted Company markets; and (3) selectively refranchising Company restaurants to provide new opportunities for existing and new franchisees, while maintaining our approximately 90/10 franchise to Company restaurant ownership mix. In April 2008, we completed a 56-restaurant acquisition in the Carolinas with Heartland Southeast and, in July 2008, we acquired 72 restaurants in Iowa and Nebraska from Simmonds Restaurant Management. These two acquisitions allow us to develop our Company restaurant portfolio in attractive markets, enabling us to leverage our existing infrastructure and established brand presence. In addition, we closed under-performing restaurants in the United Kingdom (“U.K.”) and sold certain Company restaurants in Germany and Canada which, due to their geography, were attractive to our local franchisees.
 
  •  Employ innovative marketing strategies and expand product offerings:   We intend to continue to employ innovative and creative marketing strategies to increase our restaurant traffic and comparable sales. We will utilize our successful barbell menu strategy to offer more choices to our guests and enhance the price/value proposition of our products. As part of this strategy, in fiscal 2008, we expanded our indulgent menu and launched limited time offers, including the Steakhouse Burger and the BBQ Bacon Tendercrisp® chicken sandwich in the United States and the Three Pepper Angus Burger, the Double Angus Burger and the Chorizo Angus in EMEA. At the other end of the barbell menu, we focused on new product offerings in our BKtm Value Menu and BKtm Breakfast Value Menu (the first national breakfast value menu in the FFHR category). We are also focusing on our SuperFamily customers, introducing for fiscal 2009 two new kid’s menu alternatives, nutritionally fortified KRAFT® Macaroni & Cheese and BKtm Fresh Apple Fries. Finally, we continue to introduce new products to fill gaps in our breakfast, dessert and snack menu offerings. We intend to roll-out several new and limited time offer products during the remainder of fiscal 2009.
 
Global Operations
 
We operate in three reportable segments: (i) the United States and Canada; (ii) Europe, the Middle East, Africa and Asia Pacific, or EMEA/APAC; and (iii) Latin America. Additional financial information about geographic segments is incorporated herein by reference to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and Segment Reporting in Part II, Item 8 in Note 21 of this Form 10-K.
 
United States and Canada
 
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. As of June 30, 2008, 984 Company restaurants and 6,528 franchise restaurants were operating in the United States and Canada. We believe our restaurants appeal to a broad spectrum of consumers, with multiple day parts appealing to different customer groups.
 
Operating Procedures and Hours of Operation.  All of our restaurants must adhere to strict standardized operating procedures and requirements which we believe are critical to the image and success of the Burger King brand. Each restaurant is required to follow the Manual of Operating Data, an extensive operations manual containing mandatory restaurant operating standards, specifications and procedures prescribed from time to time to assure uniformity of operations and consistent high quality of products at Burger King restaurants. Among the requirements contained in the Manual of Operating Data are standard design, equipment system, color scheme and signage, operating procedures, hours of operation and standards of quality for products and services.
 
Commencing in June 2008, we required restaurants in the United States to be open until at least 2 a.m., Thursday through Saturday and to be open by at least 6 a.m., Monday through Saturday. Restaurants in the United States and Canada are required to be open until at least midnight on the remaining days of the week. We believe that reducing the gap between our operating hours and those of our competitors will be a key component in capturing a greater share of FFHR sales in the United States and Canada.


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Management.  Substantially all of our executive management, finance, marketing, legal and operations support functions are conducted from our global restaurant support center in Miami, Florida. There is also a field staff consisting of operations, training, and real estate and marketing personnel who support Company restaurant and franchise operations in the United States and Canada. Our franchise operations are organized into eight divisions, each of which is headed by a division vice president supported by field personnel who interact directly with the franchisees. Each Company restaurant is managed by one restaurant manager and one to three assistant managers, depending upon the restaurant’s sales volume. Management of a franchise restaurant is the responsibility of the franchisee, who is trained in our techniques and is responsible for ensuring that the day-to-day operations of the restaurant are in compliance with the Manual of Operating Data.
 
Restaurant Menu.  Our barbell menu strategy of expanding our high-margin indulgent products and our value products and our goal of expanding the dayparts that we serve are the core drivers of our product offerings. The basic menu of all of our restaurants consists of hamburgers, cheeseburgers, chicken and fish sandwiches, breakfast items, french fries, onion rings, salads, desserts, soft drinks, shakes, milk and coffee. However, as we expand our hours of operation we have, and expect to continue to, introduce new breakfast, dessert and snack menu offerings which will complement our core products. We will also continue to use limited time offers, such as the Indy Whopper sandwich we offered in fiscal 2008, to provide guests with innovative taste experiences. Franchisees must offer all mandatory menu items.
 
Restaurant Design and Image.  Our restaurants consist of several different building types with various seating capacities. The traditional Burger King restaurant is free-standing, ranging in size from approximately 1,900 to 4,300 square feet, with seating capacity of 40 to 120 guests, drive-thru facilities and adjacent parking areas. Some restaurants are located in airports, shopping malls, toll road rest areas and educational and sports facilities. In fiscal 2005, we developed new, smaller restaurant designs that reduce the average building costs by approximately 25%. The seating capacity for these smaller restaurant designs is between 40 and 80 guests. We believe this seating capacity is adequate since approximately 62% of our U.S. Company restaurant sales are made at the drive-thru. We and our franchisees have opened 167 new restaurants in the United States and Canada in this format through June 30, 2008.
 
In fiscal 2008, we began our reimaging initiative for our Company restaurants in the U.S. and Canada. This initiative includes the remodeling or scraping and rebuilding of Company restaurants where we believe a new modernized exterior and interior image can drive additional sales. During fiscal 2008, we reimaged a total of 32 Company restaurants and, as of the date of this report, we had 19 additional restaurants in progress.
 
New Restaurant Development.  We employ a sophisticated and disciplined market planning and site selection process through which we identify trade areas and approve restaurant sites throughout the United States and Canada that will provide for quality expansion. We have established a development committee to oversee all new restaurant development within the United States and Canada. Our development committee’s objective is to ensure that every proposed new restaurant location is carefully reviewed and that each location meets the stringent requirements established by the committee, which include factors such as site accessibility and visibility, traffic patterns, signage, parking, site size in relation to building type and certain demographic factors. Our model for evaluating sites accounts for potential changes to the site, such as road reconfiguration and traffic pattern alterations.
 
Each franchisee wishing to develop a new restaurant is responsible for selecting a new site location. However, we work closely with our franchisees to assist them in selecting sites. They must agree to search for a potential site within an identified trade area and to have the final site location approved by the development committee.
 
We increased our restaurant count in the U.S. and Canada by 24 restaurants during fiscal 2008, the first year of net restaurant growth in this segment in six years. We have instituted several initiatives to accelerate restaurant development in the United States, including reduced upfront franchise fees, process simplifications and turnkey development assistance programs, which reduce the time and uncertainty associated with opening new restaurants.
 
Company Restaurants
 
As of June 30, 2008, we owned and operated 984 restaurants in the United States and Canada, representing 13% of total U.S. and Canada system-wide restaurants. Included in this number are 31 restaurants that were owned by a joint venture between us and an independent third party. The joint venture was dissolved on June 30, 2008 and,


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effective July 1, 2008, these restaurants have been operated as Company restaurants. Out of our 984 Company restaurants, we own the properties for 348 restaurants and we lease the remaining 636 properties from third-party landlords. Our Company restaurants in the United States and Canada generated $1.2 billion in revenues in fiscal 2008, or 74% of our total U.S. and Canada revenues and 48% of our total worldwide revenues. We also use our Company restaurants to test new products and initiatives before rolling them out to the wider Burger King system.
 
The following table details the top ten locations of our Company restaurants in the United States and Canada as of June 30, 2008:
 
                     
              % of Total U.S. and
 
        Company
    Canada Company
 
Rank
 
State/Province
  Restaurant Count     Restaurants  
 
1
  Florida     243       25 %
2
  North Carolina     108       11 %
3
  Ontario     71       7 %
4
  Indiana     70       7 %
5
  Georgia     51       5 %
6
  South Carolina     50       5 %
7
  Massachusetts     44       4 %
8
  Virginia     44       4 %
9
  Ohio     40       4 %
10
  Connecticut     33       3 %
 
In addition, in July 2008, we acquired 72 restaurants in Iowa and Nebraska from one of our franchisees.
 
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 June 30, 2008, there were 6,528 franchise restaurants, owned by 777 franchise operators, in the United States and Canada. Franchisees report gross sales on a monthly basis and pay royalties based on reported sales. Franchise restaurants in the United States and Canada generated revenues of $318 million in fiscal 2008, or 59% of our total worldwide franchise revenues. The five largest franchisees in the United States and Canada in terms of restaurant count represented in the aggregate approximately 16% of our franchise restaurants in this segment as of June 30, 2008.
 
The following table details the top ten locations of our franchisees’ restaurants in the United States and Canada as of June 30, 2008:
 
                     
              % of Total U.S. and
 
        Franchise
    Canada Franchise
 
Rank
 
State/Province
  Restaurant Count     Restaurants  
 
1
  California     673       10 %
2
  Texas     429       7 %
3
  Michigan     336       5 %
4
  New York     319       5 %
5
  Ohio     311       5 %
6
  Illinois     303       5 %
7
  Florida     300       5 %
8
  Pennsylvania     235       4 %
9
  Georgia     210       3 %
10
  New Jersey     187       3 %


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The following is a list of the five largest franchisees in terms of restaurant count in the United States and Canada as of June 30, 2008:
 
                 
        Restaurant
     
Rank
 
Name
  Count    
Location
 
1
  Carrols Corporation     318     Northeast and Midwest
2
  Stategic Restaurants Acquisition Company, LLC     264     California, Midwest and Southeast
3
  Heartland Food Corp.      221     Midwest
4
  Army Air Force Exchange Services     125     Across the United States
5
  Bravokilo, Inc./BravoGrande, Inc.      120     Midwest
 
Franchise Agreement Terms.  For each franchise restaurant, we enter into a franchise agreement covering a standard set of terms and conditions. The typical franchise agreement in the United States and Canada has a 20-year term (for both initial grants and renewals of franchises) and contemplates a one-time franchise fee of $50,000, which must be paid in full before the restaurant opens for business, or in the case of renewal, before expiration of the current franchise term. In recent years, however, we have offered franchisees reduced upfront franchise fees to encourage U.S. franchisees to open new restaurants.
 
Recurring fees consist of monthly royalty and advertising payments. Franchisees in the United States and Canada are generally required to pay us an advertising contribution equal to a percentage of gross sales, typically 4%, on a monthly basis. In addition, most existing franchise restaurants in the United States and Canada pay a royalty of 3.5% and 4% of gross sales, respectively, on a monthly basis. As of July 1, 2000, a new royalty rate structure became effective in the United States for most new franchise agreements, including both new restaurants and renewals of franchises, but limited exceptions were made for agreements that were grandfathered under the old fee structure or entered into pursuant to certain early renewal incentive programs. In general, new franchise restaurants opened and franchise agreement renewals in the United States after June 30, 2003 will generate royalties at the rate of 4.5% of gross sales for the full franchise term. As of June 30, 2008, the average royalty rate in the United States was 3.8%.
 
Franchise agreements are not assignable without our consent, and we have a right of first refusal if a franchisee proposes to sell a restaurant. Defaults (including non-payment of royalties or advertising contributions, or failure to operate in compliance with the terms of the Manual of Operating Data) can lead to termination of the franchise agreement. We can control the growth of our franchisees because we have the right to veto any restaurant acquisition or new restaurant opening. These transactions must meet our minimum approval criteria to ensure that franchisees are adequately capitalized and that they satisfy certain other requirements.
 
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 $89 million of our property revenues in fiscal 2008, or 73% of our total worldwide property revenues.
 
For properties that we lease from third-party landlords and sublease to franchisees, leases generally provide for fixed rental payments and may provide for contingent rental payments based on a restaurant’s annual gross sales. Franchisees who lease land only or land and building from us do so on a “triple net” basis. Under these triple net leases, the franchisee is obligated to pay all costs and expenses, including all real property taxes and assessments, repairs and maintenance and insurance. As of June 30, 2008, we leased or subleased to franchisees in the United States and Canada 917 properties, of which we own 454 properties and lease either the land or the land and building from third-party landlords on the remaining 463 properties.
 
Europe, the Middle East and Africa/Asia Pacific (EMEA/APAC)
 
Restaurant Operations
 
EMEA.  EMEA is the second largest geographic area in the Burger King system behind the United States as measured by number of restaurants. As of June 30, 2008, EMEA had 2,379 restaurants in 31 countries and


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territories, including 283 Company restaurants located in the U.K., Germany, Spain, The Netherlands and Italy. Germany is the largest market in EMEA with 620 restaurants as of June 30, 2008.
 
APAC.  As of June 30, 2008, APAC had 672 restaurants in 13 countries and territories, including China, Malaysia, Thailand, Australia, Philippines, Singapore, New Zealand, South Korea, Indonesia, and Japan. All of the restaurants in the region other than our nine Company restaurants in China are franchised. Australia is the largest market in APAC, with 318 restaurants as of June 30, 2008, all of which are franchised and operated under Hungry Jack’s, a brand that we own in Australia and New Zealand. Australia is the only market in which we operate under a brand other than Burger King. We believe there is significant potential for growth in APAC, particularly in our existing markets of South Korea, Hong Kong, Singapore, Malaysia, China and the Philippines and in new markets such as Japan and Indonesia.
 
Our restaurants located in EMEA/APAC generally adhere to the standardized operating procedures and requirements followed by U.S. restaurants. However, regional and country-specific market conditions often require some variation in our standards and procedures. Some of the major differences between U.S. and EMEA/APAC operations are discussed below.
 
Management Structure.  Our EMEA headquarters are located in Zug, Switzerland and our APAC headquarters are located in Singapore. In addition, we operate restaurant support centers located in Madrid, London, and Munich (for EMEA) and Shanghai (for APAC). These centers are staffed by teams who support both franchised operations and Company restaurants.
 
Menu and Restaurant Design.  Restaurants must offer certain global Burger King menu items. In many countries, special products developed to satisfy local tastes and respond to competitive conditions are also offered. Many restaurants are in-line facilities in smaller, attached buildings without a drive-thru or in food courts rather than free-standing buildings. In addition, the design, facility size and color scheme of the restaurant building may vary from country to country due to local requirements and preferences. We and our franchisees have opened 94 new restaurants with the smaller building designs in EMEA/APAC through June 30, 2008.
 
New Restaurant Development.  Unlike the United States and Canada, where all new development must be approved by the development committee, our market planning and site selection process in EMEA/APAC is managed by our regional teams, who are knowledgeable about the local market. In several of our markets, there is typically a single franchisee that owns and operates all of the restaurants within a country. We have identified opportunities for extending the reach of the Burger King brand in most of our existing markets in EMEA and APAC. Over the past two years our franchisees opened restaurants in six new markets in EMEA/APAC: Poland, Japan, Indonesia, Egypt, Bulgaria and Romania. We are also considering the possibility of entering into other EMEA/APAC markets, including countries in Eastern Europe, the Mediterranean and the Middle East, and we are in the process of identifying prospective new franchisees for these markets.
 
Company Restaurants
 
As of June 30, 2008, 283 (or 12%) of the restaurants in EMEA were Company restaurants. There are nine Company restaurants in APAC, all of which are located in China.
 
The following table details Company restaurant locations in EMEA as of June 30, 2008:
 
                         
          Company
    % of Total EMEA
 
Rank
   
Country
  Restaurant Count     Company Restaurants  
 
  1     Germany     150       53 %
  2     United Kingdom     66       23 %
  3     Spain     44       16 %
  4     Netherlands     22       8 %
  5     Italy     1       0 %
                         
        Total     283       100 %


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Franchise Operations
 
As of June 30, 2008, 2,759 or 90% of our restaurants in EMEA/APAC were franchised. Some of our international markets, including Hungary, Portugal, South Korea and the Philippines, are operated by a single franchisee. Other markets, such as the U.K., Germany and Spain, have multiple franchisees. In general, we enter into a franchise agreement for each restaurant. International franchise agreements generally contemplate a one-time franchise fee of $50,000, with monthly royalties and advertising contributions each of up to 5% of gross sales.
 
We have granted master franchises in Australia and Turkey, where the franchisees are allowed to sub-franchise restaurants within their particular territory. Additionally, in New Zealand and certain Middle East and Persian Gulf countries, we have entered into arrangements with franchisees under which they have agreed to nominate third parties to develop and operate restaurants within their respective territories under franchise agreements with us. As part of these arrangements, the franchisees have agreed to provide certain support services to third party franchisees on our behalf, and we have agreed to share the franchise fees and royalties paid by such third party franchisees. Our largest franchisee in the Middle East and Persian Gulf is also allowed to grant development rights with respect to each country within its territory. We have also entered into exclusive development agreements with franchisees in a number of countries throughout EMEA/APAC, including, most recently, Japan and Egypt. These exclusive development agreements generally grant the franchisee exclusive rights to develop restaurants in a particular geographic area and contain growth clauses requiring franchisees to open a minimum number of restaurants within a specified period.
 
The following is a list of the five largest franchisees in terms of restaurant count in EMEA/APAC as of June 30, 2008:
 
                 
Rank
 
Name
  Restaurant Count    
Location
 
1
  Hungry Jack’s Pty Ltd.      261     Australia
2
  Tab Gida     208     Turkey
3
  Compass SSP     91     United Kingdom
4
  Olayan     90     Saudi Arabia
5
  Al-Homaizi     86     Kuwait
 
Property Operations
 
Our property operations in EMEA primarily consist of franchise restaurants located in the U.K., Germany and Spain, which we lease or sublease to franchisees. We have no franchisee-operated properties in APAC. Of the 103 properties in EMEA that we lease or sublease to franchisees, we own four properties and lease the land and building from third party landlords on the remaining 99 properties. Our EMEA property operations generated $33 million of our revenues in fiscal 2008, or 27% of our total worldwide property revenues.
 
Lease terms on properties that we lease or sublease to our EMEA franchisees vary from country to country. These leases generally provide for 25-year terms, depending on the term of the related franchise agreement. We lease most of our properties from third party landlords and sublease them to franchisees. These leases generally provide for fixed rental payments based on our underlying rent plus a small markup. In general, franchisees are obligated to pay for all costs and expenses associated with the restaurant property, including property taxes, repairs and maintenance and insurance. In the U.K., many of our leases for our restaurant properties are subject to rent reviews every five years, which may result in rent adjustments to reflect current market rents for the next five years.
 
Latin America
 
As of June 30, 2008, we had 1,002 restaurants in 25 countries and territories in Latin America. There were 84 Company restaurants in Latin America, all located in Mexico, and 918 franchise restaurants in the segment as of June 30, 2008. We are the leader in 16 of the 25 countries and territories in which the Burger King system operates in Latin America, including Mexico and Puerto Rico, in terms of number of restaurants. Mexico is the largest market in this segment, with a total of 390 restaurants as of June 30, 2008, or 39% of the region. Our restaurants in Mexico have consistently had the highest Company restaurant margins worldwide due to a favorable real estate and labor environment. In fiscal 2008, we opened 41 new restaurants in Mexico, of which seven were Company restaurants


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and 34 were franchise restaurants. Additionally, we entered the country of Colombia and re-opened the Island of Curaçao during the same period.
 
The following is a list of the five largest franchisees in terms of restaurant count in Latin America as of June 30, 2008:
 
                 
Rank
 
Name
  Restaurant Count    
Location
 
1
  Caribbean Restaurants, Inc.      175     Puerto Rico
2
  Alsea and affiliates     175     Mexico/Argentina/Chile
3
  Geboy de Tijuana, S.A. de C.V.      58     Mexico
4
  Operadora Exe S.A. de C.V.      45     Mexico
5
  Salvador Safie, Fernando Safie and Ricardo Safie     40     Guatemala
 
Advertising and Promotion
 
We believe sales in the QSR segment can be significantly affected by the frequency and quality of advertising and promotional programs. We believe that three of our major competitive advantages are our strong brand equity, market position and our global franchise network which allow us to drive sales through extensive advertising and promotional programs.
 
Franchisees must make monthly contributions, generally 4% to 5% of gross sales, to our advertising funds, and we contribute on the same basis for Company restaurants. Advertising contributions are used to pay for all expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, public relations and sales promotions. In international markets where there is no Company restaurant presence, franchisees typically manage their own advertising expenditures, and these amounts are not included in the advertising fund. However, as part of our global marketing strategy, we provide these franchisees with assistance in order to deliver a consistent global brand message.
 
In the United States and in those other countries where we have Company restaurants, we coordinate the development, budgeting and expenditures for all marketing programs, as well as the allocation of advertising and media contributions, among national, regional and local markets, subject in the United States to minimum expenditure requirements for media costs and certain restrictions as to new media channels. We are required, however, under our U.S. franchise agreements to discuss the types of media in our advertising campaigns and the percentage of the advertising fund to be spent on media with the recognized franchisee association, currently the National Franchisee Association, Inc. In addition, U.S. franchisees may elect to participate in certain local advertising campaigns at the Designated Market Area (DMA) level by making contributions beyond those required for participation in the national advertising fund. Approximately 76% of DMAs in the United States participated in local advertising campaigns during fiscal 2008. This allows local markets to execute customized advertising and promotions to deliver market specific solutions. We believe that increasing the level of local advertising makes us more competitive in the FFHR category.
 
Our current global marketing strategy is based upon customer choice. We believe that quality, innovation and differentiation drive profitable customer traffic and pricing power over the long term. Our global strategy is focused on our core consumer, the SuperFan, our Have It Your Way brand promise, our core menu items, such as flame broiled hamburgers, french fries and soft drinks, the development of innovative products and the consistent communication of our brand. We concentrate our marketing on television advertising, which we believe is the most effective way to reach our target customer, the SuperFan. SuperFans are consumers who reported eating at a fast food hamburger outlet nine or more times in the past month. We also use radio and Internet advertising and other marketing tools on a more limited basis.
 
Supply and Distribution
 
We establish the standards and specifications for most of the goods used in the development, improvement and operation of our restaurants and for the direct and indirect sources of supply of most of those items. These requirements help us assure the quality and consistency of the food products sold at our restaurants and protect and enhance the image of the Burger King system and the Burger King brand.


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In general, we approve the manufacturers of the food, packaging and equipment products and other products used in Burger King restaurants, as well as the distributors of these products to Burger King restaurants. Franchisees are generally required to purchase these products from approved suppliers. We consider a range of criteria in evaluating existing and potential suppliers and distributors, including product and service consistency, delivery timeliness and financial condition. Approved suppliers and distributors must maintain standards and satisfy other criteria on a continuing basis and are subject to continuing review. Approved suppliers may be required to bear development, testing and other costs associated with our evaluation and review.
 
Restaurant Services, Inc., or RSI, is a not-for-profit, independent purchasing cooperative formed in 1992 to leverage the purchasing power of the Burger King system in the United States. RSI is the purchasing agent for the Burger King system in the United States and negotiates the purchase terms for most equipment, food, beverages (other than branded soft drinks) and other products such as promotional toys and paper products used in our restaurants. RSI is also authorized to purchase and manage distribution services on behalf of the Company restaurants and franchisees who appoint RSI as their agent for these purposes. As of June 30, 2008, RSI was appointed the distribution manager for approximately 94% of the restaurants in the United States. A subsidiary of RSI also purchases food and paper products for our Company and franchise restaurants in Canada under a contract with us. As of June 30, 2008, four distributors service approximately 85% of the U.S. system restaurants and the loss of any one of these distributors would likely adversely affect our business.
 
There is currently no designated purchasing agent that represents franchisees in our international regions. However, we are working closely with our franchisees to implement programs that leverage our global purchasing power and to negotiate lower product costs and savings for our restaurants outside of the United States and Canada. We approve suppliers and use similar standards and criteria to evaluate international suppliers that we use for U.S. suppliers. Franchisees may propose additional suppliers, subject to our approval and established business criteria.
 
In fiscal 2000, we entered into long-term exclusive contracts with The Coca-Cola Company and with Dr Pepper/Seven Up, Inc. to supply Company and franchise restaurants with their products, which obligate Burger King restaurants in the United States to purchase a specified number of gallons of soft drink syrup. These volume commitments are not subject to any time limit. As of June 30, 2008, we estimate that it will take approximately 14 years to complete the Coca-Cola and Dr Pepper purchase commitments. If these agreements were terminated, we would be obligated to pay significant termination fees and certain other costs, including in the case of the contract with Coca-Cola, the unamortized portion of the cost of installation and the entire cost of refurbishing and removing the equipment owned by Coca-Cola and installed in Company restaurants in the three years prior to the termination.
 
Research and Development
 
Company restaurants play a key role in the development of new products and initiatives because we can use them to test and perfect new products, equipment and programs before introducing them to franchisees, which we believe gives us credibility with our franchisees in launching new initiatives. This strategy allows us to keep research and development costs down and simultaneously facilitates the ability to sell new products and to launch initiatives both internally to franchisees and externally to guests.
 
We operate a research and development facility or “test kitchen” at our headquarters in Miami and certain other regional locations. In addition, certain vendors have granted us access to their facilities in the U.K. and China to test new products. While research and development activities are important to our business, these expenditures are not material. Independent suppliers also conduct research and development activities for the benefit of the Burger King system. We believe new product development is critical to our long-term success and is a significant factor behind our comparable sales growth. Product innovation begins with an intensive research and development process that analyzes each potential new menu item, including market tests to gauge consumer taste preferences, and includes an ongoing analysis of the economics of food cost, margin and final price point.
 
We have developed two new broilers including a flexible batch broiler that is significantly smaller, less expensive and easier to maintain than the current broiler used in our restaurants. We have installed the flexible batch broiler in most of our Company restaurants in the United States and Canada. During fiscal 2008, the decrease in our operating margins in the United States and Canada was partially offset by the benefits realized from the flexible


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batch broilers, including lower accelerated depreciation expense and reduced utility costs. While the depreciation benefits have been mostly realized, we expect to continue to benefit from reduced utility costs as a result of these broilers without sacrificing speed, quality or efficiency. Franchisees in the United States and Canada are required to install the new broilers in their restaurants by January 2010. We have filed a patent application with respect to the flexible batch broiler technology and design. We have licensed one of our equipment vendors on an exclusive basis to manufacture and supply the flexible batch broiler to the Burger King system throughout the world.
 
Management Information Systems
 
Franchisees typically use a point of sale, or POS, cash register system to record all sales transactions at the restaurant. We have not historically required franchisees to use a particular brand or model of hardware or software components for their restaurant system. However, we have established specifications to reduce costs, improve service and allow better data analysis and starting in January 2006 have approved three global POS vendors and one regional vendor for each of our three segments to sell these systems to our franchisees. Currently, franchisees report sales manually, and we do not have the ability to verify sales data electronically by accessing their POS cash register systems. We have the right under our franchise agreement to audit franchisees to verify sales information provided to us. The new POS system will make it possible for franchisees to submit their sales and transaction level details to us in near-real-time in a common format, allowing us to maintain one common database of sales information and to make better marketing and pricing decisions. Franchisees are required to replace legacy POS systems with the approved POS system over the next few years, depending on the age of the legacy system. All franchisees must have the new POS systems in their restaurants by no later than January 1, 2014.
 
Quality Assurance
 
We are focused on achieving a high level of guest satisfaction through the close monitoring of restaurants for compliance with our key operations platforms: Clean & Safe, Hot & Fresh and Friendly & Fast. We have uniform operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance and cleanliness of the premises and employee conduct.
 
The Clean & Safe certification is administered by an independent outside vendor whose purpose it is to bring heightened awareness of food safety, and includes immediate follow-up procedures to take any action needed to protect the safety of our customers. We measure our Hot & Fresh and Friendly & Fast operations platforms principally through Guest TracSM, a rating system based on survey data submitted by our customers.
 
We review the overall performance of our operations platforms through an Operations Excellence Review, or OER, which focuses on evaluating and improving restaurant operations and guest satisfaction.
 
All Burger King restaurants are required to be operated in accordance with quality assurance and health standards which we establish, as well as standards set by federal, state and local governmental laws and regulations. These standards include food preparation rules regarding, among other things, minimum cooking times and temperatures, sanitation and cleanliness.
 
We closely supervise the operation of all of our Company restaurants to help ensure that standards and policies are followed and that product quality, guest service and cleanliness of the restaurants are maintained. Detailed reports from management information systems are tabulated and distributed to management on a regular basis to help maintain compliance. In addition, we conduct scheduled and unscheduled inspections of Company and franchise restaurants throughout the Burger King system.
 
Intellectual Property
 
As of June 30, 2008, we and our wholly-owned subsidiaries, Burger King Corporation and Burger King Brands, Inc., owned approximately 2,445 trademark and service mark registrations and applications and approximately 620 domain name registrations around the world, some of which are of material importance to our business. Depending on the jurisdiction, trademarks and service marks generally are valid as long as they are used and/or registered. We also have established the standards and specifications for most of the goods and services used in the


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development, improvement and operation of Burger King restaurants. These proprietary standards, specifications and restaurant operating procedures are trade secrets owned by us. Additionally, we own certain patents relating to equipment used in our restaurants and provide proprietary product and labor management software to our franchisees. Patents are of varying duration.
 
Competition
 
We operate in the FFHR category of the QSR segment within the broader restaurant industry. Our two main domestic competitors in the FFHR category are McDonald’s Corporation, or McDonald’s, and Wendy’s International, Inc., or Wendy’s. To a lesser degree, we compete against national food service businesses offering alternative menus, such as Subway, Yum! Brands, Inc.’s Taco Bell, Pizza Hut and Kentucky Fried Chicken, casual restaurant chains, such as Applebee’s, Chili’s, Ruby Tuesday’s and “fast casual” restaurant chains, such as Panera Bread, as well as convenience stores and grocery stores that offer menu items comparable to that of Burger King restaurants. We compete on the basis of price, service and location and by offering quality food products.
 
Our largest U.S. competitor, McDonald’s, has significant international operations. Non-FFHR based chains, such as KFC and Pizza Hut, have many outlets in international markets that compete with Burger King and other FFHR chains. In addition, Burger King restaurants compete internationally against local FFHR chains, sandwich shops, bakeries and single-store locations.
 
Government Regulation
 
We are subject to various federal, state and local laws affecting the operation of our business, as are our franchisees. Each Burger King restaurant is subject to licensing and regulation by a number of governmental authorities, which include zoning, health, safety, sanitation, building and fire agencies in the jurisdiction in which the restaurant is located. Difficulties in obtaining, or the failure to obtain, required licenses or approvals can delay or prevent the opening of a new restaurant in a particular area.
 
In the United States, we are subject to the rules and regulations of the Federal Trade Commission, or the FTC, and various state laws regulating the offer and sale of franchises. The FTC and various state laws require that we furnish to certain prospective franchisees a franchise disclosure document containing proscribed information. A number of states, in which we are currently franchising, regulate the sale of franchises and require registration of the franchise disclosure document with state authorities and the delivery of a franchise disclosure document to prospective franchisees. We are currently operating under exemptions from registration in several of these states based upon our net worth and experience. Substantive state laws that regulate the franchisor/franchisee relationship presently exist in a substantial number of states. These state laws often limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply.
 
Company restaurant operations and our relationships with franchisees are subject to federal and state antitrust laws. Company restaurant operations are also subject to federal and state laws governing such matters as consumer protection, privacy, wages, working conditions, citizenship requirements, health insurance and overtime. Some states have set minimum wage requirements higher than the federal level.
 
In addition, we may become subject to legislation or regulation seeking to tax and/or regulate high-fat and high-sodium foods, particularly in the United States, the U.K. and Spain. For example, in New York City, restaurants and other food service establishments were required to phase out artificial trans fat by July 1, 2008. In addition, the City of Philadelphia has passed a law that requires restaurants to phase out artificial trans fat by September 1, 2008. Other counties and municipalities have adopted a ban on trans fat in restaurant foods, and more than 12 states are considering adopting such laws. We have begun the rollout of a trans fat free cooking oil to our Company restaurants in the United States. Two trans fat free oil blends have passed our operational, supply and consumer criteria, allowing us to begin the national rollout. We expect that all U.S. restaurants will be using trans fat free cooking oil and serving trans fat free par fried and baked goods by the end of October 2008.
 
Certain counties and municipalities, such as New York City, San Francisco and King County, have approved menu labeling legislation that requires restaurant chains to provide caloric information on menu boards. Other


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counties and municipalities have announced they are considering or proposing menu labeling legislation, including San Mateo, California and Philadelphia. Additional cities or states may propose to adopt trans fat restrictions, menu labeling or similar regulations. Finally, the City of Los Angeles has adopted a ban on the development of new quick service restaurants in certain districts of the City in an attempt to address the high rates of obesity in such districts.
 
In addition, public interest groups have focused attention on the marketing of high-fat and high-sodium foods to children in a stated effort to combat childhood obesity, and legislators in the United States have proposed legislation to restore the FTC’s authority to regulate children’s advertising. We have signed an advertising pledge in the United States, which is a voluntary commitment to change the way we advertise to children under the age of 12 in the United States.
 
Internationally, our Company and franchise restaurants are subject to national and local laws and regulations, which are generally similar to those affecting our U.S. restaurants, including laws and regulations concerning franchises, labor, health, privacy, sanitation and safety. For example, regulators in the U.K. have adopted restrictions on television advertising of foods high in fat, salt or sugar targeted at children. In addition, the Spanish government and certain industry organizations have focused on reducing advertisements that promote large portion sizes. We have signed the EU Pledge, which is a voluntary commitment to the European Commission to change our advertising to children under the age of 12 in the European Union. Our international restaurants are also subject to tariffs and regulations on imported commodities and equipment and laws regulating foreign investment.
 
Working Capital
 
Information about the Company’s working capital (changes in current assets and liabilities) is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and in the Consolidated Statements of Cash Flows in Financial Statements and Supplementary Data in Part II, Item 8.
 
Environmental Matters
 
We are not aware of any federal, state or local environmental laws or regulations that will materially affect our earnings or competitive position or result in material capital expenditures. However, we cannot predict the effect on our operations of possible future environmental legislation or regulations.
 
Customers
 
Our business is not dependent upon a single customer or a small group of customers, including franchisees. No franchisees or customers accounted for more than 10% of total consolidated revenues in fiscal 2008.
 
Government Contracts
 
No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.
 
Seasonal Operations
 
Our business is moderately seasonal. Restaurant sales are typically higher in the spring and summer months (our fourth and first fiscal quarters) when weather is warmer than in the fall and winter months (our second and third fiscal quarters). Restaurant sales during the winter are typically highest in December, during the holiday shopping season. Our restaurant sales and Company restaurant margins are typically lowest during our third fiscal quarter, which occurs during the winter months and includes February, the shortest month of the year. Because our business is moderately seasonal, results for any one quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
 
Our Employees
 
As of June 30, 2008, we had approximately 41,000 employees in our Company restaurants, our field management offices and our global headquarters. As franchisees are independent business owners, they and their employees are not included in our employee count. We consider our relationship with our employees to be good.


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Financial Information about Business Segments and Geographic Areas
 
Financial information about our significant geographic areas (U.S. & Canada, EMEA/APAC and Latin America) is incorporated herein by reference from Selected Financial Data in Part II, Item 6; Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7; and in Financial Statements and Supplementary Data in Part II, Item 8 of this Form 10-K.
 
Available Information
 
The Company makes available free of charge on or through the Investor Relations section of its internet website at www.bk.com, this annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, annual proxy statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission (“SEC”). This information is also available at www.sec.gov, an internet site maintained by the SEC that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The material may also be read and copied by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. The references to our website address and the SEC’s website address do not constitute incorporation by reference of the information contained in these websites and should not be considered part of this document.
 
Our Corporate Governance Guidelines, our Code of Business Ethics and Conduct, our Code of Ethics for Executive Officers, our Code of Conduct for Directors and our Code of Business Ethics and Conduct for Vendors are also located within the Investor Relations section of our website. These documents, as well as our SEC filings and copies of financial and other information, are available in print free of charge to any shareholder who requests a copy from our Investor Relations Department. Requests to Investor Relations may also be made by calling (305) 378-7696, or by sending the request to Investor Relations, Burger King Holdings, Inc., 5505 Blue Lagoon Drive, Miami, FL 33126.
 
The Company’s Chief Executive Officer, John W. Chidsey, certified to the New York Stock Exchange (NYSE) on December 27, 2007, pursuant to section 303A.12 of the NYSE’s listing standards, that he was not aware of any violation by the Company of the NYSE’s corporate governance listing standards as of that date.
 
Executive Officers of the Registrant
 
             
Name
 
Age
 
Position
 
John W. Chidsey
    46     Chairman and Chief Executive Officer
Russell B. Klein
    51     EVP and President, Global Marketing, Strategy and Innovation
Ben K. Wells
    54     EVP and Chief Financial Officer
Julio A. Ramirez
    54     EVP, Global Operations
Peter C. Smith
    52     EVP and Chief Human Resources Officer
Anne Chwat
    49     EVP, General Counsel, Chief Ethics and Compliance Officer and Secretary
Charles M. Fallon, Jr. 
    45     EVP and President, North America
Peter Robinson
    60     EVP and President, EMEA
 
John W. Chidsey has served as our Chief Executive Officer and a member of our board since April 2006 and as Chairman of the Board since July 1, 2008. From September 2005 until April 2006, he was our President and Chief Financial Officer and from June 2004 until September 2005, he was our President, North America. Mr. Chidsey joined us as Executive Vice President, Chief Administrative and Financial Officer in March 2004 and held that position until June 2004. From January 1996 to March 2003, Mr. Chidsey served in numerous positions at Cendant Corporation, most recently as Chief Executive Officer of the Vehicle Services Division and the Financial Services Division.


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Russell B. Klein has served as our Executive Vice President and President, Global Marketing, Strategy and Innovation since June 2006. Previously, he served as Chief Marketing Officer from June 2003 to June 2006. From August 2002 to May 2003, Mr. Klein served as Chief Marketing Officer at 7-Eleven Inc. From January 1999 to July 2002, Mr. Klein served as a Principal at Whisper Capital.
 
Ben K. Wells has served as our Executive Vice President and Chief Financial Officer since April 2006. From May 2005 to April 2006, Mr. Wells served as our Senior Vice President and Treasurer. From June 2002 to May 2005 he was a Principal and Managing Director at BK Wells & Co., a corporate treasury advisory firm in Houston, Texas. From June 1987 to June 2002, he was at Compaq Computer Corporation, most recently as Vice President, Corporate Treasurer. Before joining Compaq, Mr. Wells held various finance and treasury responsibilities over a 10-year period at British Petroleum.
 
Julio A. Ramirez has served as our Executive Vice President, Global Operations since September 2007. Mr. Ramirez has worked for Burger King Corporation for over 23 years. From January 2002 to September 2007, Mr. Ramirez served as our President, Latin America. During his tenure, Mr. Ramirez has held several positions, including Senior Vice President of U.S. Franchise Operations and Development from February 2000 to December 2001 and President, Latin America from 1997 to 2000.
 
Peter C. Smith has served as our Executive Vice President and Chief Human Resources Officer since December 2003. From September 1998 to November 2003, Mr. Smith served as Senior Vice President of Human Resources at AutoNation.
 
Anne Chwat has served as our Executive Vice President, General Counsel, Chief Ethics and Compliance Officer and Secretary since September 2004. In June 2007, Ms. Chwat also began serving as a board member and President of the Have It your Way® Foundation, the charitable arm of the Burger King system. From September 2000 to September 2004, Ms. Chwat served in various positions at BMG Music (now SonyBMG Music Entertainment), including as Senior Vice President, General Counsel and Chief Ethics and Compliance Officer.
 
Charles M. Fallon, Jr. has served as our Executive Vice President and President, North America since June 2006. From November 2002 to June 2006, Mr. Fallon served as Executive Vice President of Revenue Generation for Cendant Car Rental Group, Inc. Mr. Fallon served in various positions with Cendant Corporation, including Executive Vice President of Sales for Avis Rent-A-Car from August 2001 to October 2002.
 
Peter Robinson has served as our Executive Vice President and President, EMEA since October 2006. From 2003 through 2006, Mr. Robinson served as Senior Vice President and President, Pillsbury USA Division.
 
Item 1A.   Risk Factors
 
Special Note Regarding Forward-Looking Statements
 
Certain statements made in this report that reflect management’s expectations regarding future events and economic performance are forward-looking in nature and, accordingly, are subject to risks and uncertainties. These forward-looking statements include statements regarding our intent to focus on sales growth and profitability; our ability to drive sales growth by enhancing the guest experience and reducing the hours of operation gap with our competitors; our intent to expand our international platform and accelerate new restaurant development; our beliefs and expectations regarding system-wide average restaurant sales; our beliefs and expectations regarding franchise restaurants, including their growth potential and our expectations regarding franchisee distress; our expectations regarding opportunities to enhance restaurant profitability and effectively manage margin pressures, including escalating commodity prices and fuel costs; our intention to continue to employ innovative and creative marketing strategies and expand product offerings, including the launching of new and limited time offer products; our intention to focus on our restaurant reimaging program; our ability to use proactive portfolio management to drive financial performance and development; our exploration of initiatives to reduce the initial investment expense, time and uncertainty of new builds; our ability to manage fluctuations in foreign currency exchange and interest rates; our estimates regarding our liquidity, capital expenditures and sources of both, and our ability to fund future operations and obligations; our expectations regarding increasing net restaurant count; our estimates regarding the fulfillment of certain volume purchase commitments; our beliefs regarding the effects of the realignment of our European and Asian businesses; our expectations regarding the impact of accounting


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pronouncements; our intention to renew hedging contracts; our expectations regarding unrecognized tax benefits; and our continued efforts to leverage our global purchasing power. These forward-looking statements are only predictions based on our current expectations and projections about future events. Important factors could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements, including, but not limited to, the risks and uncertainties discussed below.
 
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 and Wendy’s are our principal competitors. As our competitors expand their operations, including through acquisitions or otherwise, we expect competition to intensify. We also compete against regional hamburger restaurant chains, such as Carl’s Jr., Jack in the Box and Sonic. Some of our competitors have substantially greater financial and other resources than we do, which may allow them to react to changes in pricing, marketing and the quick service restaurant segment in general better than we can.
 
To a lesser degree, we compete against national food service businesses offering alternative menus, such as Subway and Yum! Brands, Inc.’s Taco Bell, Pizza Hut and Kentucky Fried Chicken, casual restaurant chains, such as Applebee’s, Chili’s, Ruby Tuesday’s and “fast casual” restaurant chains, such as Panera Bread, as well as convenience stores and grocery stores that offer menu items comparable to that of Burger King restaurants. In one of our major European markets, the U.K., much of the growth in the quick service restaurant segment is expected to come from bakeries, sandwich shops and new entrants that are appealing to changes in consumer preferences away from the FFHR category.
 
Finally, the restaurant industry has few barriers to entry, and therefore new competitors may emerge at any time. To the extent that one of our existing or future competitors offers items that are better priced or more appealing to consumer tastes or a competitor increases the number of restaurants it operates in one of our key markets or offers financial incentives to personnel, franchisees or prospective sellers of real estate in excess of what we offer, or a competitor has more effective advertising and marketing programs than we do, it could have a material adverse effect on our financial condition and results of operations. We also compete with other restaurant chains and other retail businesses for quality site locations and hourly employees.
 
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 increasing our net restaurant count in our international markets. We can increase our net restaurant count by opening new international restaurants in both existing and new markets and by minimizing the number of closures in our existing markets. We and our franchisees face many challenges in opening new international restaurants, including, among others:
 
  •  the selection and availability of suitable restaurant locations;
 
  •  the negotiation of acceptable lease terms;
 
  •  the availability of bank credit and the ability of franchisees to obtain acceptable financing terms;
 
  •  securing required foreign governmental permits and approvals;
 
  •  securing acceptable suppliers;
 
  •  employing and training qualified personnel; and
 
  •  consumer preferences and local market conditions.
 
We expect that most of our international growth will be accomplished through the opening of additional franchise restaurants. However, our franchisees may be unwilling or unable to increase their investment in our


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system by opening new restaurants, particularly if their existing restaurants are not generating positive financial results. Moreover, opening new franchise restaurants depends, in part, upon the availability of prospective franchisees with the experience and financial resources to be effective operators of Burger King restaurants. In the past, we have approved franchisees that were unsuccessful in implementing their expansion plans, particularly in new markets. There can be no assurance that we will be able to identify franchisees who meet our criteria, or if we identify such franchisees, that they will successfully implement their expansion plans.
 
Increases in commodity or other operating costs could harm our profitability and operating results.
 
We and our franchisees purchase large quantities of food and supplies which may be subject to substantial price fluctuations. The cost of the food and supplies we use depends on a variety of factors, many of which are not predictable or within our control. Fluctuations in weather, global supply and demand and the value of the U.S. dollar, commodity market conditions, government tax incentives and other factors could adversely affect the cost, availability and quality of some of our critical products and raw ingredients, including beef, chicken, cheese and cooking oils. Increases in commodity prices could result in higher restaurant operating costs, and the highly competitive nature of our industry may limit our ability to pass increased costs on to our guests. Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs. Moreover, to the extent that we increase the prices for our products, our guests may reduce the number of visits to our restaurants or purchase less expensive menu items, which would have a material adverse effect on our business, results of operation and financial condition.
 
We purchase large quantities of beef and chicken in the United States, which represent approximately 19% and 13% of our food costs, respectively. The market for beef and chicken is particularly volatile and is subject to significant price fluctuations due to seasonal shifts, climate conditions, demand for corn (a key ingredient of cattle and chicken feed), industry demand, international commodity markets and other factors. Demand for corn for use in ethanol, the primary alternative fuel in the United States, has significantly reduced the supply of corn for cattle and chicken feed and has resulted in higher beef and chicken prices. The price of beef and chicken increased in fiscal 2008 and we expect the price of these commodities to continue to be volatile. We do not utilize commodity option or future contracts to hedge commodity prices for beef and do not have long-term pricing arrangements. As a result, we purchase beef and many other commodities at market prices, which fluctuate on a daily basis. We are currently under fixed price contracts with most of our chicken suppliers which expire in December 2008. If the price of beef, chicken or other food products that we use in our restaurants increases in the future and we choose not to pass, or cannot pass, these increases on to our guests, our operating margins would decrease.
 
Increases in energy costs for our Company restaurants, principally electricity for lighting restaurants and natural gas for our broilers, could adversely affect our operating margins and our financial results if we choose not to pass, or cannot pass, these increased costs to our guests. In addition, our distributors purchase gasoline needed to transport food and other supplies to us. Any significant increases in energy costs could result in the imposition of fuel surcharges by our distributors that could adversely affect our operating margins and financial results if we chose not to pass, or cannot pass, these increased costs to our guests.
 
Our international operations subject us to additional risks and costs and may cause our profitability to decline.
 
As of June 30, 2008, our restaurants were operated, directly by us or by franchisees, in 71 foreign countries and U.S. territories (Guam and Puerto Rico, which are considered part of our international business). During fiscal 2007 and 2008, our revenues from international operations were approximately $930 million and $1.043 billion, respectively, or 42% of total revenues for both years. Our results of operations are substantially affected not only by global economic conditions, but also by local operating and economic conditions, which can vary substantially by market. Unfavorable conditions can depress sales in a given market and may prompt promotional or other actions


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that adversely affect our margins, constrain our operating flexibility or result in charges, restaurant closures or sales of Company restaurants. Whether we can manage this risk effectively depends mainly on the following:
 
  •  our ability to manage upward pressure on commodity prices, as well as fluctuations in interest and foreign exchange rates, and local governmental actions to manage national economic conditions, such as consumer spending, inflation rates and unemployment levels;
 
  •  our ability to manage changing labor conditions and difficulties in staffing our international operations;
 
  •  the impact on our margins of labor costs given our labor-intensive business model and the long-term trend toward higher wages in both mature and developing markets and the potential impact of union organizing efforts on day-to-day operations of our restaurants;
 
  •  our ability to manage consumer preferences and respond to changes in consumer preferences;
 
  •  the effects of legal and regulatory changes and the burdens and costs of our compliance with a variety of foreign laws;
 
  •  the effects of any changes to U.S. laws and regulations relating to foreign trade and investments;
 
  •  the effects of increases in the taxes we pay and other changes in applicable tax laws;
 
  •  our ability to manage political and economic instability and anti-American sentiment;
 
  •  the risks of operating in markets such as Brazil and China, in which there are significant uncertainties regarding the interpretation, application and enforceability of laws and regulations and the enforceability of contract rights and intellectual property rights;
 
  •  whether we can develop effective initiatives in underperforming markets that may be experiencing challenges such as low consumer confidence levels, negative consumer perceptions about our foods, slow economic growth or a highly competitive operating environment;
 
  •  the nature and timing of decisions about underperforming markets or assets, including decisions that result in significant impairment charges that reduce our earnings; and
 
  •  our ability to identify and secure appropriate real estate sites and to manage the costs and profitability of our growth in light of competitive pressures and other operating conditions that may limit pricing flexibility.
 
These factors may increase in importance as we expect to open new Company and franchise restaurants in international markets as part of our growth strategy.
 
Our business is affected by changes in consumer preferences and consumer discretionary spending.
 
The restaurant industry is affected by consumer preferences and perceptions. If prevailing health or dietary preferences and perceptions cause consumers to avoid our products in favor of alternative food options, our business could suffer. In addition, negative publicity about our products could materially harm our business, results of operations and financial condition. In recent years, numerous companies in the fast food industry have introduced products positioned to capitalize on the growing consumer preference for food products that are and/or are perceived to be healthful, nutritious, low in calories and low in fat content. Our success will depend in part on our ability to anticipate and respond to changing consumer preferences, tastes and eating and purchasing habits.
 
Our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions, consumer confidence and the availability of discretionary income. We may experience declines in sales during economic downturns, periods of prolonged inflation or due to natural disasters, health epidemics or pandemics, terrorist attacks or the prospect of such events. Challenging economic conditions, particularly in the United States, due to inflationary pressures, higher unemployment rates and unprecedented increases in gasoline prices could result in a decline in consumer discretionary income. Any material decline in the amount of discretionary spending either in the United States or, as we continue to expand internationally, in other countries in which we operate, could reduce traffic in some or all of our restaurants or limit our ability to raise prices, either of which could have a material adverse effect on our financial condition and results of operations.


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Moreover, in the event of a natural disaster or act of terrorism, or the threat of either, we may be required to suspend operations in some or all of our restaurants, which could have a material adverse effect on our business, financial condition and results of operations.
 
Approximately 90% of our restaurants are franchised and this restaurant ownership mix presents a number of disadvantages and risks.
 
Approximately 90% of our restaurants are franchised and we do not expect the percentage of franchise restaurants to change significantly as we implement our growth strategy. Although we believe that this restaurant ownership mix is beneficial to us because the capital required to grow and maintain our system is funded primarily by franchisees, it also presents a number of drawbacks, such as our limited control over franchisees and limited ability to facilitate changes in restaurant ownership. In addition, we are dependent on franchisees to open new restaurants as part of our growth strategy. Franchisees may not have access to the financial resources they need in order to open new restaurants due to the unavailability of credit or other factors beyond their control. Any significant inability to obtain necessary financing on acceptable terms, or at all, could slow our planned growth.
 
Our principal competitors may have greater control over their respective restaurant systems than we do. McDonald’s exercises control through its significantly higher percentage of company restaurants and ownership of franchisee real estate. Wendy’s also has a higher percentage of company restaurants than we do. As a result of the greater number of company restaurants, McDonald’s and Wendy’s may have a greater ability to implement operational initiatives and business strategies, including their marketing and advertising programs.
 
Our franchisees are independent operators, and we have limited control over their restaurant operations or their decision to invest in other businesses.
 
Franchisees are independent operators and have a significant amount of flexibility in running their operations, including the ability to set prices of our products in their restaurants. Their employees are not our employees. Although we can exercise control over our franchisees and their restaurant operations to a limited extent through our ability under the franchise agreements and our Manual of Operating Data to mandate menu items, signage, equipment, hours of operation and standardized operating procedures and approve suppliers, distributors and products, the quality of franchise restaurant operations may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements, such as our cleanliness standards, or may not hire and train qualified managers and other restaurant personnel. While we ultimately can take action to terminate franchisees that do not comply with the standards contained in our franchise agreements and our Manual of Operating Data, we may not be able to identify problems and take action quickly enough and, as a result, our image and reputation may suffer, and our franchise and property revenues could decline.
 
Some of our franchisees have invested in other businesses, including other restaurant concepts. In some cases, these franchisees have used the cash generated by their Burger King restaurants to expand their non Burger King businesses or to subsidize losses incurred by such businesses. We have limited control over the ability of franchisees to invest in other businesses. To the extent that franchisees use the cash from their Burger King restaurants to subsidize their other businesses rather than to pay amounts owed to us for royalties, advertising fund contributions or rents or to expand their Burger King business, our financial results could be adversely affected.
 
Our 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 guests and retain existing guests. If our marketing and advertising programs are unsuccessful, our results of operations could be materially adversely affected. Moreover, because franchisees and Company restaurants contribute to our advertising fund based on a percentage of their gross sales, our advertising fund expenditures are dependent upon sales volumes at system-wide restaurants. If system-wide sales decline, there will be a reduced amount available for our marketing and advertising programs.


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The support of our franchisees is critical for the success of our marketing programs and any new strategic initiatives we seek to undertake. In the United States, we poll our franchisees before introducing any nationally- or locally-advertised price or discount promotion to gauge the level of support for the campaign. In addition, franchisees may elect to participate in certain local advertising campaigns at the Designated Market Area level, and their failure to contribute to local advertising may adversely impact sales in their markets. While we can mandate certain strategic initiatives through enforcement of our franchise agreements, we need the active support of our franchisees if the implementation of these initiatives is to be successful. Although we believe that our current relationships with our franchisees are generally good, there can be no assurance that our franchisees will continue to support our marketing programs and strategic initiatives. For example, we were recently sued by four franchisees in Florida over extended hours of operation, which is one of our important initiatives to drive higher sales. The failure of our franchisees to support our marketing programs and strategic initiatives could adversely affect our ability to implement our business strategy and could materially harm our business, results of operations and financial condition.
 
Our operating results are closely tied to the success of our franchisees.
 
We receive revenues in the form of royalties and fees from our franchisees. As a result, our operating results substantially depend upon our franchisees’ sales volumes, restaurant profitability, and financial viability. However, our franchisees are independent operators, and their decision to incur indebtedness is generally outside of our control and could result in financial distress in the future due to over-leverage.
 
In 2003, many of our franchisees in the United States and Canada were in financial distress primarily due to over-leverage. In response to this situation, we established the Franchisee Financial Restructuring Program, or FFRP program, in February 2003 to address these financial problems. At its peak in August 2003, over 2,540 restaurants were in the FFRP program. As of December 31, 2006, the FFRP program in the United States and Canada was completed. However, there will always be a percentage of franchisees in our system in financial distress and we will continue to provide assistance to these franchisees as needed. As of June 30, 2008, we have an aggregate remaining potential commitment of up to $17 million to fund certain loans to renovate franchise restaurants, make renovations to certain restaurants that we lease or sublease to franchisees, and to provide rent relief and/or contingent cash flow subsidies to certain franchisees.
 
Certain of our U.K. franchisees continue to face financial difficulties affecting their ability to meet their obligations to us, including the payment of royalties, advertising contributions and rent payments.
 
In connection with sales of Company restaurants to franchisees, we have guaranteed certain lease payments of franchisees arising from leases assigned to the franchisees as part of the sale, by remaining secondarily liable for base and contingent rents under the assigned leases of varying terms. The aggregate contingent obligation arising from these assigned lease guarantees, excluding contingent rent, was $101 million as of June 30, 2008, including $67 million in the U.K., expiring over an average period of six years.
 
To the extent that our franchisees experience financial distress, due to over-leverage or otherwise, it could negatively affect (1) our operating results as a result of delayed or reduced payments of royalties, advertising fund contributions and rents for properties we lease to them or claims under our lease guarantees, (2) our future revenue, earnings and cash flow growth and (3) our financial condition. In addition, lenders to our franchisees were adversely affected by franchisees who defaulted on their indebtedness and there can be no assurance that current or prospective franchisees can obtain necessary financing on favorable terms or at all in light of the history of financial distress among franchisees and prevailing market conditions.
 
There can be no assurance that the franchisees can or will renew their franchise agreements with us.
 
Our franchise agreements typically have a 20-year term, and our franchisees may not be willing or able to renew their franchise agreements with us. For example, franchisees may decide not to renew due to low sales volumes, high real estate costs, or may be unable to renew due to the failure to secure lease renewals. In order for a franchisee to renew its franchise agreement with us, it typically must pay a $50,000 franchise fee, remodel its restaurant to conform to our current standards and, in many cases, renew its property lease with its landlord. The average cost to remodel a stand-alone restaurant in the United States ranges from $200,000 to $250,000 and the


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average cost to replace the existing building with a new building is approximately $1 million. Franchisees generally require additional capital to undertake the required remodeling and pay the franchise fee, which may not be available to the franchisee on acceptable terms or at all. If a substantial number of our franchisees cannot or decide not to, renew their franchise agreements with us, then our results of operations and financial condition would suffer.
 
Our operating results may be adversely impacted by temporary restaurant closures and accelerated depreciation expense related to our restaurant reimaging program in the U.S. and Canada.
 
We have embarked on a reimaging program to remodel and rebuild our Company restaurants in the United States and Canada. During fiscal 2008, we spent approximately $26 million on our restaurant reimaging program, and we plan to spend an additional $30 million to $35 million through the end of fiscal 2009. As a result of this program, we have had to temporarily close Company restaurants in the process of being remodeled or rebuilt, and such restaurant closures will continue for the duration of the program. During fiscal 2008, we experienced a net reduction in sales of approximately $1 million as a result of the reimaging program. Although we have not yet experienced a significant impact on our Company restaurant revenues, we expect that, as this program begins to accelerate, these closures will result in additional lost revenues. While we believe that these capital investments will drive increased sales and traffic and ultimately generate increased profits for the improved facilities, there can be no assurance that we will experience a return on investment and, if there is such return, that it will offset the lost revenues resulting from restaurant closures.
 
Moreover, when we decide to remodel or rebuild a restaurant, we are required to depreciate the remaining book value of assets to be disposed of through their disposal date. This accelerated depreciation expense will have an immediate adverse impact on occupancy and other operating costs and, therefore, on our operating margins. During the three and twelve months ended June 30, 2008, accelerated depreciation expense contributed to the increase in occupancy and other operating expense and to the decrease in operating margins.
 
To the extent that the capital investment in our restaurants fails to generate adequate returns to offset the adverse impact on revenues and operating margins of temporary restaurant closures and accelerated depreciation expense, our restaurant reimaging program will be unsuccessful and our revenues, profits and cash position will suffer.
 
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 international operations, as well as the translation of net asset or liability positions that are denominated in foreign currencies. In countries outside of the United States where we operate Company restaurants, we generate revenues and incur operating expenses and selling, general and administrative expenses denominated in local currencies. In many countries where we do not have Company restaurants, our franchisees pay royalties in U.S. dollars. However, as the royalties are calculated based on local currency sales, our revenues are still impacted by fluctuations in exchange rates. In fiscal 2008, income from operations would have decreased or increased $14 million if all foreign currencies uniformly weakened or strengthened by 10% relative to the U.S. dollar.
 
Fluctuations in interest rates may also affect our business. We attempt to minimize this risk and lower our overall borrowing costs through the utilization of derivative financial instruments, primarily interest rate swaps. These swaps are entered into with financial institutions and have reset dates and critical terms that match those of our forecasted interest payments. Accordingly, any change in market value associated with interest rate swaps is offset by the opposite market impact on the related debt. We do not attempt to hedge all of our debt and, as a result, may incur higher interest costs for portions of our debt which are not hedged.
 
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


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third-party food suppliers and distributors outside of our control and/or multiple locations being affected rather than a single restaurant. New illnesses resistant to any precautions may develop in the future, or diseases with long incubation periods could arise, such as bovine spongiform encephalopathy, that could give rise to claims or allegations on a retroactive basis. Reports in the media of one or more instances of food-borne illnesses in one of our restaurants or in one of our competitor’s restaurants could negatively affect our restaurant sales, force the closure of some of our restaurants and conceivably have a national or international impact if highly publicized. This risk exists even if it were later determined that the illness had been wrongly attributed to the restaurant or if our restaurants were not implicated but the cause of the illness was traced to an ingredient used in our products.
 
In addition, other illnesses, such as foot and mouth disease or avian influenza, could adversely affect the supply of some of our food products and significantly increase our costs. In 2007, there was an outbreak of foot and mouth disease in England, which prompted a European-wide ban on live animals, fresh meat and milk products from the U.K. Although this disease is extremely rare in humans, the negative publicity about beef and beef products could adversely affect our sales.
 
Our industry has long been subject to the threat of food tampering by suppliers, employees or guests, such as the addition of foreign objects in the food that we sell. Reports, whether or not true, of injuries caused by food tampering have in the past severely injured the reputations of restaurant chains in the quick service restaurant segment and could affect us in the future as well. Instances of food tampering, even those occurring solely at restaurants of our competitors could, by resulting in negative publicity about the restaurant industry, adversely affect our sales on a local, regional, national or worldwide basis. A decrease in guest traffic as a result of these health concerns or negative publicity could materially harm our business, results of operations and financial condition.
 
We rely on distributors of food, beverages and other products that are necessary for our and our franchisees’ operations. If these distributors fail to provide the necessary products in a timely fashion, our business would face supply shortages and our results of operations might be adversely affected.
 
We and our franchisees are dependent on frequent deliveries of perishable food products that meet our specifications. Four distributors service approximately 85% of our U.S. system restaurants and the loss of any one of these distributors would likely adversely affect our business. Moreover, in many of our international markets, including the U.K., we have a sole distributor that delivers products to all of our restaurants. Our distributors operate in a competitive and low-margin business environment and, as a result, they often extend favorable credit terms to our franchisees. If certain of our franchisees experience financial distress and do not pay distributors for products bought from them, those distributors’ operations would likely be adversely affected which could jeopardize their ability to continue to supply us and our other franchisees with needed products. Finally, unanticipated demand, problems in production or distribution, disease or food-borne illnesses, inclement weather, terrorist attacks or other conditions could result in shortages or interruptions in the supply of perishable food products. As a result of the financial distress of our franchisees or otherwise, we may need to take steps to ensure the continued supply of products to restaurants in the affected markets, which could result in increased costs to distribute needed products. A disruption in our supply and distribution network could have a severe impact on our and our franchisees’ ability to continue to offer menu items to our guests and could adversely affect our and our franchisees’ business, results of operations and financial condition.
 
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 sustain high service levels, our business and our growth could be adversely affected. Competition for these employees could require us to pay higher wages which could result in higher labor costs. In addition, increases in the minimum wage or labor regulations could increase our labor costs. For example, the European markets have seen increased minimum wages due to a higher level of regulation and the U.S. Congress increased the national minimum wage to $6.55, with a further increase to $7.25 effective July 24, 2009. In addition, many states have adopted, and others are considering adopting, minimum wage statutes that exceed the federal minimum wage.


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We may be unable to increase our prices in order to pass these increased labor costs on to our guests, in which case our and our franchisees’ margins would be negatively affected.
 
The loss of key management personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.
 
The success of our business to date has been, and our continuing success will be, dependent to a large degree on the continued services of our executive officers, including John Chidsey, our Chairman and Chief Executive Officer; Russell Klein, our President, Global Marketing, Strategy and Innovation; Ben Wells, our Chief Financial Officer; Julio Ramirez, our Executive Vice President, Global Operations; and other key personnel who have extensive experience in the franchising and food industries. If we lose the services of any of these key personnel and fail to manage a smooth transition to new personnel, our business could suffer.
 
Our U.K. Company restaurant business has and may continue to experience operating losses that may adversely affect our tax positions.
 
We face risks and uncertainties in the U.K. that have resulted and may continue to result in operating losses in the U.K. This underperforming market continues to experience challenges such as difficulties in staffing, negative consumer perceptions about our food and a highly competitive operating environment. Continuing or increasing losses from our Company restaurants in the U.K., along with other factors, could have a negative effect on our ability to utilize foreign tax credits to offset our U.S. income taxes.
 
New tax legislation in Mexico and the results of actions by Mexican taxing authorities may have an adverse effect on our Mexico tax positions and our overall tax rate.
 
During 2007, the Mexican Government instituted a tax structure which will result in companies paying the higher of an income-based tax or an alternative flat tax commencing in fiscal 2008. The alternative flat tax does not currently have a material effect on our Mexico tax positions. Should the facts and circumstances change, we would be required to reevaluate deferred tax assets related to our Mexican operations, which may result in a change to our overall tax rate.
 
The realignment of our European and Asian businesses may result in increased income tax expense to us if these businesses are less profitable than expected.
 
Effective July 1, 2006, we realigned the activities associated with managing our European and Asian businesses, including the transfer of rights of existing franchise agreements, the ability to grant future franchise agreements and utilization of our intellectual property assets, in new European and Asian holding companies. Previously, all cash flows relating to intellectual property and franchise rights in those regions returned to the United States and were subsequently transferred back to those regions to fund their growing capital requirements. We believe this realignment more closely aligns the intellectual property with the respective regions, provides funding in the proper region and lowers our effective tax rate. However, if certain of our European and Asian businesses are less profitable than expected, there could be an adverse impact on our overall effective tax rate, which would result in increased income tax expense to us. In connection with this realignment and the transfer of certain intellectual property to our new European and Asian holding companies, we received from a third-party qualified appraiser valuations of the intellectual property assets. If the IRS were to materially disagree with the valuations or certain other assumptions made in connection with this realignment, it could result in additional income tax liability which could negatively affect our results of operations.
 
Additional tax liabilities could adversely impact our financial results.
 
We are subject to income taxes in both the United States and numerous foreign jurisdictions. In these foreign jurisdictions, changes in statutory tax rates may adversely impact our deferred taxes and effective tax rate. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Tax authorities regularly audit us as part of their routine practice. Although we believe our tax estimates are reasonable,


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the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of a tax audit or related litigation could have a material effect on our income tax provision, net income or cash flows in the period or periods for which that determination is made.
 
Leasing and ownership of a significant portfolio of real estate exposes us and our franchisees to potential losses and liabilities and we or our franchisees may not be able to renew leases, control rent increases and control real estate expenses at existing restaurant locations or obtain leases or purchase real estate for new restaurants.
 
Many of our Company restaurants are presently located on leased premises. In addition, our franchisees generally lease their restaurant locations. At the end of the term of the lease, we or our franchisees might be forced to find a new location to lease or close the restaurant. If we are able to negotiate a new lease at the existing location or an extension of the existing lease, the rent may increase significantly. With respect to the land and buildings that are owned by us or our franchisees, the value of these assets could decrease or costs could increase because of changes in the investment climate for real estate, demographic trends, increases in insurance and taxes and liability for environmental conditions. Any of these events could adversely affect our profitability or our franchisees’ profitability. Some leases are subject to renewal at fair market value, which could involve substantial rent increases, or are subject to renewal with scheduled rent increases, which could result in rents being above fair market value. We compete with numerous other retailers and restaurants for sites in the highly competitive market for retail real estate and some landlords and developers may exclusively grant locations to our competitors. As a result, we may not be able to obtain new leases or renew existing ones on acceptable terms, which could adversely affect our sales and brand-building initiatives. In the U.K., we have approximately 40 leases for properties that we sublease to franchisees in which the lease term with our landlords is longer than the sublease. As a result, we may be liable for lease obligations if such franchisees do not renew their subleases or if we cannot find substitute tenants.
 
Current restaurant locations may become unattractive, and attractive new locations may not be available for a reasonable price, if at all.
 
The success of any restaurant depends in substantial part on its location. There can be no assurance that current locations will continue to be attractive as demographic patterns change. Neighborhood or economic conditions where restaurants are located could decline in the future, thus resulting in potentially reduced sales in these locations. If we or our franchisees cannot obtain desirable locations at reasonable prices, our ability to implement 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 35% of the total assets on our balance sheet as of June 30, 2008, and we believe that our brand is very important to our success and our competitive position. We rely on a combination of trademarks, copyrights, service marks, trade secrets and similar intellectual property rights to protect our brand and branded products. The success of our business depends on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products in both domestic and international markets. We have registered certain trademarks and have other trademark registrations pending in the United States and foreign jurisdictions. Not all of the trademarks that we currently use have been registered in all of the countries in which we do business, and they may never be registered in all of these countries. We may not be able to adequately protect our trademarks, and our use of these trademarks may result in liability for trademark infringement, trademark dilution or unfair competition. The steps we have taken to protect our intellectual property in the United States and in foreign countries may not be adequate. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States.
 
We may, from time to time, be required to institute litigation to enforce our trademarks or other intellectual property rights, or to protect our trade secrets. Such litigation could result in substantial costs and diversion of resources and could negatively affect our sales, profitability and prospects regardless of whether we are able to successfully enforce our rights.


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We may experience significant fluctuations in our operating results due to a variety of factors, many of which are outside of our control.
 
We may experience significant fluctuations in our operating results due to a variety of factors, many of which are outside of our control. Our operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and sales, comparable sales, and average restaurant sales for any future period may decrease. Our results of operations may fluctuate significantly because of a number of factors, including but not limited to, our ability to retain existing guests, attract new guests at a steady rate and maintain guest satisfaction; the announcement or introduction of new or enhanced products by us or our competitors; significant marketing promotions that increase traffic to our stores; the amount and timing of operating costs and capital expenditures relating to expansion of our business; operations and infrastructure; governmental regulation; and the risk factors discussed in this section. Moreover, we may not be able to successfully implement the business strategy described in this Form 10-K and implementing our business strategy may not sustain or improve our results of operations or increase our market share. You should not place undue reliance on our financial guidance, nor should you rely on quarter-to-quarter comparisons of our operating results as indicators of likely future performance.
 
Our indebtedness under our senior secured credit facility is substantial and could limit our ability to grow our business.
 
As of June 30, 2008, we had total indebtedness under our senior secured credit facility of $869 million. Our indebtedness could have important consequences to you.
 
For example, it could:
 
  •  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 indebtedness.
 
In addition, our senior secured credit facility permits us to incur substantial additional indebtedness in the future. As of June 30, 2008, we had $73 million available to us for additional borrowing under our $150 million revolving credit facility portion of our senior secured credit facility. If we increase our indebtedness by borrowing under the revolving credit facility or incur other new indebtedness, the risks described above would increase.
 
Our senior secured credit facility 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.


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Our senior secured credit facility requires us to maintain specified financial ratios. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we may not meet those ratios. A breach of any of these restrictive covenants or our inability to comply with the required financial ratios would result in a default under our senior secured credit facility or require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness. If the banks accelerate amounts owing under our senior secured credit facility because of a default and we are unable to pay such amounts, the banks have the right to foreclose on the stock of BKC and certain of its subsidiaries.
 
A “change in control,” as defined in our senior secured credit facility, would be an event of default under the facility.
 
Under our senior secured credit facility, a “change in control” occurs if any person or group, other than the private equity funds controlled by the Sponsors, acquires more than (1) 25% of our equity value and (2) the equity value controlled by the Sponsors. A change in control is an event of default under our senior secured credit facility. The Sponsors currently control, in the aggregate, approximately 32% of our equity value, and it would be possible for another person or group to effect a “change in control” without our consent. If a change in control were to occur, the banks would have the ability to terminate any commitments under the facility and/or accelerate all amounts outstanding. We may not be able to refinance such outstanding commitments on commercially reasonable terms, or at all. If we were not able to pay such accelerated amounts, the banks under the senior secured credit facility would have the right to foreclose on the stock of BKC and certain of its subsidiaries.
 
We face risks of litigation and pressure tactics, such as strikes, boycotts and negative publicity from restaurant customers, franchisees, suppliers, employees and others, which could divert our financial and management resources and which may negatively impact our financial condition and results of operations.
 
Class action lawsuits have been filed, and may continue to be filed, against various quick service restaurants alleging, among other things, that quick service restaurants have failed to disclose the health risks associated with high-fat foods and that quick service restaurant marketing practices have targeted children and encouraged obesity. We have been sued in California under Proposition 65 to force disclosure of warnings that certain of our products, such as french fries, flame-broiled hamburgers and grilled chicken, may expose customers to potentially cancer-causing chemicals. We have also been sued by the Center for Science in the Public Interest over our use of trans fat oils in seven franchise restaurants located in Washington, D.C. Adverse publicity about these allegations may negatively affect us and our franchisees, regardless of whether the allegations are true, by discouraging customers from buying our products. In addition, we face the risk of lawsuits and negative publicity resulting from illnesses and injuries, including injuries to infants and children, allegedly caused by our products, toys and other promotional items available in our restaurants or our playground equipment.
 
In addition to decreasing our sales and profitability and diverting our management resources, adverse publicity or a substantial judgment against us could negatively impact our business, results of operations, financial condition and brand reputation, hindering our ability to attract and retain franchisees and grow our business in the United States and internationally.
 
In addition, activist groups, including animal rights activists and groups acting on behalf of franchisees, the workers who work for our suppliers and others, have in the past, and may in the future, use pressure tactics to generate adverse publicity about us by alleging, for example, inhumane treatment of animals by our suppliers, poor working conditions or unfair purchasing policies. These groups may be able to coordinate their actions with other groups, threaten strikes or boycotts or enlist the support of well-known persons or organizations in order to increase the pressure on us to achieve their stated aims. In the future, these actions or the threat of these actions may force us to change our business practices or pricing policies, which may have a material adverse effect on our business, results of operations and financial condition.
 
Further, we may be subject to employee, franchisee, customer and other claims in the future based on, among other things, mismanagement of the system, unfair or unequal treatment, discrimination, harassment, violations of privacy and consumer credit laws, wrongful termination and wage, rest break and meal break issues, including those


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relating to overtime compensation. If one or more of these claims were to be successful or if there is a significant increase in the number of these claims, our business, results of operations and financial condition could be harmed.
 
Our products are subject to numerous and changing government regulations, and failure to comply with such existing or future government regulations could negatively affect our sales, revenues and earnings.
 
Our products are subject to numerous and changing government regulations, and failure to comply with such existing or future government regulations could negatively affect our sales, revenues and earnings. In many of our markets, including the United States and Europe, we are subject to increasing regulation regarding our products, which may significantly increase our cost of doing business.
 
Many governmental bodies, particularly those in the United States, the U.K. and Spain, have begun to legislate or regulate high-fat and high-sodium foods as a way of combating concerns about obesity and health. Public interest groups have also focused attention on the marketing of high-fat and high-sodium foods to children in a stated effort to combat childhood obesity and legislators in the United States have proposed legislation to restore the FTC’s authority to regulate children’s advertising. Further, regulators in the U.K. have adopted restrictions on television advertising of foods high in fat, salt or sugar targeted at children. In addition, the Spanish government and certain industry organizations have focused on reducing advertisements that promote large portion sizes. Additional cities or states may propose or adopt similar regulations. We have made voluntary commitments to change our advertising to children under the age of 12 in the United States and European Union. The cost of complying with these regulations could increase our expenses and the negative publicity arising from such legislative initiatives could reduce our future sales.
 
Our food products are also subject to significant complex, and sometimes contradictory, health and safety regulatory risks including:
 
  •  inconsistent standards imposed by state and federal authorities regarding the nutritional content of our products, which can adversely affect the cost of our food, consumer perceptions and increase our exposure to litigation;
 
  •  the impact of nutritional, health and other scientific inquiries and conclusions, which constantly evolve and often have contradictory implications, but nonetheless drive consumer perceptions, litigation and regulation in ways that are material to our business;
 
  •  the risks and costs of our nutritional labeling and other disclosure practices, particularly given differences in practices within the restaurant industry with respect to testing and disclosure, ordinary variations in food preparation among our own restaurants, and reliance on the accuracy and appropriateness of information obtained from third-party suppliers;
 
  •  the impact and costs of menu labeling legislation, currently adopted in New York City and under consideration in various other jurisdictions, which generally requires QSR restaurant chains to provide caloric information on menu boards;
 
  •  the impact of licensing and regulation by state and local departments relating to health, food preparation, sanitation and safety standards; and
 
  •  the impact of laws that ban or limit the development of new quick service restaurants in an attempt to address the high rates of obesity in certain areas, such as the ban recently adopted by the City of Los Angeles.
 
Additional U.S. or foreign jurisdictions may propose to adopt similar regulations. The cost of complying with these regulations could increase our expenses. Additionally, menu labeling legislation may cause some of our guests to avoid certain of our products and/or alter the frequency of their visits.
 
If we fail to comply with existing or future laws and regulations governing our products, we may be subject to governmental or judicial fines or sanctions. In addition, our and our franchisees’ capital expenditures could increase due to remediation measures that may be required if we are found to be noncompliant with any of these laws or regulations.


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Increasing regulatory complexity surrounding our operations will continue to affect our operations and results of operations in material ways.
 
Our legal and regulatory environment worldwide exposes us to complex compliance regimes and similar risks that affect our operations and results of operations in material ways. In many of our markets, including the United States and Europe, we are subject to increasing regulation regarding our operations, which may significantly increase our cost of doing business. In developing markets, we face the risks associated with new and untested laws and judicial systems. Among the more important regulatory risks regarding our operations we face are the following:
 
  •  the impact of minimum wage, overtime, occupational health and safety, employer mandated healthcare, immigration, privacy and other local and foreign laws and regulations on our business;
 
  •  the impact of “no match” regulations issued by the Department of Homeland Security regarding how employers must deal with a mismatch between the name and social security number on record with the Social Security Administration and the name and number provided to employers;
 
  •  the impact of municipal zoning laws that restrict or ban the development of new quick service restaurants;
 
  •  disruptions in our operations or price volatility in a market that can result from governmental actions, including price controls, currency and repatriation controls, limitations on the import or export of commodities we use or government-mandated closure of our or our vendors’ operations;
 
  •  the risks of operating in foreign markets in which there are significant uncertainties, including with respect to the application of legal requirements and the enforceability of laws and contractual obligations; and
 
  •  the risks associated with information security, and the use of cashless payments, such as increased investment in technology, the costs of compliance with privacy, consumer protection and other laws, costs resulting from consumer fraud and the impact on our margins as the use of cashless payments increases.
 
We are also subject to a Federal Trade Commission rule and to various state and foreign laws that govern the offer and sale of franchises. These laws regulate various aspects of the franchise relationship, including terminations and the refusal to renew franchises. The failure to comply with these laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales, fines, other penalties or require us to make offers of rescission or restitution, any of which could adversely affect our business and operating results. We could also face lawsuits by our franchisees based upon alleged violations of these laws.
 
The Americans with Disabilities Act, or ADA, prohibits discrimination on the basis of disability in public accommodations and employment. We have, in the past, been required to make certain modifications to our restaurants pursuant to the ADA. Although our obligations under those requirements are substantially complete, future mandated modifications to our facilities to make different accommodations for disabled persons and modifications required under the Department of Justice’s proposal to ADA could result in material unanticipated expense to us and our franchisees.
 
If we fail to comply with existing or future laws and regulations, we may be subject to governmental or judicial fines or sanctions. In addition, our and our franchisees’ capital expenditures could increase due to remediation measures that may be required if we are found to be noncompliant with any of these laws or regulations.
 
The personal information that we collect may be vulnerable to breach, theft or loss that could adversely affect our reputation and operations.
 
Possession and use of employee, franchisee, vendor and consumer personal information in the ordinary course of our business subjects us to risks and costs that could harm our business. We collect, process, transmit and retain personal information regarding our employees and their families, such as social security numbers, banking and tax ID information, and health care information. We also collect, process, transmit and retain personal information of our franchisees and vendors. In connection with credit card sales, we transmit confidential credit card information securely over public networks. Some of this personal information is held and managed by certain of our vendors.


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Although we use security and business controls to limit access and use of personal information, a third party may be able to circumvent those security and business controls, which could result in a breach of employee, consumer or franchisee privacy. Furthermore, any such breach could result in substantial fines, penalties and potential litigation which could negatively impact our results of operations and financial condition. In addition, errors in the storage, use or transmission of personal information could result in a breach of privacy. Possession and use of personal information in our operations also subjects us to legislative and regulatory burdens that could require notification of data breaches and restrict our use of personal information. We cannot assure you that a breach, loss or theft of personal information will not occur. A major breach, theft or loss of personal information regarding our employees and their families or our franchisees, vendors and consumers that is held by us or our vendors could have a material adverse effect on our reputation and results of operations and result in further regulation and oversight by federal and state authorities and increased costs of compliance.
 
We rely on computer systems and information technology to run our business. Any material failure, interruption or security breach of our computer systems or information technology may adversely affect our business and our results of operations.
 
Computer viruses or terrorism may disrupt our operations and harm our operating results. Despite our implementation of security measures, all of our technology systems are vulnerable to disability or failures due to hacking, viruses, acts of war or terrorism and other causes. In addition, some of our systems and processes are not fully integrated worldwide and, as a result, require us to manually estimate and consolidate certain information that we use to manage our business and prepare our financial statements. If our technology systems were to fail, and we were unable to recover in a timely way, or if we do not adequately manage our financial reporting and information systems, our results of operations and financial condition could be adversely affected.
 
Compliance with or cleanup activities required by environmental laws may hurt our business.
 
We are subject to various federal, state, local and foreign environmental laws and regulations. These laws and regulations govern, among other things, discharges of pollutants into the air and water as well as the presence, handling, release and disposal of and exposure to, hazardous substances. These laws and regulations provide for significant fines and penalties for noncompliance. If we fail to comply with these laws or regulations, we could be fined or otherwise sanctioned by regulators. Third parties may also make personal injury, property damage or other claims against owners or operators of properties associated with releases of, or actual or alleged exposure to, hazardous substances at, on or from our properties.
 
Environmental conditions relating to prior, existing or future restaurants or restaurant sites, including franchised sites, may have a material adverse effect on us. Moreover, the adoption of new or more stringent environmental laws or regulations could result in a material environmental liability to us and the current environmental condition of the properties could be harmed by tenants or other third parties or by the condition of land or operations in the vicinity of our properties.
 
Our results can be adversely affected by disruptions or catastrophic events.
 
Unforeseen events, including war, terrorism and other international conflicts, public health issues, and natural disasters such as earthquakes, hurricanes and other adverse weather and climate conditions, whether occurring in the United States or abroad, could disrupt our operations, disrupt the operations of franchisees, suppliers or customers, have an adverse impact on consumer spending and confidence levels or result in political or economic instability. These events could reduce demand for our products or make it difficult or impossible to receive products from distributors.
 
Our current principal stockholders own a significant amount of our common stock and have certain contractual rights to appoint directors, which will allow them to significantly influence all matters requiring shareholder approval.
 
The private equity funds controlled by the Sponsors beneficially own approximately 32% of our outstanding common stock. In addition, three of our 10 directors are representatives of the private equity funds controlled by the


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Sponsors. Although each Sponsor has currently elected to nominate only one director, each Sponsor retains the right to nominate two directors, subject to reduction and elimination as the stock ownership percentage of the private equity funds controlled by the applicable Sponsor declines. In addition, with respect to each committee of our board other than the audit committee, each Sponsor has the right to appoint at least one director to each committee, for Sponsor directors to constitute a majority of the membership of each committee (subject to NYSE requirements) and for the chairman of each committee to be a Sponsor director until the private equity funds controlled by the Sponsors collectively own less than 30% of our outstanding common stock. As a result of these contractual rights, the Sponsors will continue to have significant influence over our decision to enter into any corporate transaction and may have the ability to prevent any transaction that requires the approval of stockholders, regardless of whether or not other stockholders believe that such transaction is in their own best interests. Such concentration of voting power could have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to our stockholders.
 
Until November 19, 2007, we were a “controlled company” within the meaning of the New York Stock Exchange rules and we may continue to rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.
 
Since November 19, 2007, the private equity funds controlled by the Sponsors have collectively owned less than 50% of the total voting power of our common stock, and we have no longer been a “controlled company” under the New York Stock Exchange, or NYSE, corporate governance listing standards. The NYSE rules require that each of our compensation committee and our nominating and corporate governance committee has only independent directors by November 19, 2008. During the transition period, from November 19, 2007 through November 19, 2008, we are entitled to continue utilizing certain exemptions under the NYSE standards that free us from these requirements. For that portion of the transition period that we use these “controlled company” exemptions, you will not have the same protection afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements. At this time, our audit committee is fully independent. A majority of the members of our compensation and nominating and corporate governance committees is independent and these committees will be fully independent by November 19, 2008.
 
Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.
 
Our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Our board also has the authority to issue debt convertible into shares of common stock. Issuances of common stock, voting preferred stock or convertible debt could reduce your influence over matters on which our stockholders vote, and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.
 
The sale of a substantial number of shares of our common stock may cause the market price of shares of our common stock to decline.
 
Future sales of a substantial number of shares of our common stock, or the perception that such sales might occur, could cause the market price of our common stock to decline. The private equity funds controlled by the Sponsors have approximately 43 million shares, which represents approximately 32% of our common stock issued and outstanding at June 30, 2008 and all of which are subject to registration rights.
 
Provisions in our certificate of incorporation could make it more difficult for a third party to acquire us and could discourage a takeover and adversely affect existing stockholders.
 
Our certificate of incorporation authorizes our board of directors to issue up to 10,000,000 preferred shares and to determine the powers, preferences, privileges, rights, including voting rights, qualifications, limitations and restrictions on those shares, without any further vote or action by our stockholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred shares


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that may be issued in the future. The issuance of preferred shares could have the effect of delaying, deterring or preventing a change in control and could adversely affect the voting power or economic value of your shares.
 
Item 1B.   Unresolved Staff Comments
 
None.
 
Item 2.   Properties
 
Our global restaurant support center is located in Miami, Florida and consists of approximately 213,000 square feet which we lease. We extended the Miami lease for our global restaurant support center in May 2007 through September 2018 with an option to renew for one five-year period. We lease properties for our EMEA headquarters in Zug, Switzerland and our APAC headquarters in Singapore. We believe that our existing headquarters and other leased and owned facilities are adequate to meet our current requirements.
 
The following table presents information regarding our restaurant properties as of June 30, 2008:
 
                                         
          Leased        
                Building/
             
                Land &
    Total
       
    Owned (1)     Land     Building     Leases     Total  
 
United States and Canada:
                                       
Company restaurants
    348       211       425       636       984  
Franchisee-operated properties
    454       265       198       463       917  
Non-operating restaurant locations
    15       17       8       25       40  
Offices
                6       6       6  
                                         
Total
    817       493       637       1,130       1,947  
                                         
International:
                                       
Company restaurants
    20       44       312       356       376  
Franchisee-operated properties
    4             99       99       103  
Non-operating restaurant locations
    2             34       34       36  
Offices
                11       11       11  
                                         
Total
    26       44       456       500       526  
                                         
 
                         
 
(1) Owned refers to properties where we own the land and the building.
 
Item 3.   Legal Proceedings
 
Cowley v. Burger King Corporation, Case No. 07-21772 (U.S. District Court for the Southern District of Florida). On July 10, 2007, a purported class action lawsuit was filed against us in the United States District Court for the Southern District of Florida. The case alleged liability under the Fair and Accurate Credit Transactions Act or FACTA for failure to truncate credit and debit card account numbers and/or omit the expiration date on customer receipts. In May 2008, Congress passed the FACTA Reform Act, which provides that any company that printed the expiration date on customer receipts prior to the effective date of the bill was not in willful violation of FACTA so long as the company was complying with FACTA’s requirement of truncating the customer’s credit card number at all times. Shortly after the bill was enacted, the plaintiff offered to voluntarily dismiss the case with prejudice, and the case was dismissed on May 28, 2008.
 
Ramalco Corp. et al. v. Burger King Corporation, Case No. 08-43704CA05 (Circuit Court of the Eleventh Judicial Circuit, Dade County, Florida). On July 30, 2008, we were sued by four Florida franchisees over our decision to mandate extended operating hours in the United States. The plaintiffs seek damages, declaratory relief and injunctive relief. While we believe that we have the right under our franchise agreements to mandate extended operating hours, the case is in the preliminary stages and we are unable to predict the ultimate outcome of the litigation.


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From time to time, we are involved in other legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
None.
 
Part II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market for Our Common Stock
 
Our common stock trades on the New York Stock Exchange under the symbol “BKC.” Trading of our common stock commenced on May 18, 2006 following the completion of our initial public offering. Prior to that date, no public market existed for our common stock. As of August 25, 2008, there were approximately 222 holders of record of our common stock. The following table sets forth the high and low sales prices of our common stock as reported on the New York Stock Exchange and dividends declared per share of common stock:
 
                                                 
    2008     2007  
Dollars per Share:
  High     Low     Dividend     High     Low     Dividend  
 
First Quarter
  $ 27.00     $ 22.21     $ 0.0625     $ 16.64     $ 12.41        
Second Quarter
  $ 29.19     $ 24.41     $ 0.0625     $ 21.28     $ 15.46        
Third Quarter
  $ 28.90     $ 21.60     $ 0.0625     $ 22.84     $ 19.67     $ 0.0625  
Fourth Quarter
  $ 30.75     $ 26.41     $ 0.0625     $ 27.04     $ 21.53     $ 0.0625  
 
Issuer Purchases of Equity Securities
 
The following table presents information related to the repurchase of our common stock during the three months ended June 30, 2008:
 
                                 
                      Number (or
 
                Total Number of Shares
    Approximate Dollar Value) of
 
    Total Number
          Purchased as Part of
    Shares That May Yet be
 
    of Shares
    Average Price
    Publicly Announced
    Purchased Under
 
Period
  Purchased(1)     Paid per Share     Plans or Programs(2)(3)     the Plans or Programs  
 
April 1-30, 2008
          N/A           $ 68,390,877  
May 1-31, 2008
    15,413     $ 30.42           $ 68,390,877  
June 1-30, 2008
          N/A           $ 68,390,877  
                                 
Total
    15,413     $ 30.42           $ 68,390,877  
 
                         
 
(1) All shares purchased were in connection with the Company’s obligation to withhold from restricted stock and option awards the amount of federal withholding taxes due in respect of such awards.
 
(2) On May 31, 2007, the Company’s Board of Directors authorized a $100 million share repurchase program pursuant to which the Company would repurchase shares directly in the open market consistent with the Company’s insider trading policy and also repurchase shares under plans complying with Rule 10b5-1 under the Exchange Act during periods when the Company may be prohibited from making direct share repurchases under such policy. The program expires on December 31, 2008.
 
(3) All shares purchased to date pursuant to the Company’s share repurchase program have been deposited, and all future shares, if any, will be deposited, into treasury and retained for future uses.


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Dividend Policy
 
During the last two quarters of fiscal 2007 and each quarter of fiscal 2008, we paid a quarterly cash dividend of $0.0625 per share. Although we do not have a dividend policy, we elected to pay a cash dividend in each of these quarters because we generated strong cash flow during these periods, and we expect our cash flow to continue to strengthen.
 
On February 21, 2006, we paid an aggregate cash dividend of $367 million to holders of record of our common stock on February 9, 2006. At the same time, we paid a compensatory make-whole payment of $33 million to holders of our options and restricted stock unit awards, primarily members of senior management. This compensatory make-whole payment and related taxes was recorded as compensation expense in the third quarter of fiscal 2006.
 
The terms of our credit facility limit our ability to pay cash dividends in certain circumstances. In addition, because we are a holding company, our ability to pay cash dividends on shares of our common stock may be limited by restrictions on our ability to obtain sufficient funds through dividends from our subsidiaries, including the restrictions under our credit facility. Subject to the foregoing, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our board of directors.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
The following table presents information regarding options outstanding under our compensation plans as of June 30, 2008:
 
                         
          (b)
       
          Weighted-
    (c)
 
    (a)
    Average Exercise
    Number of
 
    Number of
    Price of
    Securities Remaining Available for
 
    Securities to be Issued Upon
    Outstanding
    Future Issuance Under Equity
 
    Exercise of Outstanding
    Options, Warrants
    Compensation Plans (Excluding
 
Plan Category
  Options, Warrants and Rights     and Rights     Securities Reflected in Column(a))  
 
Equity Compensation Plans Approved by Security Holders:
                       
Burger King Holdings, Inc. 2006 Omnibus Incentive Plan
    1,428,981     $ 14.05       5,556,119  
Burger King Holdings, Inc. Equity Incentive Plan
    5,351,064     $ 12.72       1,065,299  
Equity Compensation Plans Not Approved by Security Holders
                 
                         
TOTAL
    6,780,045     $ 12.89       6,621,418  
                         
 
Included in the 6.8 million total number of securities in column (a) above are approximately 1.4 million restricted stock units, performance-based restricted stock awards and deferred stock awards. The weighted average exercise price in column (b) is based only on stock options as restricted stock units, performance-based restricted stock awards and deferred stock awards have no exercise price. The Company does not currently have warrants or rights outstanding.


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Stock Performance Graph
 
This graph compares the cumulative total return of the Company’s common stock to the cumulative total return of the S&P 500 Stock Index and the S&P Restaurant Index for the period from May 18, 2006 through June 30, 2008, the last trading day of the Company’s fiscal year. The graph assumes an investment in the Company’s common stock and the indices of $100 at May 18, 2006 and that all dividends were reinvested.
 
BAR GRAPH
 
                                         
      5/18/2006       6/30/2006       6/29/2007       6/30/2008  
BKC
    $ 100       $ 90       $ 151       $ 155  
S&P 500 Index
    $ 100       $ 101       $ 122       $ 106  
S&P Restaurant Index
    $ 100       $ 100       $ 122       $ 122  
                                         
 
All amounts rounded to nearest dollar.
 
Item 6.   Selected Financial Data
 
The following tables present selected consolidated financial and other data for each of the periods indicated. The selected historical financial data as of June 30, 2008 and 2007 and for the fiscal years ended June 30, 2008, 2007 and 2006 have been derived from our audited consolidated financial statements and the notes thereto included in this report. The selected historical financial data as of June 30, 2006, 2005 and 2004, and for fiscal years ended June 30, 2005 and 2004 have been derived from our audited consolidated financial statements and the notes thereto, which are not included in this report.


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The selected historical consolidated financial and other operating data included below and elsewhere in this report are not necessarily indicative of future results. The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and “Financial Statements and Supplementary Data” in Part II, Item 8 of this report.
 
                                         
    For the Fiscal Years Ended June 30,  
    2008     2007     2006     2005     2004  
    (In millions, except per share data)  
 
Income Statement Data:
                                       
Revenues:
                                       
Company restaurant revenues
  $ 1,796     $ 1,658     $ 1,516     $ 1,407     $ 1,276  
Franchise revenues
    537       460       420       413       361  
Property revenues
    122       116       112       120       117  
                                         
Total revenues
    2,455       2,234       2,048       1,940       1,754  
Company restaurant expenses:
                                       
Food, paper and product costs
    564       499       470       437       391  
Payroll and employee benefits
    535       492       446       415       382  
Occupancy and other operating costs
    439       418       380       343       314  
                                         
Total Company restaurant expenses
    1,538       1,409       1,296       1,195       1,087  
Selling, general and administrative expenses(1)
    500       474       488       487       474  
Property expenses
    62       61       57       64       58  
Fees paid to affiliates(2)
                39       9       8  
Other operating (income) expenses, net
    1       (1 )     (2 )     34       54  
                                         
Total operating costs and expenses
    2,101       1,943       1,878       1,789       1,681  
Income from operations
    354       291       170       151       73  
Interest expense, net
    61       67       72       73       64  
Loss on early extinguishment of debt
          1       18              
                                         
Income before income taxes
    293       223       80       78       9  
Income tax expense
    103       75       53       31       4  
                                         
Net income
  $ 190     $ 148     $ 27     $ 47     $ 5  
                                         
Earnings per share — basic(3)
  $ 1.40     $ 1.11     $ 0.24     $ 0.44     $ 0.05  
Earnings per share — diluted(3)
  $ 1.38     $ 1.08     $ 0.24     $ 0.44     $ 0.05  
Weighted average shares outstanding-basic
    135.1       133.9       110.3       106.5       106.1  
Weighted average shares outstanding-diluted
    137.6       136.8       114.7       106.9       106.1  
Cash dividends per common share(4)
  $ 0.25     $ 0.13     $ 3.42     $     $  
 
                                         
    For the Fiscal Years Ended June 30,  
    2008     2007     2006     2005     2004  
    (In millions)  
 
Other Financial Data:
                                       
Net cash provided by operating activities
  $ 243     $ 110     $ 67     $ 210     $ 185  
Net cash (used for) provided by investing activities
    (199 )     (77 )     (67 )     3       (170 )
Net cash (used for) provided by financing activities
    (62 )     (127 )     (173 )     (2 )     3  
Capital expenditures
    178       87       85       93       81  
EBITDA(5)
  $ 450     $ 380     $ 258     $ 225     $ 136  
 


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    As of June 30,  
    2008     2007     2006     2005     2004  
    (In millions)  
 
Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 166     $ 170     $ 259     $ 432     $ 221  
Total assets
    2,687       2,517       2,552       2,723       2,665  
Total debt and capital lease obligations
    947       943       1,065       1,339       1,294  
Total liabilities
    1,842       1,801       1,985       2,246       2,241  
Total stockholders’ equity
  $ 845     $ 716     $ 567     $ 477     $ 424  
 
                                         
    For the Fiscal Years Ended June 30,  
    2008     2007     2006     2005     2004  
 
Other Operating Data:
                                       
Comparable sales growth(6)(7)(8)
    5.4 %     3.4 %     1.9 %     5.6 %     1.0 %
Sales growth(6)(7)
    8.3 %     4.9 %     2.1 %     6.1 %     1.2 %
Average restaurant sales (in thousands)(7)
  $ 1,301     $ 1,193     $ 1,126     $ 1,104     $ 1,014  
 
                         
    For the Fiscal Years Ended June 30,  
    2008     2007     2006  
 
Segment Data:
                       
Company restaurant revenues (in millions):
                       
United States and Canada
  $ 1,172     $ 1,082     $ 1,032  
EMEA/APAC (9)
    555       515       428  
Latin America (10)
    69       61       56  
                         
Total company restaurant revenues
  $ 1,796     $ 1,658     $ 1,516  
                         
Company restaurant expenses as a percentage of revenue (11):
                       
United States and Canada
                       
Food, paper and products costs
    32.5 %     30.8 %     31.4 %
Payroll and employee benefits
    30.5 %     30.4 %     30.2 %
Occupancy and other operating costs
    23.1 %     23.5 %     24.3 %
                         
Total Company restaurant expenses
    86.1 %     84.7 %     85.9 %
                         
EMEA/APAC (9)
                       
Food, paper and products costs
    28.5 %     27.9 %     29.1 %
Payroll and employee benefits
    30.5 %     30.3 %     29.8 %
Occupancy and other operating costs
    27.1 %     28.8 %     27.2 %
                         
Total Company restaurant expenses
    86.1 %     87.0 %     86.1 %
                         
Latin America (10)
                       
Food, paper and products costs
    36.7 %     36.6 %     36.4 %
Payroll and employee benefits
    11.8 %     11.7 %     11.7 %
Occupancy and other operating costs
    26.1 %     25.8 %     25.3 %
                         
Total Company restaurant expenses
    74.6 %     74.1 %     73.4 %
                         

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    For the Fiscal Years Ended June 30,  
    2008     2007     2006  
 
Worldwide
                       
Food, paper and products costs
    31.4 %     30.1 %     31.0 %
Payroll and employee benefits
    29.8 %     29.7 %     29.4 %
Occupancy and other operating costs
    24.5 %     25.2 %     25.1 %
                         
Total Company restaurant expenses
    85.7 %     85.0 %     85.5 %
                         
Franchise revenues (in millions) (12):
                       
United States and Canada
  $ 318     $ 284     $ 267  
EMEA/APAC (9)
    173       135       119  
Latin America (10)
    46       41       34  
                         
Total franchise revenues
  $ 537     $ 460     $ 420  
                         
Income from operations (in millions):
                       
United States and Canada
  $ 348     $ 336     $ 295  
EMEA/APAC (9)
    92       54       62  
Latin America (10)
    41       35       29  
Unallocated (13)
    (127 )     (134 )     (216 )
                         
Total income from operations
  $ 354     $ 291     $ 170  
                         
 
                         
 
(1) Selling, general and administrative expenses for fiscal 2006 include compensation expense and taxes related to a $33 million compensatory make-whole payment made on February 21, 2006 to holders of options and restricted stock unit awards, primarily members of senior management.
 
(2) Fees paid to affiliates consist of management fees we paid to the Sponsors under a management agreement. Fees paid to affiliates in fiscal 2006 also include a $30 million fee that we paid to terminate the management agreement with the Sponsors.
 
(3) Earnings per share is calculated using whole dollars and shares.
 
(4) The cash dividend paid in fiscal 2006 represents a special dividend paid prior to our initial public offering. See Note 17 to our audited consolidated financial statements in Part II, Item 8 of this Form 10-K for further information on this dividend.
 
(5) EBITDA is defined as earnings (net income) before interest, taxes, depreciation and amortization, and is used by management to measure operating performance of the business. Management believes that EBITDA is a useful measure as it incorporates certain operating drivers of our business such as sales growth, operating costs, selling, general and administrative expenses and other income and expense. EBITDA is also one of the measures used by us to calculate incentive compensation for management and corporate-level employees.
 
While EBITDA is not a recognized measure under generally accepted accounting principles (“GAAP”), management uses this financial measure to evaluate and forecast our business performance. The non-GAAP measure has certain material limitations, including:
 
  •  it does not include interest expense, net. Because we have borrowed money for general corporate purposes, interest expense is a necessary element of our costs and ability to generate profits and cash flows;
 
  •  it does not include depreciation and amortization expenses. Because we use capital assets, depreciation and amortization are necessary elements of our costs and ability to generate profits; and
 
  •  it does not include provision for taxes. The payment of taxes is a necessary element of our operations.
 
Management compensates for these limitations by using EBITDA as only one of its measures for evaluating the Company’s business performance. In addition, capital expenditures, which impact depreciation and amortization, interest expense and income tax expense, are reviewed separately by management. Management believes that EBITDA provides both management and investors with a more complete understanding of the underlying operating results and trends and an enhanced overall understanding of our financial performance and prospects for the future. EBITDA is not intended to be a measure of liquidity or cash flows from operations nor a measure comparable to net income, as it does not take into account certain requirements such as capital expenditures and related depreciation, principal and interest payments and tax payments.

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The following table is a reconciliation of our net income to EBITDA:
 
                                         
    For the Fiscal Years Ended June 30,  
    2008     2007     2006     2005     2004  
    (In millions)  
 
Net income
  $ 190     $ 148     $ 27     $ 47     $ 5  
Interest expense, net
    61       67       72       73       64  
Loss on early extinguishment of debt
          1       18              
Income tax expense
    103       75       53       31       4  
Depreciation and amortization
    96       89       88       74       63  
                                         
EBITDA
  $ 450     $ 380     $ 258     $ 225     $ 136  
                                         
 
(6) Comparable sales growth and sales growth 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 trends, without distortion from the effect of foreign currency movements.
 
(7) Unless otherwise stated, comparable sales growth, sales growth and average restaurant sales are presented on a system-wide basis, which means they include Company restaurants and franchise restaurants. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues. However, our royalty revenues are calculated based on a percentage of franchise sales. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Business Measures.”
 
(8) Comparable sales growth refers to the change in restaurant sales in one period from a comparable period for restaurants that have been open for thirteen months or longer.
 
(9) Refers to our operations in Europe, the Middle East, Africa and Asia Pacific.
 
(10) Refers to our operations in Mexico, Central and South America, the Caribbean and Puerto Rico.
 
(11) Calculated using dollars expressed in hundreds of thousands.
 
(12) Franchise revenues consist primarily of royalties paid by franchisees. Royalties earned are based on a percentage of franchise sales, which were $13 billion, $12 billion and $11 billion for fiscal 2008, 2007, and 2006, respectively. Franchise sales are sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues.
 
(13) Unallocated includes corporate support costs in areas such as facilities, finance, human resources, information technology, legal, marketing, and supply chain management. Unallocated for fiscal 2006 includes: $34 million of compensation expense and taxes related to the compensatory make-whole payment made to holders of options and restricted stock unit awards in February 2006; $9 million of quarterly management fees paid to the Sponsors; a $30 million termination fee paid to the Sponsors to terminate the management agreement; $10 million of costs related to the realignment of our European and Asian businesses; and $5 million of executive severance.


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Burger King Holdings, Inc. and Subsidiaries Restaurant Count
 
The following table presents information relating to the analysis of our restaurant count for the geographic areas and periods indicated.
 
                         
    As of June 30,  
                Increase/
 
    2008     2007     (Decrease)  
    (Unaudited)  
 
Number of Company restaurants:
                       
U.S. & Canada
    984       897       87  
EMEA/APAC
    292       329       (37 )
Latin America
    84       77       7  
                         
Total Company restaurants
    1,360       1,303       57  
                         
Number of franchise restaurants:
                       
U.S. & Canada
    6,528       6,591       (63 )
EMEA/APAC
    2,759       2,563       196  
Latin America
    918       826       92  
                         
Total franchise restaurants
    10,205       9,980       225  
                         
Number of system-wide restaurants:
                       
U.S. & Canada
    7,512       7,488       24  
EMEA/APAC
    3,051       2,892       159  
Latin America
    1,002       903       99  
                         
Total system-wide restaurants
    11,565       11,283       282  
                         
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
You should read the following discussion together with Part II, Item 6 “Selected Financial Data” and our audited consolidated financial statements and the related notes thereto included in Item 8 “Financial Statements and Supplementary Data.” In addition to historical consolidated financial information, this discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Actual results could differ from these expectations as a result of factors including those described under Item 1A, “Risk Factors,” “Special Note Regarding Forward-Looking Statements” and elsewhere in this Form 10-K.
 
References to fiscal 2009, fiscal 2008, fiscal 2007 and fiscal 2006 in this section are to our fiscal year ending June 30, 2009 and our fiscal years ended June 30, 2008, 2007 and 2006, respectively. Unless otherwise stated, comparable sales growth, average restaurant sales and sales growth are presented on a system-wide basis, which means that these measures include sales at both Company restaurants and franchise restaurants.
 
Overview
 
We operate in the fast food hamburger restaurant, or FFHR, category of the quick service restaurant, or QSR, segment of the restaurant industry. We are the second largest FFHR chain in the world as measured by number of restaurants and system-wide sales. Our business operates in three reportable segments: the United States and Canada; Europe, the Middle East, Africa and Asia Pacific, or EMEA/APAC; and Latin America. In fiscal 2008,


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segment revenues and income from operations, excluding unallocated corporate general and administrative expenses, were allocated as follows:
 
                 
          Income from
 
    Revenues     Operations  
 
Segment:
               
U.S. & Canada
    65 %     72 %
EMEA/APAC
    31 %     19 %
Latin America
    4 %     9 %
                 
Total
    100 %     100 %
                 
 
We generate revenues from three sources: retail sales at Company restaurants; franchise revenues, consisting of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid to us by our franchisees; and property income from restaurants that we lease or sublease to franchisees. In fiscal 2008, Company restaurant revenues and franchise revenues represented 73% and 22% of total revenues, respectively. The remaining 5% of total revenues was derived from property income.
 
Our sales are heavily influenced by brand advertising, menu selection and initiatives to improve restaurant operations. Company restaurant revenues are affected by comparable sales, timing of Company restaurant openings and closures, acquisitions by us of franchise restaurants and sales of Company restaurants to franchisees, or “refranchisings.” In fiscal 2008, franchise restaurants generated 88% of system-wide sales. We do not record franchise sales as revenues. However, royalties paid by franchisees are based on a percentage of franchise sales and are recorded as franchise revenues.
 
Company restaurants incur three types of operating expenses: (i) food, paper and other product costs, which represent the costs of the products that we sell to customers in Company restaurants; (ii) payroll and employee benefits costs, which represent the wages paid to Company restaurant managers and staff, as well as the cost of their health insurance, other benefits and training; and (iii) occupancy and other operating costs, which represent all other direct costs of operating our Company restaurants, including the cost of rent or real estate depreciation (for restaurant properties owned by us), depreciation on equipment, repairs and maintenance, insurance, restaurant supplies and utilities. As average restaurant sales increase, we can leverage payroll and employee benefits costs and occupancy and other costs, resulting in a direct improvement in restaurant profitability. As a result, we believe our continued focus on increasing average restaurant sales will result in improved profitability to our restaurants system-wide.
 
We promote our brand and products by advertising in all the countries and territories in which we operate. In countries where we have Company restaurants, such as the United States, Canada, the U.K. and Germany, we manage an advertising fund for that country by collecting required advertising contributions from Company and franchise restaurants and purchasing advertising and other marketing initiatives on behalf of all Burger King restaurants in that country. These advertising contributions are based on a percentage of sales at Company and franchise restaurants. We do not record advertising contributions collected from franchisees as revenues, or expenditures of these contributions as expenses. Amounts which are contributed to the advertising funds by Company restaurants are recorded as selling expenses. In countries where we manage an advertising fund, we plan the marketing calendar in advance based on expected contributions into the fund for that year. To the extent that contributions received exceed advertising and promotional expenditures, the excess contributions are recorded as accrued advertising liability on our consolidated balance sheets. We may also make discretionary contributions into these funds, which are also recorded as selling expenses. We made additional discretionary contributions of $5 million, $9 million and $1 million in fiscal 2008, fiscal 2007 and fiscal 2006, respectively.
 
Our selling, general and administrative expenses include the costs of field management for Company and franchise restaurants, costs of our operational excellence programs (including program staffing, training and Clean & Safe certifications), corporate overhead, including corporate salaries and facilities, advertising and bad debt expenses, net of recoveries and amortization of intangible assets. We believe that our current staffing and structure will allow us to expand our business globally without increasing general and administrative expenses significantly.


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Property expenses include costs of depreciation and rent on properties we lease and sublease to franchisees.
 
Fees paid to affiliates were primarily management fees paid to our Sponsors under a management agreement that we entered into in connection with our acquisition of BKC and terminated upon completion of our initial public offering. Under this agreement, we paid a management fee to the Sponsors equal to 0.5% of fiscal 2006 revenues, which amount was limited to 0.5% of the prior year’s total revenues. The management agreement was terminated in the fourth quarter of fiscal 2006. We paid a one time fee of $30 million to the Sponsors in May 2006 to terminate the management agreement.
 
Other operating (income) expenses, net include income and expenses that are not directly derived from the Company’s primary business such as gains and losses on asset and business disposals, write-offs associated with Company restaurant closures, impairment charges, settlement losses recorded in connection with acquisitions of franchise operations, gains and losses on foreign currency transactions, gains and losses on foreign currency forward contracts and other miscellaneous items.
 
Fiscal 2008 Highlights
 
Our accomplishments for fiscal 2008 include:
 
  •  18 consecutive quarters of positive worldwide comparable sales growth, our best comparable sales growth trend in more than a decade, including comparable sales growth of 5.3% for the fourth quarter of fiscal 2008;
 
  •  17 consecutive quarters of positive comparable sales growth in the United States and Canada, including comparable sales growth of 5.5% for the fourth quarter of fiscal 2008;
 
  •  all-time high annual worldwide revenues of $2.5 billion for fiscal 2008, a 10% increase from the prior year;
 
  •  all-time high worldwide average restaurant sales for fiscal 2008 of $1.3 million system-wide and $1.4 million for Company restaurants for the same period;
 
  •  continued acceleration of system-wide restaurant growth with 282 net new openings during fiscal 2008;
 
  •  net growth of 24 restaurants in the United States and Canada, the first time we have increased our restaurant count in this segment in six years;
 
  •  worldwide system restaurant count of 11,565 at June 30, 2008, our highest restaurant count in the history of the brand;
 
  •  restaurant openings in four new international markets: Colombia, Romania, Bulgaria and Curaçao;
 
  •  execution of our portfolio management strategy, including strategic acquisitions of 83 restaurants and 38 refranchisings;
 
  •  award-winning advertising and promotion programs focused on our core customers;
 
  •  continued high guest satisfaction scores, as well as speed of service and cleanliness scores; and
 
  •  net income up 28% to $190 million and diluted earnings per share up 28% to $1.38 per share for fiscal 2008 compared to fiscal 2007.
 
Key Business Measures
 
We track our results of operations and manage our business by using three key business measures: comparable sales growth, average restaurant sales and sales growth. System-wide results are driven primarily by our franchise restaurants as approximately 90% of our system-wide restaurants are franchised. Comparable sales growth and sales growth are provided by reportable segments and are analyzed on a constant currency basis, which means they are calculated using the same exchange rate over the periods under comparison to remove the effects of currency fluctuations from these trend analyses. We believe these constant currency measures provide a more meaningful analysis of our business by identifying the underlying business trend, without distortion from the effect of foreign currency movements. System-wide data represents measures for both Company restaurants and franchise


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restaurants. Unless otherwise stated, comparable sales growth, average restaurant sales and sales growth are presented on a system-wide basis.
 
Comparable Sales Growth
 
Comparable sales growth refers to the change in restaurant sales in one period from a comparable period in the prior year for restaurants that have been open for 13 months or longer as of the end of the most recent period. Company comparable sales growth refers to comparable sales growth for Company restaurants and franchise comparable sales growth refers to comparable sales growth for franchise restaurants, in each case by reportable segment. We believe comparable sales growth is a key indicator of our performance, as influenced by our strategic initiatives and those of our competitors.
 
                         
    For the
 
    Fiscal Years Ended June 30,  
    2008     2007     2006  
    (In constant currencies)  
 
Company Comparable Sales Growth:
                       
United States & Canada
    2.6 %     2.1 %     2.0 %
EMEA/APAC
    3.8 %     2.2 %     (0.7 )%
Latin America
    1.8 %     1.1 %     (1.7 )%
Total Company Comparable Sales Growth
    2.9 %     2.1 %     1.1 %
Franchise Comparable Sales Growth:
                       
United States & Canada
    5.8 %     3.8 %     2.6 %
EMEA/APAC
    5.6 %     3.1 %     0.1 %
Latin America
    4.5 %     3.7 %     2.8 %
Total Franchise Comparable Sales Growth
    5.7 %     3.6 %     2.0 %
System-wide Comparable Sales Growth:
                       
U.S. & Canada
    5.4 %     3.6 %     2.5 %
EMEA/APAC
    5.4 %     3.0 %     0.0 %
Latin America
    4.3 %     3.5 %     2.5 %
Total System-wide Comparable Sales Growth
    5.4 %     3.4 %     1.9 %
 
Our comparable sales growth in fiscal 2008 and fiscal 2007 was driven by our strategic initiatives related to our global growth pillars — marketing, products, operations and development — including our barbell menu strategy of innovative indulgent products and value menu items and continued development of our breakfast and late night dayparts. These results are driven mostly by our franchise restaurants, as approximately 90% of our system-wide restaurants are franchised.
 
In the United States and Canada, our comparable sales growth performance increased for fiscal 2008 compared to fiscal 2007, as a result of our innovative advertising, our barbell menu strategy, which featured new indulgent products such as the A-1 Steakhouse Burger, BBQ Bacon Tendercrisp chicken sandwich and Homestyle Melts as well as new offerings on our BK Value Menu and BK Breakfast Value Menu, such as the Spicy Chick‘N Crisp® sandwich and the Cheesy Bacon BK Wrappertm. Our results were also fueled by successful product promotions, such as the Whopper 50th anniversary promotion featuring the Whopper Freakout media campaign in the United States and the Whopper Superiority promotion, late-night hours and successful movie tie-ins, such as The Simpsonstm Movie, Transformerstm, SpongeBob SquarePantstm, Snoopy®, Indiana Jonestm and the Kingdom of the Crystal Skulltm, Iron Mantm and The Incredible Hulktm.
 
Comparable sales growth in EMEA/APAC was driven primarily by continued growth in EMEA due to our continued focus on operational improvements, marketing and advertising, and on high quality indulgent offerings, such as the limited time offer Angrytm Whopper® sandwich and Aberdeen Angus Burger, the continued success of the King Ahorro value menu in Spain and the BK Fusionstm Real Dairy Ice Cream offerings in the U.K.


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Latin America demonstrated strong results in comparable sales for fiscal 2008 as this segment continues to grow. The improvement in comparable sales reflects continued strength in Central America and South America, driven by sales of higher margin indulgent products, such as the Steakhouse Burger, Extreme Whopper sandwich and BKtm Stacker sandwich and Whopper sandwich limited time offers. In addition, promotional tie-ins with global marketing properties, such as The Simpsonstm Movie, Transformerstm, Scooby Dootm, Snoopy®, Indiana Jonestm and the Kingdom of the Crystal Skulltm and Iron Mantm as well as combo meal offerings also drove sales. This increase was partially offset by softer performance in Puerto Rico due to current economic conditions in that U.S. territory as well as the introduction of a VAT tax which has negatively affected disposable income.
 
In the United States and Canada our comparable sales growth performance increased for fiscal 2007 compared to fiscal 2006, as a result of our provocative advertising, menu enhancements, such as the introduction of new products like the BK Stacker sandwich, as well as limited time offers, such as the Angus Cheesy Bacon sandwich, Texas Double Whopper® sandwich, and Western Whopper sandwich. Other comparable sales growth drivers included the BK Value Menu, late-night hours and successful movie tie-ins and innovative promotions such as Spider-Mantm 3, SpongeBob Pest of the Westtm, Fantastic 4tm and the Xbox® game collection.
 
Comparable sales growth in EMEA/APAC reflected positive sales performance in all major countries in this segment for fiscal 2007. Strong comparable sales in the U.K. were driven by the introduction of fresh, high quality indulgent products, such as the Aberdeen Angus Burger and 3 Pepper Angus Burger and the Spider-Mantm 3 movie tie-in which featured the Spider-Mantm Dark Whopper sandwich limited time offer. In addition, a strategic investment of $7 million was made to the U.K. marketing fund to improve brand recognition and introduce new products through commercials, such as the “Manthem” and the Have It Your Way brand promise.
 
Latin America achieved strong results in comparable sales for fiscal 2007 compared to fiscal 2006. These strong results were fueled by the introduction of new products, limited time offers, innovative promotions and marketing campaigns, such as the Have It Your Way brand promise.
 
Average Restaurant Sales
 
Average restaurant sales, or ARS, is an important measure of the financial performance of our restaurants and changes in the overall direction and trends of sales. ARS is influenced mostly by comparable sales performance and restaurant openings and closures and also includes the impact of movement in foreign currency exchange rates.
 
                         
    For the
 
    Fiscal Years Ended June 30,  
    2008     2007     2006  
    (In thousands)  
 
Average Restaurant Sales
  $ 1,301     $ 1,193     $ 1,126  
 
Our ARS improvement during fiscal 2008 was primarily due to improved worldwide comparable sales growth of 5.4% for the period as discussed above, the opening of new restaurants with higher than average sales volumes, a $32 thousand favorable impact from the movement of foreign currency exchange rates, primarily in EMEA, and, to a lesser extent, the closure of under-performing restaurants. We and our franchisees opened 282 net new restaurants during fiscal 2008. We believe that continued improvement in the ARS of existing restaurants and strong sales at new restaurants, combined with the closure of under-performing restaurants, will result in financially stronger operators throughout our system.
 
Our ARS improvement during fiscal 2007 was primarily due to improved comparable sales of 3.4% for the period, the opening of new restaurants with higher than average sales volumes and, to a lesser extent, the closure of under-performing restaurants. We and our franchisees opened 441 new restaurants and closed 287 restaurants during fiscal 2007.
 
Sales Growth
 
Sales growth refers to the change in sales at all Company and franchise restaurants from one period to another. Sales growth is an important indicator of the overall direction and trends of sales and income from operations on a


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system-wide basis. Sales growth is influenced by restaurant openings and closures and comparable sales growth, as well as the effectiveness of our advertising and marketing initiatives and featured products.
 
                         
    For the
 
    Fiscal Years Ended June 30,  
    2008     2007     2006  
    (In constant currencies)  
 
Sales Growth:
                       
United States and Canada
    6.0 %     3.0 %     0.2 %
EMEA/APAC
    12.6 %     7.9 %     5.0 %
Latin America
    13.1 %     13.3 %     13.0 %
Total System-wide Sales Growth
    8.3 %     4.9 %     2.1 %
 
Sales growth continued on a positive trend during fiscal 2008, as comparable sales and restaurant count continued to increase on a system-wide basis. We expect net restaurant openings to accelerate in most regions.
 
Our sales growth in the United States and Canada during fiscal 2008 reflects comparable sales growth and an increase in the amount of revenues earned by net new restaurants. We had 7,512 restaurants in the United States and Canada as of June 30, 2008, compared to 7,488 restaurants as of June 30, 2007.
 
EMEA/APAC demonstrated strong sales growth during fiscal 2008, reflecting net openings of new restaurants and comparable sales growth in most major markets. We had 3,051 restaurants in EMEA/APAC as of June 30, 2008, compared to 2,892 restaurants as of June 30, 2007, a 5% increase in the number of restaurants.
 
Latin America’s sales growth was driven by net new restaurant openings and strong comparable sales growth in fiscal 2008. We had 1,002 restaurants in Latin America as of June 30, 2008, compared to 903 restaurants as of June 30, 2007, an 11% increase in the number of restaurants.
 
Sales growth continued on a positive trend during fiscal 2007, as comparable sales and the number of restaurants continued to increase on a system-wide basis.
 
Our sales growth in the United States and Canada during fiscal 2007, reflects positive comparable sales growth and an increase in the amount of revenues earned by new restaurants, offset by a net reduction in restaurant count. We had 7,488 restaurants in the United States and Canada as of June 30, 2007, compared to 7,534 restaurants as of June 30, 2006.
 
EMEA/APAC demonstrated strong sales growth during fiscal 2007 reflecting restaurant openings and positive comparable sales in all the major markets, including the U.K., Germany, Spain, Australia and New Zealand and smaller markets in the Mediterranean and the Middle East. Sales performance improved in the U.K. during the second half of fiscal 2007 as a result of our strategic investments in that country.
 
Latin America’s sales growth was driven by new restaurant openings and strong comparable sales growth in fiscal 2007.
 
Factors Affecting Comparability of Results
 
Termination of Global Headquarters Lease
 
In May 2007, BKC terminated the lease for its proposed new global headquarters facility, which was to be constructed in Coral Gables, Florida (the “Coral Gables Lease”). We determined that remaining at our current headquarters location would avoid the cost and disruption of moving to a new facility and that the current headquarters facility would continue to meet our needs for a global headquarters more effectively and cost efficiently. The Coral Gables Lease provided for the lease of approximately 225,000 square feet for a term of 15 years at an estimated initial annual rent of approximately $6 million per year, subject to escalations. By terminating the Coral Gables Lease, we will save approximately $24 million in future rent payments between October 2008 and September 2018 and approximately $23 million of tenant improvements and moving costs, which were expected to be paid over an 18-month period. Total costs associated with the termination of the Coral Gables Lease were $7 million, including a termination fee of $5 million we paid to the landlord, which includes a


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reimbursement of the landlord’s expenses. See Note 15 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K. These costs are reflected in other operating (income) expense, net in our consolidated statements of income for fiscal 2007.
 
Our Global Realignment
 
During fiscal 2006, we regionalized the activities associated with our European and Asian businesses, including: the transfer of rights of existing franchise agreements; the ability to grant future franchise agreements; and utilization of our intellectual property assets in EMEA/APAC, in new European and Asian holding companies. In connection with our global realignment of our European and Asian businesses, and the resulting corporate restructuring, we incurred costs of $4 million and $10 million in fiscal 2007 and fiscal 2006, respectively, consisting primarily of consulting and severance-related costs, which included severance payments, outplacement services and relocation costs.
 
Results of Operations
 
The following table presents our results of operations for the periods indicated:
 
                                         
    For the Fiscal Years Ended June 30,  
    2008     2007     2006  
                Increase/
          Increase/
 
    Amount     Amount     (Decrease)     Amount     (Decrease)  
    (In millions, except percentages and per share data)  
 
Revenues:
                                       
Company restaurant revenues
  $ 1,796     $ 1,658       8 %   $ 1,516       9 %
Franchise revenues
    537       460       17 %     420       10 %
Property revenues
    122       116       5 %     112       4 %
                                         
Total revenues
    2,455       2,234       10 %     2,048       9 %
Company restaurant expenses
    1,538       1,409       9 %     1,296       9 %
Selling, general and administrative expenses
    500       474       5 %     488       (3 )%
Property expenses
    62       61       2 %     57       7 %
Fees paid to affiliates
                %     39       *  
Other operating (income) expenses, net
    1       (1 )     (200 )%     (2 )     (50 )%
                                         
Total operating costs and expenses
    2,101       1,943       8 %     1,878       3 %
Income from operations
    354       291       22 %     170       71 %
Interest expense, net
    61       67       (9 )%     72       (7 )%
Loss on early extinguishment of debt
          1       (100 )%     18       (94 )%
                                         
Income before income taxes
    293       223       31 %     80       179 %
Income tax expense
    103       75       37 %     53       42 %
                                         
Net income
  $ 190     $ 148       28 %   $ 27       448 %
                                         
 
                         
 
* Not meaningful
 
Fiscal Year Ended June 30, 2008 Compared to Fiscal Year Ended June 30, 2007
 
Revenues
 
Company Restaurant Revenues
 
Total Company restaurant revenues increased by $138 million, or 8%, to $1.8 billion in fiscal 2008, primarily as a result of the addition of 57 Company restaurants (net of closures and refranchisings) during fiscal 2008 and worldwide Company comparable sales growth of 2.9%. Approximately $70 million, or 51%, of the increase in


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Company restaurant revenues was generated by the favorable impact from the movement of foreign currency exchange rates, primarily in EMEA.
 
In the United States and Canada, Company restaurant revenues increased by $90 million, or 8%, to $1.2 billion in fiscal 2008, primarily as a result of a net increase of 87 Company restaurants during fiscal 2008, including the acquisition of 56 franchise restaurants in April 2008, and Company comparable sales growth of 2.6% for the period in this segment. Approximately $16 million, or 18%, of the increase in Company restaurant revenues was generated by the favorable impact from the movement of foreign currency exchange rates in Canada.
 
In EMEA/APAC, Company restaurant revenues increased by $40 million, or 8%, to $555 million in fiscal 2008, primarily as a result of Company comparable sales growth of 3.8% for the period in this segment and a $53 million favorable impact from the movement of foreign currency exchange rates. Partially offsetting these factors was a decrease in revenues from a net decrease of 37 Company restaurants during fiscal 2008, which was primarily attributable to 15 closures and 16 refranchisings in the U.K.
 
In Latin America, Company restaurant revenues increased by $8 million, or 13%, to $69 million in fiscal 2008, primarily as a result of a net increase of seven Company restaurants during fiscal 2008, Company comparable sales growth of 1.8% for the period in this segment and a $1 million favorable impact from the movement of foreign currency exchange rates.
 
Franchise Revenues
 
Total franchise revenues increased by $77 million, or 17%, to $537 million in fiscal 2008, driven by a net increase of 225 franchise restaurants during fiscal 2008, worldwide franchise comparable sales growth of 5.7% for the period and a $16 million favorable impact from the movement of foreign currency exchange rates.
 
In the United States and Canada, franchise revenues increased by $34 million, or 12%, to $318 million in fiscal 2008, primarily as a result of franchise comparable sales growth of 5.8% for the period in this segment and higher effective royalty rates, partially offset by the elimination of royalties from 63 fewer franchise restaurants driven by acquisitions by the Company and closures during fiscal 2008, including the acquisition of 56 franchise restaurants in April 2008.
 
In EMEA/APAC, franchise revenues increased by $38 million, or 28%, to $173 million in fiscal 2008, driven by a net increase of 196 franchise restaurants during fiscal 2008, franchise comparable sales growth of 5.6% for the period in this segment and a $16 million favorable impact from the movement of foreign currency exchange rates.
 
Latin America franchise revenues increased by $5 million, or 12%, to $46 million in fiscal 2008, as a result of the net addition of 92 franchise restaurants during fiscal 2008 and franchise comparable sales growth of 4.5% for the period in this segment.
 
Property Revenues
 
Total property revenues increased by $6 million, or 5%, to $122 million in fiscal 2008, primarily as a result of worldwide franchise comparable sales growth of 5.7% resulting in increased contingent rents and a $2 million favorable impact from the movement of foreign currency exchange rates, partially offset by the net effect of changes to our property portfolio, which includes the impact of the closure or acquisition of restaurants leased to franchisees.
 
In the United States and Canada, property revenues increased by $4 million, or 5%, to $89 million in fiscal 2008. This increase was driven by increased contingent rent payments from increased franchise sales.
 
Our EMEA/APAC property revenues increased by $2 million, or 6%, to $33 million, primarily from increased contingent rents as a result of an increase in franchise sales and a $2 million favorable impact from the movement of foreign currency exchange rates, partially offset by the effect of a net reduction in the number of properties we lease or sublease to franchisees in EMEA.


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Operating Costs and Expenses
 
Food, Paper and Product Costs
 
Total food, paper and product costs increased by $65 million, or 13%, to $564 million in fiscal 2008, as a result of an 8% increase in Company restaurant revenues, a significant increase in commodity costs and a $21 million unfavorable impact from the movement of foreign currency exchange rates, primarily in EMEA. As a percentage of Company restaurant revenues, food, paper and product costs increased 1.3% to 31.4%, primarily due to the increase in commodity and other food costs in the U.S. and Canada.
 
In the United States and Canada, food, paper and product costs increased by $48 million, or 14%, to $381 million in fiscal 2008, as a result of an 8% increase in Company restaurant revenues in this segment, a significant increase in commodity costs and a $6 million unfavorable impact from the movement of foreign currency exchange rates. Food, paper and product costs as a percentage of Company restaurant revenues increased 1.7% to 32.5%, primarily due to an increase in beef, cheese, chicken and other food costs, partially offset by sales of higher margin products.
 
In EMEA/APAC, food, paper and product costs increased by $14 million, or 10%, to $158 million in fiscal 2008, primarily as a result of an 8% increase in Company restaurant revenues in this segment, an increase in commodity costs and a $15 million unfavorable impact from the movement of foreign currency exchange rates. Food, paper and product costs as a percentage of Company restaurant revenues increased 0.6% to 28.5%, reflecting the unfavorable impact from product mix and commodity pressures during fiscal 2008.
 
In Latin America, food, paper and product costs increased by $3 million, or 14%, to $25 million in fiscal 2008, as a result of a 13% increase in Company restaurant revenues in this segment. As a percentage of revenues, food, paper and product costs remained relatively unchanged at 36.7% for fiscal 2008 compared to 36.6% for fiscal 2007.
 
Payroll and Employee Benefits
 
Payroll and employee benefits costs increased by $43 million, or 9%, to $535 million in fiscal 2008. This increase was primarily due to the net addition of 57 Company restaurants in fiscal 2008, additional labor needed to service increased traffic, inflationary increases in salaries and wages, increases in fringe benefit costs and a $21 million unfavorable impact from the movement of foreign currency exchange rates, primarily in EMEA. As a percentage of Company restaurant revenues, payroll and employee benefits costs remained relatively unchanged at 29.8% in fiscal 2008 compared to 29.7% in fiscal 2007, reflecting inflationary increases in salaries and wages, partially offset by worldwide Company comparable sales growth of 2.9% for the period.
 
In the United States and Canada, payroll and employee benefits costs increased by $28 million, or 9%, to $357 million in fiscal 2008. This increase was primarily due to the net addition of 87 Company restaurants in fiscal 2008, additional labor needed to service increased traffic, inflationary increases in salaries and wages and a $5 million unfavorable impact from the movement of foreign currency exchange rates in Canada. As a percentage of Company restaurant revenues, payroll and employee benefits costs remained relatively unchanged at 30.5% in fiscal 2008 compared to 30.4% in fiscal 2007, reflecting inflationary increases in salaries and wages, partially offset by Company comparable sales growth of 2.6% for the period in this segment.
 
In EMEA/APAC, payroll and employee benefits costs increased by $14 million, or 9%, to $170 million in fiscal 2008. This increase was primarily due to an increase in temporary staffing, inflationary increases in salaries and wages, increases in fringe benefit costs and a $16 million unfavorable impact from the movement of foreign currency exchange rates, partially offset by the net reduction of 37 Company restaurants in fiscal 2008. As a percentage of Company restaurant revenues, payroll and employee benefits costs increased 0.2% to 30.5% as a result of inflationary increases in salaries and wages and increases in fringe benefit costs, partially offset by Company comparable sales growth of 3.8% for the period in this segment.
 
In Latin America, payroll and employee benefits increased by $1 million, or 14%, to $8 million in fiscal 2008. This increase was primarily due to a net increase of seven Company restaurants during fiscal 2008. As a percentage of Company restaurant revenues, payroll and employee benefits remained relatively unchanged at 11.8% compared to 11.7% in fiscal 2007.


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Occupancy and Other Operating Costs
 
Occupancy and other operating costs increased by $21 million, or 5%, to $439 million in fiscal 2008. This increase was primarily attributable to the net addition of 57 Company restaurants in fiscal 2008 and an $18 million unfavorable impact from the movement of foreign currency exchange rates, primarily in EMEA. As a percentage of Company restaurant revenues, occupancy and other operating costs decreased by 0.7% to 24.5% as a result of the benefits realized from the new flexible batch broilers in the United States and Canada, which includes accelerated depreciation expense on the old broilers recorded in fiscal 2007, the closure of under-performing restaurants and the refranchising of Company restaurants in the U.K. (including benefits from the write-off of unfavorable leases) and worldwide Company comparable sales growth of 2.9% for the period. These benefits were partially offset by the unfavorable impact of accelerated depreciation expense related to our restaurant reimaging program in the United States and Canada.
 
In the United States and Canada, occupancy and other operating costs increased by $17 million, or 7%, to $271 million in fiscal 2008. This increase was primarily driven by the net addition of 87 Company restaurants in fiscal 2008, accelerated depreciation expense related to our restaurant reimaging program and a $4 million unfavorable impact from the movement in foreign currency exchange rates in Canada. As a percentage of Company restaurant revenues, occupancy and other operating costs decreased by 0.4% to 23.1% primarily as a result of the benefits realized from the accelerated depreciation expense on the old broilers recorded in fiscal 2007 and not recurring this year, and Company comparable sales growth of 2.6% for the period in this segment, partially offset by the unfavorable impact of accelerated depreciation expense related to our restaurant reimaging program.
 
In EMEA/APAC, occupancy and other operating costs increased by $2 million, or 1%, to $150 million in fiscal 2008. This increase was primarily due to a $14 million unfavorable impact from the movement in foreign currency exchange rates, partially offset by the net reduction of 37 Company restaurants in fiscal 2008. As a percentage of Company restaurant revenues, occupancy and other operating costs decreased by 1.7% to 27.1%, reflecting the benefits realized from the closure of under-performing restaurants and the refranchising of Company restaurants in the U.K. (including benefits from the write-off of unfavorable leases) as well as Company comparable sales growth of 3.8% for the period in this segment.
 
In Latin America, occupancy and other operating costs increased by $2 million, or 13%, to $18 million in fiscal 2008 primarily due to the net addition of seven new Company restaurants in fiscal 2008. As a percentage of Company restaurant revenues, occupancy and other operating costs increased by 0.3% to 26.1% primarily as a result of an increase in utilities, property taxes and the cost of information technology upgrades, including POS systems associated with the additional restaurants.
 
Selling, General and Administrative Expenses
 
Selling expenses increased by $8 million, or 10%, to $91 million in fiscal 2008. The increase was primarily attributable to $4 million of additional sales promotions and advertising expenses generated by higher Company restaurant revenues, a $4 million reduction in the amount of bad debt recoveries compared to the prior year and a $4 million unfavorable impact from the movement of foreign currency exchange rates, primarily in EMEA, partially offset by a $4 million reduction in the amount of discretionary contributions to advertising funds in EMEA.
 
General and administrative expenses increased by $18 million, or 5%, to $409 million in fiscal 2008. The increase was primarily attributable to a $6 million increase in stock-based compensation expense, as an additional year of grants is included in the expense amount. In addition, general and administrative expenses increased as a result of a $5 million increase in corporate salary, fringe benefits and other employee-related costs, a $5 million increase in general corporate travel and meeting costs and a $15 million unfavorable impact from the movement of foreign currency exchange rates, primarily in EMEA. These increases were partially offset by a $2 million decrease in operating costs, which includes a decrease in rent expense, utility expense and repairs and maintenance and $8 million in miscellaneous cost savings and other items, including decreased insurance costs and an increase in the amount of capitalized indirect labor costs on capital projects. Annual stock-based compensation expense is expected to increase through fiscal year 2010, as a result of our adoption of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-based Payment” in fiscal 2007, which has resulted in stock-based compensation expense only for awards granted subsequent to our initial


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public offering. See Note 3 to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for further information regarding our stock-based compensation.
 
Property Expenses
 
Property expenses increased by $1 million, or 2%, to $62 million in fiscal 2008, primarily as a result of an increase in contingent rent expense generated by comparable sales growth in the United States and Canada, as well as a $2 million unfavorable impact from the movement of foreign currency exchange rates in EMEA. These increases were partially offset by a net reduction in the number of properties we lease or sublease to franchisees in EMEA. Property expenses were 37% of property revenues in the United States and Canada in both fiscal 2008 and fiscal 2007. Our property expenses in EMEA/APAC approximate our property revenues because most of the EMEA/APAC property operations consist of properties that are subleased to franchisees on a pass-through basis.
 
Other Operating (Income) Expense, Net
 
Other operating (income) expense, net was $1 million of expense in fiscal 2008, compared to $1 million of income in fiscal 2007. Other operating expense, net in fiscal 2008 includes $4 million of franchise system distress costs in the U.K., which includes a $1 million payment made to our sole distributor, $2 million of foreign currency transaction losses, $2 million of charges associated with the acquisition of franchise restaurants, $1 million in charges for litigation reserves and a loss of $1 million from forward currency contracts used to hedge intercompany loans denominated in foreign currencies. These costs were partially offset by net gains of $10 million from the disposal of assets and restaurant closures, primarily in Germany and the United States, which includes the refranchising of Company restaurants in Germany.
 
Other operating income, net in fiscal 2007 included a net gain of $5 million from the disposal of assets and a gain of $7 million from forward currency contracts used to hedge intercompany loans denominated in foreign currencies, partially offset by $7 million in costs associated with the termination of the Coral Gables Lease, $2 million in charges for litigation reserves and $3 million in franchise workout costs.
 
Income from Operations
 
                 
    For the
 
    Fiscal Years
 
    Ended
 
    June 30,  
    2008     2007  
    (In millions)  
 
Income from Operations:
               
United States and Canada
  $ 348     $ 336  
EMEA/APAC
    92       54  
Latin America
    41       35  
Unallocated
    (127 )     (134 )
                 
Total income from operations
  $ 354     $ 291  
                 
 
Income from operations increased by $63 million, or 22%, to $354 million in fiscal 2008, primarily due to a $77 million increase in franchise revenues driven by worldwide franchise comparable sales growth of 5.7% for the period and an increase in the effective royalty rate. See Note 21 to our audited consolidated financial statements for segment information disclosed in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The favorable impact that the movement in foreign currency exchange rates had on revenues was partially offset by the unfavorable impact on operating costs and expenses, resulting in a $8 million net favorable impact on income from operations during fiscal 2008.
 
In the United States and Canada, income from operations increased by $12 million, or 4%, to $348 million in fiscal 2008, primarily as a result of a $34 million increase in franchise revenues, reflecting franchise comparable sales growth of 5.8% for the period in this segment and an increase in the effective royalty rate. This increase was


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partially offset by higher selling, general and administrative expenses of $316 million, driven primarily by increased salaries and wages, fringe benefit costs and increased stock-based compensation expense.
 
Income from operations in EMEA/APAC increased by $38 million, or 70%, to $92 million in fiscal 2008, primarily as a result of a $38 million increase in franchise revenues, reflecting franchise comparable sales growth of 5.6% for the period in this segment and the net increase of 196 franchise restaurants during fiscal 2008. The favorable impact that the movement in foreign currency exchange rates had on revenues was partially offset by the unfavorable impact on operating costs and expenses, resulting in a $8 million net favorable impact on income from operations.
 
Income from operations in Latin America increased by $6 million, or 17%, to $41 million in fiscal 2008, primarily as a result of an increase in franchise revenues, reflecting comparable sales growth of 4.5% for the period in this segment, and a net increase of 92 franchise restaurants during fiscal 2008.
 
Our unallocated corporate expenses decreased by $7 million during fiscal 2008, primarily as a result of non-recurring professional services fees incurred associated with the realignment of our European and Asian businesses during fiscal 2007.
 
Interest Expense, Net
 
Interest expense, net decreased by $6 million during fiscal 2008, reflecting a reduction in the amount of borrowings outstanding due to early prepayments of our debt and a decrease in rates paid on borrowings during the period. The weighted average interest rates for fiscal 2008 and fiscal 2007 were 6.02% and 6.91%, respectively, which included the impact of interest rate swaps on 56% and 57% of our term debt, respectively.
 
Income Tax Expense
 
Income tax expense was $103 million in fiscal 2008. Compared to the same period in the prior fiscal year, our effective tax rate increased slightly by 1.6 percentage points to 35.2%.
 
See Note 14 to our consolidated financial statements for further information regarding our effective tax rate. See Item 1A “Risk Factors” in Part I of this report for a discussion regarding our ability to utilize foreign tax credits and estimate deferred tax assets.
 
Net Income
 
Net income increased by $42 million, or 28%, to $190 million in fiscal 2008, primarily as a result of a net increase in restaurants and strong comparable sales growth, which increased franchise revenues by $77 million, Company restaurant margin by $9 million and net property revenues by $5 million. We also benefited from a $6 million decrease in interest expense. These improvements were partially offset by a $26 million increase in selling, general and administrative expenses and a $28 million increase in income tax expense.
 
Fiscal Year Ended June 30, 2007 Compared to Fiscal Year Ended June 30, 2006
 
Revenues
 
Company Restaurant Revenues
 
Total Company restaurant revenues increased by 9% to $1.7 billion in fiscal 2007, primarily as a result of the addition of 63 Company restaurants (net of closures and refranchisings) during fiscal 2007 and positive worldwide Company comparable sales of 2.1%. Approximately $40 million, or 28%, of the increase in Company restaurant revenues was generated by the favorable impact from the movement of foreign currency exchange rates primarily in EMEA.
 
In the United States and Canada, Company restaurant revenues increased by 5% to $1.1 billion in fiscal 2007, primarily as a result of positive Company comparable sales in this segment of 2.1% and a net increase of 19 Company restaurants during fiscal 2007. Approximately $4 million, or 8%, of the increase in Company


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restaurant revenues was generated by the favorable impact from the movement of foreign currency exchange rates in Canada.
 
In EMEA/APAC, Company restaurant revenues increased by 20% to $515 million in fiscal 2007, primarily as a result of a net increase of 36 Company restaurants in this segment during fiscal 2007. The net increase of 36 Company restaurants reflects 41 acquisitions in the U.K., and 20 openings offset by 15 closures and 10 refranchisings. Company comparable sales for EMEA/APAC was a positive 2.2% overall in this segment reflecting positive comparable sales in Germany, Spain, The Netherlands and the U.K. The increase in revenues also reflects $37 million, or 9%, due to the favorable impact in the movement of foreign currency exchange rates.
 
In Latin America, Company restaurant revenues increased by 9% to $61 million in fiscal 2007, primarily as a result of the addition of eight Company restaurants to this segment during fiscal 2007, and Company comparable sales growth of 1.1%. The increase in revenues was offset by an unfavorable $1 million, or 1%, due to the impact from the movement of foreign currency exchange rates.
 
Franchise Revenues
 
Total franchise revenues increased by 10% to $460 million in fiscal 2007, driven by positive worldwide franchise comparable sales of 3.6% during that period and by $7 million of favorable impact from the movement of foreign currency exchange rates. The number of franchise restaurants (net of closures and acquisitions of franchise restaurants by us) increased by 91 during fiscal 2007.
 
In the United States and Canada, franchise revenues increased by 6% to $284 million in fiscal 2007, primarily as a result of positive franchise comparable sales in this segment of 3.8% and higher effective royalty rates partially offset by the elimination of royalties from a net reduction of 65 franchise restaurants during fiscal 2007.
 
In EMEA/APAC, franchise revenues increased by 13% to $135 million in fiscal 2007, driven by an increase of 69 restaurants (net of closures and acquisitions of franchise restaurants by us) during fiscal 2007, franchise comparable sales in this segment of 3.1% and the favorable impact from the movement of foreign currency exchange rates of $7 million.
 
Latin America franchise revenues increased by 21% to $41 million in fiscal 2007, as a result of positive franchise comparable sales in this segment of 3.7% and the addition of 87 franchise restaurants (net of closures) during fiscal 2007.
 
Property Revenues
 
Total property revenues increased by 4% to $116 million in fiscal 2007, primarily as a result of higher contingent rent payments driven by our franchise comparable sales growth and the favorable impact of foreign currency exchange rates in Europe, partially offset by a decrease in the number of properties that we lease or sublease to franchisees due to franchise restaurants that were closed or acquired by us during the period. In fiscal 2006, property revenues decreased by 7% to $112 million, as a result of a decrease in the number of properties that we lease or sublease to franchisees due to franchise restaurants that were closed or acquired by us during the period, partially offset by higher contingent rent payments.
 
In the United States and Canada, property revenues increased to $85 million in fiscal 2007 from $83 million in fiscal 2006. The revenues for both fiscal years in this segment were driven by higher contingent rent payments from increased franchise sales offset by the decrease in the number of properties that we lease or sublease to franchisees due to franchise restaurants that were closed or acquired by us.
 
Our EMEA/APAC property revenues increased by $2 million to $31 million, primarily as a result of the favorable impact of foreign currency exchange rates in Europe. In fiscal 2006, property revenues in this segment decreased by $8 million to $29 million primarily as a result of the closure of franchise restaurants in the U.K.


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Operating Costs and Expenses
 
Food, Paper and Product Costs
 
Total food, paper and product costs increased by 6% to $499 million in fiscal 2007, as a result of a 9% increase in Company restaurant revenues and the unfavorable impact of foreign currency exchange rates primarily in EMEA. As a percentage of Company restaurant revenues, food, paper and product costs decreased 0.9% to 30.1%, primarily from a decrease in the cost of beef and tomatoes for most of the year and the sale of higher margin products.
 
In the United States and Canada, food, paper and product costs increased by 3% in fiscal 2007, as a result of a 5% increase in Company restaurant revenues in this segment offset by a benefit from lower food costs. Food, paper and product costs as a percentage of Company restaurant revenues decreased 0.6% to 30.8%, primarily due to decreases in the cost of beef and tomatoes for most of the year. The cost of beef increased in the fourth quarter of fiscal 2007 placing downward pressures on Company restaurant margins in the U.S. and Canada.
 
In EMEA/APAC, food, paper and product costs increased by 15% in fiscal 2007, primarily as a result of a 20% increase in Company restaurant revenues in this segment and from the unfavorable impact of foreign currency exchange rates. Food, paper and product costs as a percentage of Company restaurant revenues decreased 1.2% to 27.9% driven by price increases for our products and promotions geared towards higher margin products.
 
In Latin America, food, paper and product costs increased by 10% in fiscal 2007 as a result of a 9% increase in Company restaurant revenues in this segment. As a percentage of revenues, food, paper and product costs remained relatively unchanged at 36.6% for fiscal 2007 compared to 36.4% for fiscal 2006.
 
Payroll and Employee Benefits
 
Payroll and employee benefits costs increased by 10% to $492 million in fiscal 2007. This increase was primarily due to the addition of 63 Company restaurants (net of closures) in fiscal 2007, increased wages and health insurance benefit costs, and unfavorable impact of foreign currency exchange rates. As a percentage of Company restaurant revenues, payroll and employee benefits costs remained relatively unchanged at 29.7% in fiscal 2007 compared to 29.4% in fiscal 2006 reflecting the increase from the items above offset by labor efficiencies.
 
In the United States and Canada, payroll and employee benefits increased by 5%, as a result of a net increase in the number of Company restaurants, additional labor hours required for late night hours and the increase in Company comparable sales, and inflationary increases in salaries and wages and benefits. Payroll and employee benefits remained relatively unchanged as a percentage of Company restaurant revenues reflecting positive comparable sales and labor efficiencies as an offset to inflationary increases.
 
In EMEA/APAC, payroll and employee benefits increased by 23% in fiscal 2007, primarily as a result of 36 additional Company restaurants (net of closures and refranchisings) in fiscal 2007 and the unfavorable impact of foreign currency exchange rates. Payroll and employee benefits as a percentage of Company restaurant revenues increased 0.5% to 30.3% primarily due to the acquisition of franchise restaurants in the U.K. generating lower sales.
 
In Latin America, payroll and employee benefits increased by 9% in fiscal 2007, primarily as a result of the opening of eight new Company restaurants during fiscal 2007. Payroll and employee benefits remained relatively unchanged as a percentage of Company restaurant revenues in fiscal 2007 compared to fiscal 2006.
 
Occupancy and Other Operating Costs
 
Occupancy and other operating costs increased by 10% to $418 million in fiscal 2007, compared to the prior year. This increase was primarily attributable to escalating rent and utility costs in EMEA, the addition of 63 Company restaurants (net of closures and refranchisings) in fiscal 2007 and the unfavorable impact of foreign currency exchange rates. Occupancy and other operating costs remained relatively unchanged as a percentage of worldwide Company restaurant revenues in fiscal 2007 compared to fiscal 2006.
 
In the United States and Canada, occupancy and other operating costs increased by 2% in fiscal 2007, compared to fiscal 2006, driven by 19 additional Company restaurants (net of closures and refranchisings) in fiscal


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2007, and an increase in utility costs to operate during late night hours. These costs decreased as a percentage of Company restaurant revenues by 0.8% to 23.5% as a result of a reduction in casualty and hurricane-related losses.
 
In EMEA/APAC, occupancy and other operating costs increased by 28% in fiscal 2007, compared to the same period in the prior year, primarily due to the addition of 36 Company restaurants (net of closures and refranchisings) in fiscal 2007, and unfavorable impact of foreign currency exchange rates. As a percentage of Company restaurant revenues, occupancy and other operating costs increased to 28.8%, compared to 27.2% in fiscal 2006. The increase in these costs as a percentage of revenues reflects increases in utilities and rents in all major markets.
 
In Latin America, occupancy and other operating costs increased by 16%, primarily as a result of an increase of eight Company restaurants in fiscal 2007. As a percentage of Company restaurant revenues, these costs increased by 0.6% to 25.9% in fiscal 2007 compared to the prior year, primarily as a result of an increase in utilities, property taxes, repairs and maintenance and the cost of information technology including POS systems.
 
Selling, General and Administrative Expenses
 
Selling expenses increased by $11 million for the twelve months ended June 30, 2007, compared to the same period in the prior year. This increase includes $9 million of additional sales promotions and advertising expenses generated by higher Company restaurant revenues, and $7 million related to incremental contributions made by the Company to the marketing fund in the U.K. and Germany, offset by a $5 million recovery of bad debt. The incremental contribution to the marketing fund in the U.K. was used to improve brand recognition in that market and to introduce new premium products with commercials such as, the “Manthem” and the Have It Your Way brand promise, and promotions for the £1.99 Whopper sandwich and Aberdeen Angus burger. The overall increase in selling expenses for fiscal 2007 of $11 million also includes the unfavorable impact of approximately $3 million from the movement in foreign currency exchange rates.
 
General and administrative expenses decreased by $25 million to $391 million for fiscal 2007, compared to the same period in the prior year. This decrease was primarily driven by a non-recurring compensation expense and taxes related to the compensatory make-whole payment of $34 million in the prior year, and by a reduction in severance and relocation of $3 million, offset by $4 million in professional fees including $1 million of expenses related to the secondary offering by private equity funds controlled by the Sponsors, $5 million of stock-based compensation, an increase in corporate salary and fringe benefits of $3 million, and an increase in travel and meetings of $4 million. The overall decrease of $25 million also includes the unfavorable impact of approximately $8 million from the movement in foreign currency exchange rates.
 
Property Expenses
 
Property expenses increased by $4 million to $61 million in fiscal 2007, as a result of lower amortization of unfavorable leases in the United States and Canada and the unfavorable impact of foreign currency exchange rates in Europe. Property expenses decreased by $7 million to $57 million in fiscal 2006, as a result of a decrease in the number of properties that we lease or sublease to franchisees, primarily due to restaurant closures and the acquisition of franchise restaurants. Additionally, the revenues from properties that we lease or sublease to non-restaurant businesses after restaurant closures is treated as a reduction in property expenses, resulting in decreased property revenues and expenses in fiscal 2006. Property expenses were 37% of property revenues in the United States and Canada in fiscal 2007 compared to 35% in fiscal 2006. Our property expenses in EMEA/APAC approximate our property revenues because most of the EMEA/APAC property operations consist of properties that are subleased to franchisees on a pass-through basis.
 
Fees Paid to Affiliates
 
During fiscal 2007, we incurred no fees to affiliates.  Fees paid to affiliates were $39 million during fiscal 2006, consisting of $30 million paid to our Sponsors to terminate the management agreement and $9 million from regular recurring monthly management fees.


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Other Operating (Income) Expense, Net
 
Other operating income, net for fiscal 2007 was $1 million, compared to $2 million for the same period in the prior year. The $1 million of other operating income, net for fiscal 2007 includes a net gain of $5 million from the disposal of assets, a gain of $7 million from forward currency contracts used to hedge intercompany loans denominated in foreign currencies offset by $7 million in costs associated with the termination of the lease for a new headquarters which we had proposed to build in Coral Gables, Florida, $2 million in litigation reserves, and $3 million in franchise workout costs. The $2 million of other operating income, net for the twelve months ended June 30, 2006 included a gain of $3 million from the disposal of assets including the termination of unfavorable leases in the U.S., Canada, and the U.K., a $2 million gain from the recovery of an investment in franchisee debt, and a $1 million recovery from an investment in New Zealand that has since been dissolved. These gains were offset by $4 million of closed restaurant expenses in the U.K. and the U.S.
 
Income from Operations
 
                 
    For the
 
    Fiscal Years
 
    Ended
 
    June 30,  
    2007     2006  
    (in millions)  
 
Income from Operations:
               
United States and Canada
  $ 336     $ 295  
EMEA/APAC
    54       62  
Latin America
    35       29  
Unallocated
    (134 )     (216 )
                 
Total Income from Operations
  $ 291     $ 170  
                 
 
Income from operations increased by $121 million to $291 million in fiscal 2007 compared to the prior year, primarily as a result of a reduction in fees paid to affiliates and decreased selling, general and administrative expenses from the non-recurrence of management fees of $39 million paid to our Sponsors, as well as the compensation expense and taxes of $34 million recorded in fiscal 2006 related to the compensatory make-whole payment. Improvement in restaurant sales driven by strong comparable sales increased franchise revenues and Company restaurant revenues and margins. See Note 21 to our audited consolidated financial statements contained in this report for income from operations by segment. The favorable impact that the movement in foreign currency exchange rates had on revenues was offset by the unfavorable impact on operating costs and expenses, resulting in a $1 million favorable overall impact on income from operations.
 
In the United States and Canada, income from operations increased by $41 million to $336 million during fiscal 2007 compared to the prior year, primarily as a result of an increase in Company restaurant margins of $20 million and an increase in franchise revenues of $17 million, driven by lower Company restaurant expenses and positive comparable sales for both Company and franchise restaurants.
 
Income from operations in EMEA/APAC decreased by $8 million to $54 million in fiscal 2007 compared to the prior year, driven primarily by an increase of $34 million in selling, general and administrative expenses, offset by an increase in Company restaurant margins of $5 million, an increase in franchise revenues of $16 million and an increase in other operating income of $5 million generated by a gain on the sale of a joint venture in New Zealand in fiscal 2007. The increase in selling, general and administrative expenses of $34 million reflects increases in the following: advertising expenses of $11 million; salaries and fringe benefits of $6 million; relocation, severance and training expenses of $5 million; professional fees of $4 million; travel and meeting expenses of $3 million; and bad debt expense of $2 million.
 
Income from operations in Latin America increased by $6 million to $35 million in fiscal 2007 compared to the prior year, due to an increase in franchise revenues from comparable sales of 3.7% and a net increase of 87 franchise restaurants during fiscal 2007.


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Interest Expense, Net
 
Interest expense, net decreased by $5 million during the twelve months ended June 30, 2007, compared to the same period in the prior year reflecting a decrease in interest expense of $8 million offset by a decrease in interest income of $3 million. The decrease in interest expense is primarily due to a reduction in the amount of borrowings outstanding, which reduced interest expense by $12 million. An increase in rates paid on borrowings increased interest expense by $10 million during the period, offset by the benefit from interest rate swaps of $6 million. The decrease in interest income of $3 million is due to a reduction in the amount of interest earning cash equivalents combined with a reduction in yields.
 
Loss on Early Extinguishment of Debt
 
Loss on early extinguishment of debt was $1 million in fiscal 2007 compared to $18 million in fiscal 2006. The decrease of $17 million was due to the write off of deferred financing costs recognized in conjunction with the refinancing of our secured debt in July 2005, the incremental $350 million borrowing made in February 2006, and the $350 million prepayment of term debt from the proceeds of our initial public offering.
 
Income Tax Expense
 
Income tax expense was $75 million in fiscal 2007. Compared to the prior fiscal year, our effective tax rate decreased approximately 33 percentage points to 33.6%, primarily as a result of tax benefits realized from an operational realignment of our European and Asian businesses, and from the reduction in tax accruals due to the resolution of certain tax audit matters.
 
See Note 14 to our consolidated financial statements for further information regarding our effective tax rate. See Item 1A “Risk Factors” in Part I of this report for a discussion regarding our ability to utilize foreign tax credits.
 
Net Income
 
Net income increased by $121 million to $148 million in fiscal 2007 compared to the prior year, primarily as a result of a reduction in fees paid to affiliates and decreased selling, general and administrative expenses from the non-recurrence of management fees of $39 million paid to our Sponsors, as well as the compensation expense and taxes of $34 million recorded in fiscal 2006 related to the compensatory make-whole payment. Improvement in restaurant sales driven by strong comparable sales increased franchise revenues and Company restaurant revenues and improved our margins. The increase in net income was also attributed to the net decrease in interest expense of $5 million, decrease in early extinguishment of debt of $17 million, offset by an increase in income tax expense of $22 million.
 
Liquidity and Capital Resources
 
Overview
 
Cash provided by operations was $243 million in fiscal 2008, compared to $110 million in fiscal 2007.
 
Our leverage ratio, as defined by our credit agreement, was 1.8x as of June 30, 2008, compared to 2.1x as of June 30, 2007. The weighted average interest rate on our term debt for fiscal 2008 was 6.0%, which included the benefit of interest rates swaps on 56% of our debt.
 
On January 30, 2008, we entered into interest rate swaps with an aggregate notional value of $275 million, which became effective on March 31, 2008 and mature on December 31, 2011, and in September 2007, interest rate swaps with an aggregate notional value of $60 million matured. At June 30, 2008, 75% of our debt was hedged using interest rate swaps.
 
During fiscal 2008, we declared and paid four quarterly dividends of $0.0625 per share, resulting in $34 million of cash payments to shareholders of record. During the first quarter of fiscal 2009, we declared a quarterly dividend of $0.0625 that is payable on September 30, 2008 to shareholders of record on September 12, 2008.


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During fiscal 2008, we repurchased 1.2 million shares of common stock under our previously announced share repurchase program at an aggregate cost of $32 million, which we will retain in treasury for future use. As of July 1, 2008, we had $68 million remaining under the share repurchase program. We intend to use a portion of our excess cash to repurchase shares under our share repurchase program depending on market conditions.
 
We had cash and cash equivalents of $166 million as of June 30, 2008. In addition, as of June 30, 2008, we had a borrowing capacity of $73 million under our $150 million revolving credit.
 
On July 16, 2008, we acquired 72 restaurants in Nebraska and Iowa from one of our franchisees for a purchase price of approximately $67 million.
 
We expect that cash on hand, cash flow from operations and our borrowing capacity under our revolving credit facility will allow us to meet cash requirements, including capital expenditures, tax payments, dividends, debt service payments and share repurchases, if any, over the next twelve months and for the foreseeable future. If additional funds are needed for strategic initiatives or other corporate purposes, we believe we could incur additional debt or raise funds through the issuance of our equity securities.
 
Comparative Cash Flows
 
Operating Activities
 
Cash provided by operating activities was $243 million in fiscal 2008, compared to $110 million in fiscal 2007. The $133 million increase in the amount of cash provided by operating activities in fiscal 2008 is primarily attributable to the non-recurrence of $82 million of tax payments made in connection with the operational realignment of our European and Asian businesses in fiscal 2007 and increases in earnings and cash provided by other changes in working capital, partially offset by a $22 million payment to establish a rabbi trust to invest compensation deferred under our Executive Retirement Plan and fund future deferred compensation obligations.
 
Cash provided by operating activities was $110 million and $67 million in fiscal 2007 and 2006, respectively. The $110 million provided in fiscal 2007 includes net income of $148 million, offset by a usage of cash from a change in working capital of $112 million, including tax payments of $151 million, which were primarily comprised of payments of $82 million made in connection with the operational realignment of our European and Asian businesses and $37 million of quarterly estimated U.S. federal and state tax payments. The $67 million provided in fiscal 2006 includes an interest payment to affiliates of $103 million on PIK notes and a usage of cash from a change in working capital of $29 million.
 
Investing Activities
 
Cash used for investing activities was $199 million in fiscal 2008, compared to $77 million in fiscal 2007. The $122 million increase in the amount of cash used in fiscal 2008 was primarily attributable to a $91 million increase in capital expenditures and a $37 million increase in cash used for acquisitions of franchise restaurants.
 
Cash used for investing activities was $77 million in fiscal 2007, compared to $67 million in fiscal 2006. The $10 million increase in the amount of cash used in fiscal 2007, compared to the prior fiscal year, was due primarily to an increase in cash used of $13 million for acquisitions of franchise restaurants, investments in third party debt, and payments for property and equipment offset by an increase in proceeds of $4 million from asset disposals and restaurant closures.
 
Capital expenditures for new restaurants include the costs to build new Company restaurants as well as properties for new restaurants that we lease to franchisees. Capital expenditures for existing restaurants consist of the purchase of real estate related to existing restaurants, as well as renovations to Company restaurants, including restaurants acquired from franchisees, investments in new equipment and normal annual capital investments for each Company restaurant to maintain its appearance in accordance with our standards. Capital expenditures for existing restaurants also include investments in improvements to properties we lease and sublease to franchisees, including contributions we make toward leasehold improvements completed by franchisees on properties we own.


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Other capital expenditures include investments in information technology systems and corporate furniture and fixtures. The following table presents capital expenditures by type of expenditure:
 
                         
    For the
 
    Fiscal Years Ended
 
    June 30,  
    2008     2007     2006  
    (In millions)  
 
New restaurants
  $ 55     $ 23     $ 25  
Existing restaurants
    102       47       46  
Other, including corporate
    21       17       14  
                         
Total
  $ 178     $ 87     $ 85  
                         
 
Our capital expenditures increased in fiscal 2008 primarily as a result a $32 million increase in the construction of new Company restaurants and properties leased to franchisees, a $30 million increase in costs associated with our restaurant reimaging program, a $12 million increase in real estate purchases and a $7 million increase in capital expenditures related to operational initiatives.
 
For fiscal 2009, we expect capital expenditures of approximately $170 million to $190 million to develop new restaurants and properties, to fund our restaurant reimaging program and to make improvements to restaurants we acquire, for operational initiatives in our restaurants and for other corporate expenditures.
 
Financing Activities
 
Cash used by financing activities was $62 million in fiscal 2008, compared to $127 million in fiscal 2007. The $65 million decrease in the amount of cash used in fiscal 2008 was primarily attributable to a $124 million reduction in net repayments of debt, partially offset by a $33 million increase in cash used to repurchase our common stock and a $17 million increase in cash dividends paid to our shareholders.
 
Financing activities used cash of $127 million in fiscal 2007 and $173 million in fiscal 2006. Uses of cash in financing activities in fiscal 2007 primarily consisted of repayments of debt and capital leases of $131 million, two quarterly cash dividend payments totaling $17 million and the purchase of treasury stock of $2 million, offset by $14 million in tax benefits from stock-based compensation, $8 million from proceeds of stock-option exercises and $1 million of proceeds from a foreign credit facility. Uses of cash in financing activities in fiscal 2006 included the repayment of $2.3 billion in long-term debt and capital leases, payment of a $367 million cash dividend and payment of financing costs of $19 million, offset by $2.1 billion of proceeds received from the refinancing of our credit facility.
 
Contractual Obligations and Commitments
 
The following table presents information relating to our contractual obligations as of June 30, 2008:
 
                                         
    Payment Due by Period  
          Less Than
                More Than
 
Contractual Obligations
  Total     1 Year     1-3 Years     3-5 Years     5 Years  
    (In millions)  
 
Capital lease obligations
  $ 154     $ 15     $ 30     $ 28     $ 81  
Operating lease obligations
    1,531       171       312       268       780  
Unrecognized tax benefits(1)
    19       8       8       3        
Long-term debt, including current portion and interest(2)
    1,040       49       288       702       1  
Purchase commitments(3)
    125       97       28              
                                         
Total
  $ 2,869     $ 340     $ 666     $ 1,001     $ 862  
                                         


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(1) The period of settlement related to $4 million of our total $23 million of unrecognized tax benefits can not be determined and therefore, this $4 million has been excluded from this table. See Note 14 to our consolidated financial statements for additional information regarding unrecognized tax benefits.
 
(2) We have estimated our interest payments based on (i) current LIBOR rates, (ii) the portion of our debt we converted to fixed rates through interest rate swaps and (iii) the amortization schedule in our credit agreement.
 
(3) Includes open purchase orders, as well as commitments to purchase advertising and other marketing services from third parties in advance on behalf of the Burger King system and obligations related to information technology and service agreements.
 
See Note 16 to our audited consolidated financial statements in Part II, Item 8 of this Form 10-K for information about our leasing arrangements.
 
As of June 30, 2008, the projected benefit obligation of our U.S. and international defined benefit pension plans exceeded pension assets by $54 million. We use the Moody’s long-term corporate bond yield indices for Aa bonds (“Moody’s Aa rate”), plus an additional 25 basis points to reflect the longer duration of our plans, as the discount rate used in the calculation of the projected benefit obligation as of the measurement date. We made contributions totaling $6 million into our pension plans and estimated benefit payments of $5 million out of these plans during fiscal 2008. Estimates of reasonably likely future pension contributions are dependent on pension asset performance, future interest rates, future tax law changes, and future changes in regulatory funding requirements.
 
Other Commercial Commitments and Off-Balance Sheet Arrangements
 
We have commitments outstanding and contingent obligations relating to our FFRP Program, guarantees and letters of credit issued in our normal course of business, vendor relationships, litigation and our insurance programs. For information on these commitments and contingent obligations, see Note 20 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
 
Impact of Inflation
 
We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing commodity prices did not have a material impact on our operations in fiscal 2008, fiscal 2007 or fiscal 2006. Severe increases in inflation, however, could affect the global and U.S. economies and could have an adverse impact on our business, financial condition and results of operations.
 
Critical Accounting Policies and Estimates
 
This discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosures of contingent assets and liabilities. We evaluate our estimates on an ongoing basis and we base our estimates on historical experience and various other assumptions we deem reasonable to the situation. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Changes in our estimates could materially impact our results of operations and financial condition in any particular period.
 
We consider our critical accounting policies and estimates to be as follows based on the high degree of judgment or complexity in their application:
 
Long-lived Assets
 
Long-lived assets (including definite-lived intangible assets) are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We regularly review long-lived assets for indications of impairment. Some of the events or changes in circumstances that would trigger an impairment test include, but are not limited to:
 
  •  significant under-performance relative to expected and/or historical results (negative comparable sales or cash flows for two consecutive years);


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  •  significant negative industry or economic trends; or
 
  •  knowledge of transactions involving the sale of similar property at amounts below our carrying value.
 
The impairment test for long-lived assets requires us to assess the recoverability of our long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual disposition of the assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we would be required to record an impairment charge equal to the excess, if any, of net carrying value over fair value.
 
Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. Definite-lived intangible assets, consisting primarily of franchise agreements and reacquired franchise rights, are grouped for impairment reviews at the country level. Other long-lived assets and related liabilities are grouped together for impairment reviews at the operating market level (based on geographic areas) in the case of the United States, Canada, the U.K. and Germany. The operating market groupings within the United States and Canada are predominantly based on major metropolitan areas within the United States and Canada. Similarly, operating markets within the other foreign countries with larger long-lived asset concentrations (the U.K. and Germany) are made up of geographic regions within those countries (three in the U.K. and four in Germany). These operating market definitions are based upon the following primary factors:
 
  •  management views profitability of the restaurants within the operating markets as a whole, based on cash flows generated by a portfolio of restaurants, rather than by individual restaurants and area managers receive incentives on this basis; and
 
  •  management does not evaluate individual restaurants to build, acquire or close independent of any analysis of other restaurants in these operating markets.
 
In countries in which we have a smaller number of restaurants most operating functions and advertising are performed at the country level, and shared by all restaurants in the country. As a result, we have defined operating markets as the entire country in the case of The Netherlands, Spain, Italy, Mexico and China.
 
When assessing the recoverability of our long-lived assets, we make assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high degree of judgment and also bear a significant impact on the assessment conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection of comparable sales, restaurant operating expenses, and capital requirements for property and equipment. We formulate estimates from historical experience and assumptions of future performance, based on business plans and forecasts, recent economic and business trends, and competitive conditions. In the event that our estimates or related assumptions change in the future, we may be required to record an impairment charge in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.
 
Impairment of Goodwill and Indefinite-lived Intangible Assets
 
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in our acquisitions of franchise restaurants, predominately in the United States, which are accounted for as business combinations in accordance with SFAS No. 141, “Business Combinations.” Our indefinite-lived intangible asset consists of the Burger King brand (the “Brand”).
 
We test goodwill and the Brand for impairment on an annual basis and more often if an event occurs or circumstances change that indicates impairment might exist, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.
 
Our impairment test for goodwill requires us to compare the carrying value of a reporting unit with assigned goodwill to its fair value. Our reporting units are our operating segments, as we have defined them under SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.” If the carrying value of the reporting unit exceeds its fair value, we may be required to record an impairment charge to goodwill. Our impairment test for the Brand consists of a comparison of the carrying value of the Brand to its fair value on a


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consolidated basis, with impairment equal to the amount by which the carrying value of the Brand exceeds its fair value.
 
When testing goodwill and the Brand for impairment, we make assumptions regarding the amount and the timing of estimated future cash flows similar to those when testing long-lived assets for impairment, as described above. In the event that our estimates or related assumptions change in the future, we may be required to record an impairment charge in accordance with SFAS No. 142.
 
We completed our impairment testing of goodwill and the Brand as of the beginning of our fourth fiscal quarter. Impairment charges did not result from these impairment tests for fiscal 2008, fiscal 2007 and fiscal 2006.
 
Accounting for Income Taxes
 
We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carry-forwards. When considered necessary, we record a valuation allowance to reduce deferred tax assets to the balance that is more likely than not to be realized. We must make estimates and judgments on future taxable income, considering feasible tax planning strategies and taking into account existing facts and circumstances, to determine the proper valuation allowance. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and income statement reflect the change in the period such determination is made. Due to changes in facts and circumstances and the estimates and judgments that are involved in determining the proper valuation allowance, differences between actual future events and prior estimates and judgments could result in adjustments to this valuation allowance.
 
We file income tax returns, including returns for our subsidiaries, with federal, state, local and foreign jurisdictions. We are subject to routine examination by taxing authorities in these jurisdictions. Effective July 1, 2007, we adopted FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate available evidence to determine if it appears more likely than not that an uncertain tax position will be sustained on an audit by a taxing authority, based solely on the technical merits of the tax position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settling the uncertain tax position.
 
Although we believe we have adequately accounted for our uncertain tax positions, from time to time, audits result in proposed assessments where the ultimate resolution may result in us owing additional taxes. We adjust our uncertain tax positions in light of changing facts and circumstances, such as the completion of a tax audit, expiration of a statute of limitations, the refinement of an estimate, and interest accruals associated with uncertain tax positions until they are resolved. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters. However, to the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.
 
We use an estimate of the annual effective tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at fiscal year-end.
 
Insurance Reserves
 
We carry insurance to cover claims such as workers’ compensation, general liability, automotive liability, executive risk and property, and we are self-insured for healthcare claims for eligible participating employees. Through the use of insurance program deductibles (ranging from $0.5 million to $1 million) and self insurance, we retain a significant portion of the expected losses under these programs. Insurance reserves have been recorded based on our estimates of the anticipated ultimate costs to settle all claims, both reported and incurred-but-not-reported (IBNR).
 
Our accounting policies regarding these insurance programs include judgments and independent actuarial assumptions about economic conditions, the frequency or severity of claims and claim development patterns and claim reserve, management and settlement practices. Since there are many estimates and assumptions involved in


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recording insurance reserves, differences between actual future events and prior estimates and assumptions could result in adjustments to these reserves.
 
Stock-based Compensation
 
Stock-based compensation expense for stock options is estimated on the grant date using a Black-Scholes option pricing model. We only grant non-qualified stock options and do not grant incentive stock options. Our specific weighted average assumptions for the risk-free interest rate, expected term, expected volatility and expected dividend yield are documented in Note 3 to our audited consolidated financial statements included in Part II, Item 8 of this Form 10-K. Additionally, under SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), we are required to estimate pre-vesting forfeitures for purposes of determining compensation expense to be recognized. Future expense amounts for any quarterly or annual period could be affected by changes in our assumptions or changes in market conditions.
 
In connection with the adoption of SFAS No. 123R, we have determined the expected term of stock options granted using the simplified method as discussed in Section D, Certain Assumptions Used in Valuation Methods, of SEC Staff Accounting Bulletin (“SAB”) No. 107. Based on the results of applying the simplified method, we have determined that 6.25 years is an appropriate expected term for awards with four-year ratable vesting and 6.50 years for awards with five-year ratable vesting.
 
As a newly public company, we had previously elected, for stock options granted subsequent to our adoption of SFAS No. 123R to base our estimate of the expected volatility of our common stock for the Black-Scholes model solely on the historical volatility of a group of our peers, as permitted under SFAS No. 123R and SAB No. 107. Beginning in fiscal 2008, we determined that we had sufficient information regarding the historical volatility of our stock price and implied volatility of our exchange-traded options to incorporate a portion of these volatilities into the calculation of expected volatility used in the Black-Scholes model in addition to the historical volatility of a group of our peers.
 
New Accounting Pronouncements Issued But Not Yet Adopted
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which allows entities to voluntarily choose, at specified election dates, to measure certain financial assets and financial liabilities (as well as certain nonfinancial instruments that are similar to financial instruments) at fair value (the “fair value option”). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, SFAS No. 159 specifies that all subsequent changes in fair value for that instrument must be reported in earnings. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, which for us was July 1, 2008. We do not expect to make an election to measure any of our currently eligible financial assets or liabilities at fair value upon the adoption of SFAS No. 159 and, therefore, do not expect the adoption of SFAS No. 159 will have a material impact on our statements of operations or financial position.
 
In December 2007, the FASB issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS 141R”). SFAS No. 141R replaces SFAS No. 141 but retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141 defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS No. 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values at the acquisition date. Costs incurred by the acquirer to effect the acquisition are not allocated to the assets acquired or liabilities assumed, but are recognized separately. SFAS No. 141R is effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which for us will be business combinations with an acquisition date beginning on or after July 1, 2009. We have not yet determined the impact that SFAS No. 141R will have on our consolidated balance sheet and income statement.
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.” SFAS No. 160 amends ARB No. 51 to establish accounting and


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reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary and clarifies that a noncontrolling interest in a subsidiary is an ownership interest that should be reported as equity in the consolidated financial statements. SFAS No. 160 establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and requires a parent to recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS No. 160 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest and to disclose, on the face of the consolidated statement of income, the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008, which for us will be our fiscal year beginning on July 1, 2009. We have not yet determined the impact, if any, that SFAS No. 160 will have on our consolidated balance sheet and income statement.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in GAAP, and enhances disclosures about fair value measurements. In February 2008, the FASB amended SFAS No. 157 by issuing FASB Staff Position (“FSP”) FAS 157-1,Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement No. 13”, which states that SFAS No. 157 does not address fair value measurements for purposes of lease classification or measurement. FSP FAS 157-1 does not apply to assets acquired or liabilities assumed in a business combination that are required to be measured at fair value under SFAS No. 141 or SFAS No. 141(R), regardless of whether those assets and liabilities are related to leases. In February 2008, the FASB also issued FSP FAS 157-2,Effective Date of FASB Statement No. 157”, which delayed the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.
 
SFAS No. 157 applies when other accounting pronouncements require fair value measurements but does not require new fair value measurements. We will be required to adopt the provisions of SFAS No. 157 effective July 1, 2008 for financial assets and liabilities. We do not expect this adoption to have a material impact on our statements of operations or financial position. We have not yet determined the impact, if any, of applying the provisions of SFAS No. 157 to our nonfinancial assets and liabilities for the purpose of assessing goodwill and brand impairment, the valuation of our other intangible and long-lived assets when assessing them for impairment and the valuation of assets acquired and liabilities assumed in business combinations.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133,” which establishes, among other things, the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for fiscal periods and interim periods beginning after November 15, 2008, which for us will be of our fiscal year beginning July 1, 2009.
 
Item 7A.   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 speculative purposes, and we have procedures in place to monitor and control their use.
 
Foreign Currency Exchange Risk
 
Movements in foreign currency exchange rates may affect the translated value of our earnings and cash flow associated with our foreign operations, as well as the translation of net asset or liability positions that are denominated in foreign currencies. In countries outside of the United States where we operate Company restaurants, we generate revenues and incur operating expenses and selling, general and administrative expenses denominated in


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local currencies. In many foreign countries where we do not have Company restaurants our franchisees pay royalties in U.S. dollars. However, as the royalties are calculated based on local currency sales, our revenues are still impacted from fluctuations in exchange rates. In fiscal 2008, income from operations would have decreased or increased $14 million if all foreign currencies uniformly weakened or strengthened 10% relative to the U.S. dollar.
 
We use foreign exchange forward contracts as economic hedges to offset the future impact of gains and losses resulting from changes in the expected amount of functional currency cash flows to be received or paid upon settlement of intercompany loans denominated in foreign currencies. Changes in the fair value of the forward contracts attributable to changes in the current spot rates between the U.S. Dollar and the foreign currencies are offset by the remeasurement of the intercompany loans. The portion of the fair value of the forward contracts attributable to the spot-forward difference (the difference between the spot exchange rate and the forward exchange rate) is recognized in earnings as a gain or loss on foreign exchange (See Note 12 to the Consolidated Financial Statements). The contracts outstanding as of June 30, 2008 mature at various dates through December 2008 and we intend to continue to renew these contracts to hedge our foreign exchange impact.
 
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 interest rate swaps. These swaps are entered into with financial institutions and have reset dates and key terms that match those of the underlying debt. Accordingly, any change in market value associated with interest rate swaps is offset by the opposite market impact on the related debt.
 
As of June 30, 2008, we had interest rate swaps with a notional value of $655 million that qualify as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. The interest rate swaps help us manage exposure to changes in forecasted LIBOR-based interest payments made on variable rate debt. A 1% change in interest rates on our existing debt of $871 million would result in an increase or decrease in interest expense of approximately $2 million in a given year, as we have hedged interest payments on $655 million of our debt.
 
Commodity Price Risk
 
We purchase certain products, including beef, chicken, cheese, french fries, tomatoes and other commodities which are subject to price volatility that is caused by weather, market conditions and other factors that are not considered predictable or within our control. Additionally, our ability to recover increased costs is typically limited by the competitive environment in which we operate. We do not utilize commodity option or future contracts to hedge commodity prices and do not have long-term pricing arrangements other than for chicken, which expires in December 2008. As a result, we purchase beef and other commodities at market prices, which fluctuate on a daily basis.
 
The estimated change in Company restaurant food, paper and product costs from a hypothetical 10% change in average prices of our commodities would have been approximately $55 million for fiscal 2008. The hypothetical change in food, paper and product costs could be positively or negatively affected by changes in prices or product sales mix.


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Item 8.   Financial Statements and Supplementary Data
 
BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
         
 
       
Management’s Report on Internal Control Over Financial Reporting
    68  
       
Reports of Independent Registered Public Accounting Firm
    69  
       
Consolidated Balance Sheets as of June 30, 2008 and 2007
    71  
       
Consolidated Statements of Income for each of the years in the three-year period ended June 30, 2008
    72  
       
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for each of the years in the three-year period ended June 30, 2008
    73  
       
Consolidated Statements of Cash Flows for each of the years in the three-year period ended June 30, 2008
    74  
       
Notes to Consolidated Financial Statements
    75  


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Management’s Report on Internal Control Over Financial Reporting
 
Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements, related notes and other information included in this annual report. The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and include certain amounts based on management’s estimates and assumptions. Other financial information presented is consistent with the financial statements.
 
Management is also responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of June 30, 2008. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2008 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management determined that the Company’s internal control over financial reporting was effective as of June 30, 2008.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
The effectiveness of the Company’s internal control over financial reporting as of June 30, 2008 has been audited by KPMG LLP, the Company’s independent registered public accounting firm, as stated in its report which is included herein.


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
Burger King Holdings, Inc.:
 
We have audited the accompanying consolidated balance sheets of Burger King Holdings, Inc. and subsidiaries (the Company) as of June 30, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 30, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Burger King Holdings, Inc. and subsidiaries as of June 30, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2008, in conformity with U.S. generally accepted accounting principles.
 
As discussed in notes 2 and 14 to the consolidated financial statements, the Company changed its method of accounting for uncertain tax positions by adopting Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” effective July 1, 2007. As discussed in notes 2 and 18 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106 and 132 (R),” as of June 30, 2007. As discussed in notes 2 and 3 to the consolidated financial statements, effective July 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R (revised 2004), “Share-Based Payment”.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 28, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
 
/s/ KPMG LLP
 
 
Miami, Florida
August 28, 2008
Certified Public Accountants


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
Burger King Holdings, Inc.:
 
We have audited the internal control over financial reporting of Burger King Holdings, Inc. and subsidiaries (the Company) as of June 30, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of June 30, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 30, 2008, and our report dated August 28, 2008 expressed an unqualified opinion on those consolidated financial statements.
 
 
/s/ KPMG LLP
 
 
Miami, Florida
August 28, 2008
Certified Public Accountants


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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
 
Consolidated Balance Sheets
 
                 
    As of June 30,  
    2008     2007  
    (In millions, except share data)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 166     $ 170  
Trade and notes receivable, net
    139       125  
Prepaids and other current assets, net
    54       66  
Deferred income taxes, net
    45       43  
                 
Total current assets
    404       404  
Property and equipment, net
    961       879  
Intangible assets, net
    1,055       986  
Goodwill
    27       23  
Net investment in property leased to franchisees
    135       142  
Other assets, net
    105       83  
                 
Total assets
  $ 2,687     $ 2,517  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Accounts and drafts payable
  $ 130     $ 106  
Accrued advertising
    77       64  
Other accrued liabilities
    242       259  
Current portion of long term debt and capital leases
    7       5  
                 
Total current liabilities
    456       434  
Term debt, net of current portion
    869       871  
Capital leases, net of current portion
    71       67  
Other deferrals and liabilities
    360       334  
Deferred income taxes, net
    86       95  
                 
Total liabilities
    1,842       1,801  
                 
Commitments and Contingencies (Note 20) 
               
Stockholders’ equity:
               
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding
           
Common stock, $0.01 par value; 300,000,000 shares authorized; 135,022,753 and 135,217,470 shares issued and outstanding at June 30, 2008 and 2007, respectively
    1       1  
Restricted stock units
          3  
Additional paid-in capital
    601       574  
Retained earnings
    290       134  
Accumulated other comprehensive income
    (8 )     8  
Treasury stock, at cost; 2,042,887 and 673,430 shares at June 30, 2008 and 2007, respectively
    (39 )     (4 )
                 
Total stockholders’ equity
    845       716  
                 
Total liabilities and stockholders’ equity
  $ 2,687     $ 2,517  
                 
 
See accompanying notes to consolidated financial statements.


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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
 
Consolidated Statements of Income
 
                         
    Years Ended June 30,  
    2008     2007     2006  
    (In millions, except
 
    per share data)  
 
Revenues:
                       
Company restaurant revenues
  $ 1,796     $ 1,658     $ 1,516  
Franchise revenues
    537       460       420  
Property revenues
    122       116       112  
                         
Total revenues
    2,455       2,234       2,048  
Company restaurant expenses:
                       
Food, paper and product costs
    564       499       470  
Payroll and employee benefits
    535       492       446  
Occupancy and other operating costs
    439       418       380  
                         
Total Company restaurant expenses
    1,538       1,409       1,296  
Selling, general and administrative expenses
    500       474       488  
Property expenses
    62       61       57  
Fees paid to affiliates
                39  
Other operating (income) expenses, net
    1       (1 )     (2 )
                         
Total operating costs and expenses
    2,101       1,943       1,878  
                         
Income from operations
    354       291       170  
                         
Interest expense
    67       73       81  
Interest income
    (6 )     (6 )     (9 )
                         
Total interest expense, net
    61       67       72  
Loss on early extinguishment of debt
          1       18  
                         
Income before income taxes
    293       223       80  
Income tax expense
    103       75       53  
                         
Net income
  $ 190     $ 148     $ 27  
                         
Earnings per share:
                       
Basic
  $ 1.40     $ 1.11     $ 0.24  
Diluted
  $ 1.38     $ 1.08     $ 0.24  
Weighted average shares outstanding:
                       
Basic
    135.1       133.9       110.3  
Diluted
    137.6       136.8       114.7  
Dividends per common share
  $ 0.25     $ 0.13     $ 3.42  
 
See accompanying notes to consolidated financial statements.


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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
 
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
 
                                                                 
          Issued
                                     
    Issued
    Common
    Restricted
    Additional
          Accumulated Other
             
    Common
    Stock
    Stock
    Paid-In
    Retained
    Comprehensive
    Treasury
       
    Stock Shares     Amount     Units     Capital     Earnings     Income (Loss)     Stock     Total  
    (In millions, except per share information)  
 
Balances at June 30, 2005
    107     $ 1     $ 2     $ 406     $ 76     $ (6 )   $ (2 )   $ 477  
Issuance of common stock including option exercises, net
    26                   399                         399  
Stock option tax benefits
                      7                         7  
Issuance of restricted stock units
                3                               3  
Dividend paid on common shares ($3.42 per share)
                      (267 )     (100 )                 (367 )
Comprehensive income:
                                                               
Net income
                            27                   27  
Foreign currency translation adjustment
                                  2             2  
Net change in fair value of derivatives, net of tax of ($10)
                                  16             16  
Minimum pension liability adjustment, net of tax of ($2)
                                  3             3  
                                                                 
Total comprehensive income
                                                            48  
                                                                 
Balances at June 30, 2006
    133     $ 1     $ 5     $ 545     $ 3     $ 15     $ (2 )   $ 567  
Stock option exercises
    2                   8                         8  
Stock option tax benefits
                      14                         14  
Stock-based compensation
                      5                         5  
Treasury stock purchases
                                        (2 )     (2 )
Issuance of shares upon settlement of restricted stock units
                (2 )     2                          
Dividend paid on common shares ($0.13 per share)
                            (17 )                 (17 )
Comprehensive income:
                                                               
Net income
                            148                   148  
Foreign currency translation adjustment
                                  (5 )           (5 )
Cash flow hedges:
                                                               
Net change in fair value of derivatives, net of tax of $3
                                  (5 )           (5 )
Amounts reclassified to earnings during the period, net of tax of $2
                                  (3 )           (3 )
                                                                 
Total comprehensive income
                                                            135  
Adjustment to initially apply SFAS No 158, net of tax of ($4)
                                  6             6  
                                                                 
Balances at June 30, 2007
    135     $ 1     $ 3     $ 574     $ 134     $ 8     $ (4 )   $ 716  
Stock option exercises
    1                   4                         4  
Stock option tax benefits
                      9                         9  
Stock-based compensation
                      11                         11  
Treasury stock purchases
    (1 )                                   (35 )     (35 )
Issuance of shares upon settlement of restricted stock units
                (3 )     3                          
Dividend paid on common shares ($0.25 per share)
                            (34 )                   (34 )
Comprehensive income:
                                                               
Net income
                            190                     190  
Foreign currency translation adjustment
                                  (2 )           (2 )
Cash flow hedges:
                                                               
Net change in fair value of derivatives, net of tax of $4
                                  (6 )           (6 )
Amounts reclassified to earnings during the period, net of tax of $1
                                  (1 )           (1 )
Pension and post-retirement benefit plans, net of tax of $4
                                  (7 )           (7 )
                                                                 
Total comprehensive income
                                                            174  
                                                                 
Balances at June 30, 2008
    135     $ 1     $     $ 601     $ 290     $ (8 )   $ (39 )   $ 845  
                                                                 
 
See accompanying notes to consolidated financial statements.


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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
 
 
                         
    Years Ended June 30,  
    2008     2007     2006  
    (In millions)  
 
Cash flows from operating activities:
                       
Net income
  $ 190     $ 148     $ 27  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    96       89       88  
Gain on hedging activities
    (2 )     (4 )      
Gain on remeasurement of foreign denominated transactions
    (56 )     (23 )      
Gain on asset sales and release of unfavorable lease obligation
    (17 )     (11 )     (1 )
Bad debt recoveries, net of provisions
    (3 )     (4 )     (2 )
Pension curtailment gain
                (6 )
Loss on early extinguishment of debt
          1       18  
Stock-based compensation
    11       5       1  
Deferred income taxes
    20       10       68  
Changes in current assets and liabilities, excluding acquisitions and dispositions:
                       
Trade and notes receivable
    (9 )     (13 )     7  
Prepaids and other current assets
    15       (17 )     (4 )
Accounts and drafts payable
    21       5       8  
Accrued advertising
    11       14       (10 )
Other accrued liabilities
    (6 )     (101 )     (30 )
Payment of interest on PIK notes
                (103 )
Other long-term assets and liabilities, net
    (28 )     11       6  
                         
Net cash provided by operating activities
    243       110       67  
                         
Cash flows from investing activities:
                       
Purchases of available-for-sale securities
          (350 )      
Proceeds from sale of available-for-sale securities
          350        
Payments for property and equipment
    (178 )     (87 )     (85 )
Proceeds from asset disposals and restaurant closures
    27       22       18  
Payments for acquired franchisee operations, net of cash acquired
    (54 )     (17 )     (8 )
Return of investment on direct financing leases
    7       7       7  
Other investing activities
    (1 )     (2 )     1  
                         
Net cash used for investing activities
    (199 )     (77 )     (67 )
                         
Cash flows from financing activities:
                       
Proceeds from term debt and credit facility
    50       1       2,143  
Repayments of term debt, credit facility and capital leases
    (56 )     (131 )     (2,329 )
Payments for financing costs
                (19 )
Proceeds from sale of common stock, net of offering costs
                399  
Proceeds from stock option exercises
    4       8        
Dividends paid on common stock
    (34 )     (17 )     (367 )
Excess tax benefits from stock-based compensation
    9       14        
Repurchase of common stock
    (35 )     (2 )      
                         
Net cash used for financing activities
    (62 )     (127 )     (173 )
                         
Effect of exchange rates on cash and cash equivalents
    14       5        
Decrease in cash and cash equivalents
    (4 )     (89 )     (173 )
Cash and cash equivalents at beginning of year
    170       259       432  
                         
Cash and cash equivalents at end of year
  $ 166     $ 170     $ 259  
                         
Supplemental cashflow disclosures:
                       
Interest paid(1)
  $ 65     $ 61     $ 180  
Income taxes paid(2)
  $ 74     $ 151     $ 16  
Non-cash investing and financing activities:
                       
Acquisition of property with capital lease obligations
  $ 9     $ 8     $ 13  
 
                         
 
(1) Amount for the year ended June 30, 2007 is net of $13 million received upon termination of interest rate swaps. Amount for the year ended June 30, 2006 included $103 million of interest paid on PIK notes.
 
(2) Amount for the year ended June 30, 2007 includes $82 million in income taxes incurred, resulting from the realignment of the Company’s European and Asian businesses.
 
See accompanying notes to consolidated financial statements.


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BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
 
 
Note 1.   Description of Business and Organization
 
Description of Business
 
Burger King Holdings, Inc. (“BKH” or the “Company”) is a Delaware corporation formed on July 23, 2002. The Company is the parent of Burger King Corporation (“BKC”), a Florida corporation that franchises and operates fast food hamburger restaurants, principally under the Burger King brand.
 
The Company generates revenues from three sources: (i) retail sales at Company restaurants; (ii) franchise revenues, consisting of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; and (iii) property income from restaurants that the Company leases or subleases to franchisees.
 
Restaurant sales are affected by the timing and effectiveness of the Company’s advertising, new products and promotional programs. The Company’s results of operations also fluctuate from quarter to quarter as a result of seasonal trends and other factors, such as the timing of restaurant openings and closings and the acquisition of franchise restaurants, as well as variability of the weather. Restaurant sales are typically higher in the Company’s fourth and first fiscal quarters, which are the spring and summer months when weather is warmer, than in the Company’s 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. The Company’s restaurant sales and Company restaurant margins are typically lowest during the Company’s third fiscal quarter, which occurs during the winter months and includes February, the shortest month of the year.