Burger King 2006 Annual Report Download - page 71

In November 2005, we announced the curtailment of our pension plans in the United States and we froze
future pension benefit accruals, effective December 31, 2005. These plans will continue to pay benefits and
invest plan assets. We recognized a one-time pension curtailment gain of approximately $6 million in
December 2005. In conjunction with this curtailment gain, we accrued a contribution totaling $6 million as of
December 31, 2005, on behalf of those pension participants who were affected by the curtailment. The
curtailment gain and contribution offset each other to result in no net effect on our results of operations.
Other Commercial Commitments and Off-Balance Sheet Arrangements
Franchisee Restructuring Program
In connection with the FFRP program we have made commitments to: fund loans to certain franchisees
for the purpose of remodeling restaurants; remodel certain properties we lease or sublease to franchisees;
provide temporary rent reductions to certain franchisees; and fund shortfalls in certain franchisee cash flow
beyond specified levels (to annual and aggregate maximums). As of June 30, 2006, our remaining
commitments under the FFRP program totaled $36 million, which we may incur. These arrangements expire
over the next five years.
Guarantees
We guarantee certain lease payments of franchisees arising from leases assigned in connection with sales
of company restaurants to franchisees, by remaining secondarily liable under the assigned leases of varying
terms, for base and contingent rents. The maximum contingent rent amount is not determinable as the amount
is based on future revenues. In the event of default by the franchisees, we have typically retained the right to
acquire possession of the related restaurants, subject to landlord consent. The aggregate contingent obligation
arising from these assigned lease guarantees was $112 million at June 30, 2006, expiring over an average
period of five years.
Other commitments arising out of normal business operations were $10 million and $12 million as of
June 30, 2006 and 2005, respectively, of which $6 million and $4 million, respectively were guaranteed under
bank guarantee arrangements.
Letters of Credit
At June 30, 2006, there were $42 million in irrevocable standby letters of credit outstanding, which were
issued primarily to certain insurance carriers to guarantee payment for various insurance programs such as
health and commercial liability insurance. Included in that amount was $41 million of standby letters of credit
issued under the Company's $150 million revolving credit facility. As of June 30, 2006, none of these
irrevocable standby letters of credit had been drawn upon.
As of June 30, 2006, we had posted bonds totaling $2 million, which related to certain utility deposits.
Vendor Relationships
In fiscal 2000, we entered into long-term, exclusive contracts with the Coca-Cola Company and with
Dr Pepper/Seven Up, Inc. to supply Company and franchise restaurants with their products and obligating
Burger King restaurants in the United States to purchase a specified number of gallons of soft drink syrup.
These volume commitments are not subject to any time limit. As of June 30, 2006, we estimate that it will
take approximately 16 years and 17 years to complete the Coca-Cola and Dr Pepper/Seven Up, Inc. purchase
commitments, respectively. In the event of early termination of these arrangements, we may be required to
make termination payments that could be material to our results of operations and financial position.
Additionally, in connection with these contracts, we have received upfront fees, which are being amortized
over the term of the contracts. At June 30, 2006 and 2005, the deferred amounts totaled $23 million and
$26 million, respectively. These deferred amounts are amortized as a reduction to food, paper and product
costs in the accompanying consolidated statements of operations.
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