Burger King 2006 Annual Report Download - page 18

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Each franchisee wishing to develop a new restaurant is responsible for selecting a new site location. We
work closely with our franchisees to assist them in selecting sites. They must agree to search for a potential site
within an identified trade area and to have the final site location approved by the development committee.
Our franchisees closed 1,196 restaurants in the United States between July 1, 2002 and June 30, 2006.
Many of these closures involved franchisees in bankruptcy and our franchisee financial restructuring program.
See Part II, Item 7, ""Management's Discussion and Analysis of Financial Condition and Results of
Operations Ì Factors Affecting Comparability of Results Ì Historical Franchisee Financial Distress''. The
franchise restaurants that closed had average restaurant sales of approximately $625,000 in the 12 months
prior to closure. We and our franchisees opened 146 new restaurants in the United States between fiscal 2004
and fiscal 2006, of which 81 were opened for at least 12 months as of June 30, 2006. The average restaurant
sales of these new restaurants was approximately $1.3 million for the 12 months after opening. We and our
franchisees opened 53 restaurants and closed 225 restaurants in the United States in fiscal 2006. We believe
that the number of closures will significantly decline in fiscal 2007 and beyond. We have instituted a program
in the United States and Canada to encourage franchisees to open new restaurants by offering them reduced
upfront franchise fees.
In recent years, we have experienced lower levels of franchisees in the United States renewing their
expiring franchise agreements for a standard additional 20-year term than we have historically experienced. In
many cases, however, we agreed to extend the existing agreements to avoid the closure of the restaurants by
giving franchisees additional time to comply with our renewal requirements. To encourage franchisees to
renew, we instituted a program in the United States to allow them to pay the $50,000 franchise fee in
installments and to delay the required restaurant remodel for up to two years, while providing an incentive to
accelerate the completion of the remodel by offering reduced royalties for a limited period. We believe that
this program was important to maintaining our base of restaurants. As a result of this program and our other
initiatives, we have seen an increase in the number of restaurants with renewed franchise agreements.
Company Restaurants
As of June 30, 2006, we owned and operated 878 restaurants in the United States and Canada,
representing 12% of total U.S. and Canada system restaurants. Included in this number are 29 restaurants that
we operate but are owned by a joint venture between us and an independent third party. We also use our
company restaurants to test new products and initiatives before rolling them out to the wider Burger King
system.
Franchise Restaurants
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, 2006, there were approximately 6,656 franchise
restaurants in the United States and Canada. Franchisees report gross sales on a monthly basis and pay
royalties based on reported sales. The five largest franchisees in the United States and Canada in terms of
restaurant count represented in the aggregate approximately 16% of U.S. and Canadian Burger King franchise
restaurants at June 30, 2006.
Franchise Agreement Terms. For each franchise restaurant, we enter into a franchise agreement
covering a standard set of terms and conditions. The typical franchise agreement in the United States and
Canada has a 20-year term (for both initial grants and renewals of franchises) and contemplates a one-time
franchise fee of $50,000, which must be paid in full before the restaurant opens for business, or in the case of
renewal, before expiration of the current franchise term.
Recurring fees consist of monthly royalty and advertising payments. Franchisees in the United States and
Canada are generally required to pay us an advertising contribution equal to a percentage of gross sales,
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