UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-32875

 

BURGER KING HOLDINGS, INC.

Delaware		75-3095469
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

5505 Blue Lagoon Drive, Miami, Florida (Address of Principal Executive Offices)		33126 (Zip Code)

(305) 378-3000
(Registrant’s telephone number, including area code)

     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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one);

Large Accelerated Filer o           Accelerated Filer þ           Non-Accelerated Filer 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

     As of February 4, 2008, there were 135,677,544 shares of the registrant’s Common Stock outstanding.

 

 

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

				Page
		PART I — Financial Information
Item 1.		Financial Statements:
		Condensed Consolidated Balance Sheets as of December 31, 2007 (unaudited) and June 30, 2007			3
		Condensed Consolidated Statements of Income for the three and six months ended December 31, 2007 and 2006 (unaudited)			4
		Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2007 and 2006 (unaudited)			5
		Notes to Condensed Consolidated Financial Statements (unaudited)			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			35
Item 4.		Controls and Procedures			35
		PART II — Other Information
Item 1A.		Risk Factors			37
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 4.		Submission of Matters to a Vote of Security Holders			38
Item 6.		Exhibits			38
		Signatures			39
		Index to Exhibits			40
EX-10.45 Option Award Agreement dated June 6, 2006 between Burger King Holdings, Inc. and Charles M. Fallon, Jr.
EX-10.46 Option Award Agreement dated June 6, 2006 between Burger King Holdings, Inc. and Charles M. Fallon, Jr.
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 906 Certification of CFO

PART I — Financial Information

Item 1.		Financial Statements

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

		As of
		December 31,				June 30,
		2007				2007
		(Unaudited)
		(In millions, except share data)
Assets
Current assets:
Cash and cash equivalents		$	183			$	170
Trade and notes receivable, net			137				125
Prepaids and other current assets			52				66
Deferred income taxes, net			46				43
Total current assets			418				404
Property and equipment, net			886				879
Intangible assets, net			1,002				986
Goodwill			23				23
Net investment in property leased to franchisees			135				142
Other assets, net			108				83
Total assets		$	2,572			$	2,517
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts and drafts payable		$	79			$	106
Accrued advertising			95				64
Other accrued liabilities			251				259
Current portion of long term-debt and capital leases			5				5
Total current liabilities			430				434
Term debt, net of current portion			821				871
Capital leases, net of current portion			71				67
Other deferrals and liabilities			355				334
Deferred income taxes, net			106				95
Total liabilities			1,783				1,801
Commitments and Contingencies (See Note 12)
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; 135,373,694 and 135,217,470 shares issued and outstanding at December 31, 2007 and June 30, 2007, respectively			1				1
Restricted stock units			3				3
Additional paid-in capital			585				574
Retained earnings			215				134
Accumulated other comprehensive income			(5	)			8
Treasury stock, at cost; 934,291 and 673,430 shares, at December 31, 2007 and June 30, 2007, respectively			(10	)			(4	)
Total stockholders’ equity			789				716
Total liabilities and stockholders’ equity		$	2,572			$	2,517

See accompanying notes to condensed consolidated financial statements.

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
		(In millions, except per share data)
Revenues:
Company restaurant revenues		$	448			$	417			$	889			$	822
Franchise revenues			134				112				265				225
Property revenues			31				30				61				58
Total revenues			613				559				1,215				1,105
Company restaurant expenses:
Food, paper and product costs			140				125				277				247
Payroll and employee benefits			132				123				263				242
Occupancy and other operating costs			106				103				211				205
Total company restaurant expenses			378				351				751				694
Selling, general and administrative expenses			125				119				244				231
Property expenses			16				15				30				31
Other operating (income) expense, net			(1	)			(1	)			(1	)			(8	)
Total operating costs and expenses			518				484				1,024				948
Income from operations			95				75				191				157
Interest expense			18				19				36				38
Interest income			(2	)			(2	)			(4	)			(4	)
Total interest expense, net			16				17				32				34
Loss on early extinguishment of debt			—				—				—				1
Income before income taxes			79				58				159				122
Income tax expense			30				20				61				44
Net income		$	49			$	38			$	98			$	78
Earnings per share:
Basic		$	0.36			$	0.28			$	0.72			$	0.59
Diluted		$	0.36			$	0.28			$	0.71			$	0.57
Weighted average shares outstanding:
Basic			135.3				133.5				135.2				133.3
Diluted			137.9				136.5				137.9				136.1
Dividends per common share		$	0.06			$	—			$	0.13			$	—

See accompanying notes to condensed consolidated financial statements.

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

		Six Months Ended
		December 31,
		2007				2006
		(In millions)
Cash flows from operating activities:
Net income		$	98			$	78
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization			44				43
Gain on hedging activities			(1	)			(2	)
Gain on remeasurement of foreign denominated transactions			(30	)			(13	)
Gain on asset sales and release of unfavorable lease obligation			(6	)			(7	)
Bad debt recoveries, net of provisions			(1	)			—
Loss on early extinguishment of debt			—				1
Stock-based compensation			5				2
Deferred income taxes			20				8
Changes in current assets and liabilities, excluding acquisitions and dispositions:
Trade and notes receivables			(11	)			(7	)
Prepaids and other current assets			15				(10	)
Accounts and drafts payable			(29	)			(28	)
Accrued advertising			30				5
Other accrued liabilities			5				(86	)
Other long-term assets and liabilities			(20	)			14
Net cash provided by (used for) operating activities			119				(2	)
Cash flows from investing activities:
Purchases of available-for-sale securities			—				(308	)
Proceeds from sale of available-for-sale securities			—				308
Payments for property and equipment			(50	)			(31	)
Proceeds from asset disposals and restaurant closures			13				15
Increase in cash held in escrow			(3	)			—
Payments for acquired franchisee operations			(1	)			(8	)
Investment in franchisee debt			(2	)			(4	)
Collections on franchisee debt			2				1
Net cash used for investing activities			(41	)			(27	)
Cash flows from financing activities:
Proceeds from term debt and credit facility			—				1
Repayments of term debt, credit facility and capital leases			(53	)			(103	)
Dividends paid on common stock			(17	)			—
Stock option exercises			2				2
Excess tax benefits from stock-based compensation			3				4
Repurchases of common stock			(6	)			(1	)
Net cash used for financing activities			(71	)			(97	)
Effect of exchange rates on cash and cash equivalents			6				2
Increase (decrease) in cash and cash equivalents			13				(124	)
Cash and cash equivalents at beginning of period			170				259
Cash and cash equivalents at end of period		$	183			$	135

See accompanying notes to condensed consolidated financial statements.

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)

		Six Months Ended
		December 31,
		2007				2006
		(In millions)
Supplemental cash flow disclosures:
Interest paid (1)		$	20			$	27
Income taxes paid (2)		$	41			$	114
Non-cash investing and financing activities:
Acquisition of property with capital lease obligations		$	5			$	5

See accompanying notes to condensed consolidated financial statements.

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1. Organization and Basis of Presentation

     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. As of June 30, 2007, the Company was approximately 58% owned by private equity funds controlled by TPG Capital, the Goldman Sachs Funds and Bain Capital Partners (collectively, the “Sponsors”). The percentage ownership of the private equity funds controlled by the Sponsors was reduced to approximately 43% as of December 31, 2007 as a result of the sale of 20.7 million shares of the Company’s common stock in November 2007 through a secondary offering, including the underwriters’ exercise of the over-allotment option (“the secondary offering”). The Company received no proceeds from the secondary offering.

     The Company generates revenues from three sources: (i) sales at restaurants owned by the Company; (ii) royalties and franchise fees paid by franchisees; and (iii) property income from restaurants that the Company leases or subleases to franchisees. The Company receives monthly royalties and advertising contributions from franchisees based on a percentage of restaurant sales.

Basis of Presentation and Consolidation

     The Company has prepared the accompanying Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007 filed with the SEC on September 7, 2007. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for the six months ended December 31, 2007 do not necessarily indicate the results that may be expected for the full year.

     The Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. The Company has consolidated, in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, “Consolidation of Variable Interest Entities — an interpretation of ARB No. 51”, one joint venture that operates restaurants where the Company is a 49% partner, but is deemed to be the primary beneficiary, as the joint venture agreement provides protection to the joint venture partner from absorbing expected losses. The results of operations of this joint venture are not material to the Company’s results of operations and financial position.

Use of Estimates

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Financial Statements and accompanying notes. Actual results could differ from those estimates.

Restricted Assets

     Included in other assets, net in the accompanying condensed consolidated balance sheets are restricted investment securities, which consist of investments in various mutual funds made by eligible employees as part of the Company’s deferred compensation plan. Such investments are held in a Rabbi trust whereby all assets of the trust are irrevocably set aside to fund the Company’s obligations under the deferred compensation plan. The Rabbi trust is required to be consolidated into the Financial Statements in accordance with the provisions of Emerging Issues Task Force (EITF) Issue No. 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested”. Prior to July 1, 2007, participants received a fixed return from the Company on amounts they contributed into the deferred compensation plan. Subsequent to July 1, 2007, participants receive returns based on the mutual funds that they selected.

     The investment securities in the Rabbi trust have been designated by the Company as trading in accordance with Statement of Financial Accounting Standards (“SFAS”) No.115, “Accounting for Certain Investments in Debt and Equity Securities”, and are carried at fair value in other assets, net in the accompanying condensed consolidated balance sheets, with unrealized trading gains and losses recorded in earnings. The fair value of the investment securities held in the Rabbi trust was $23 million as of December 31,

2007. Net unrealized trading gains of less than $1 million were recorded during the six months ended December 31, 2007 and are reflected in other operating (income) expense, net in the accompanying condensed consolidated statements of income. These unrealized trading gains are offset by compensation expense related to the deferred compensation plans, which are reflected in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.

     Also included in other assets, net in the accompanying condensed consolidated balance sheets is $3 million of cash held in escrow by a third party on behalf of the Company. Such cash represents the proceeds from the sale of real property by the Company in December 2007, which the Company has elected to treat as an exchange transaction under Section 1031 of the Internal Revenue Code.

Inventories

     Inventories, totaling $16 million and $15 million as of December 31, 2007 and June 30, 2007, respectively, are stated at the lower of cost (first-in, first-out) or net realizable value, and consist primarily of restaurant food items and paper supplies. Inventories are included in prepaids and other current assets in the accompanying condensed consolidated balance sheets.

Note 2. Stock-based Compensation

     On July 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which requires share-based compensation cost to be recognized based on the grant date estimated fair value of each award, net of estimated cancellations, over the employee’s requisite service period, which is generally the vesting period of the equity grant. The Company was required to adopt SFAS No.123R using a combination of the prospective and modified prospective methods. As a result, the Company applied the prospective method for awards granted prior to the Company filing its registration statement on Form S-1 to become a public company (February 16, 2006), as the Company used the minimum value method for these awards for disclosure under SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), and the modified prospective method for all awards granted subsequent to the Company becoming a public company (subsequent to February 16, 2006).

     The Company recorded $5 million and $2 million of stock-based compensation expense for the six months ended December 31, 2007 and 2006, respectively.

     The Company uses the Black-Scholes option pricing model to calculate the grant date estimated fair value of options awarded to employees. As a newly public company, the Company had previously elected, for options granted subsequent to the adoption of SFAS No. 123R, to base the estimate of expected volatility of its common stock for the Black-Scholes model solely on the historical volatility of a group of its peers, as permitted under SFAS No. 123R and SEC Staff Accounting Bulletin No.107. The weighted average expected volatility of the Company’s peer group was 33.01% for options granted during the year ended June 30, 2007.

     Beginning in July 2007, the Company determined it had sufficient information regarding the historical volatility of its stock price and implied volatility of its exchange-traded options to incorporate a portion of these volatilities into the calculation of expected volatility used in the Black-Scholes model.

     In August 2007, the Company granted 1.2 million nonqualified stock options under the Company’s Equity Incentive Plan as long-term incentive compensation to selected executives and other key employees. The stock options vest ratably over four years. The grant date estimated fair value of each stock option was $7.92 and was based on the Black-Scholes model using the following weighted average assumptions:

Risk-free interest rate			4.40	%
Expected term (in years)			6.25
Expected volatility			29.35	%
Expected dividend yield			1.07	%

     In August 2007, the Company granted approximately 0.5 million restricted shares and performance-based restricted shares (PBRS) as long-term incentive compensation to selected executives and key employees. Both the restricted shares and the PBRS generally vest at the end of three years. The fair value of the restricted shares and PBRS on the grant date was $23.35 per share, representing the closing share price of the Company’s common stock on the grant date. The amount of stock-based compensation recorded by the Company for the PBRS awards may be adjusted up or down each reporting period during the performance period, based on the Company’s probability of achieving the performance measure. At the end of the one-year performance period, the number of the PBRS awards will be adjusted to the actual awards earned based on the performance of the Company.

     In November 2007, the Company granted approximately 57,000 deferred shares to non-employee members of the Company’s Board of Directors as an annual grant and a portion as payment for the quarterly retainer and committee fees that certain Board members elected to receive in deferred shares rather than cash. The deferred shares granted as an annual grant vest in quarterly installments over a one-year period on the first day of each calendar quarter following the grant date. The deferred shares granted in lieu of cash for quarterly retainer and committee fees were fully vested on the grant date. The deferred shares will settle and shares of common stock will be issued upon termination of board service.

     The Company granted an insignificant number of options, restricted shares and PBRS awards during the quarter ended December 31, 2007.

Note 3. Acquisitions, Closures and Dispositions

Acquisitions

     All acquisitions of franchised restaurant operations are accounted for using the purchase method of accounting under Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS 141”) and the guidance under Emerging Issues Task Force (EITF) Issue No. 04-1, Accounting for Preexisting Relationships between parties to a Business Combination. These acquisitions are summarized as follows:

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Number of restaurants acquired			12				41				16				46
Prepaids and other current assets		$	—			$	1			$	—			$	1
Property and equipment, net			1				5				1				5
Goodwill and other intangible assets			1				6				1				6
Assumed liabilities			—				(4	)			—				(4	)
Total purchase price		$	2			$	8			$	2			$	8

Asset and Business Dispositions

     Gains and losses on closures and dispositions represent sales of Company-owned properties and other costs related to restaurant closures and sales of Company-owned restaurants to franchisees, referred to as “refranchisings”, and are recorded in other operating income, net in the accompanying condensed consolidated statements of income (See Note 12). Gains and losses recognized in the current period may reflect closures and refranchisings that occurred in previous periods.

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Number of restaurant closures			7				4				12				8
Number of refranchisings			—				3				17				4
Net loss (gain) on restaurant closures, refranchisings, and dispositions of assets		$	(3	)		$	2			$	(2	)		$	(4	)

     Included in the gain on restaurant closures, refranchisings, and dispositions of assets for the six months ended December 31, 2006 is a $5 million gain from the sale of an investment in a non-consolidated joint venture in New Zealand.

Note 4. Earnings Per Share

     Basic and diluted earnings per share are calculated as follows:

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Numerator:
Numerator for basic and diluted earnings per share:
Net income		$	49,177,412			$	37,782,214			$	97,699,110			$	78,227,071
Denominator:
Weighted average shares — basic			135,275,453				133,450,444				135,235,468				133,264,354
Effect of dilutive securities			2,636,903				3,004,899				2,634,235				2,840,642
Weighted average shares — diluted			137,912,356				136,455,343				137,869,703				136,104,996
Basic earnings per share		$	0.36			$	0.28			$	0.72			$	0.59
Diluted earnings per share		$	0.36			$	0.28			$	0.71			$	0.57

     For the three months ended December 31, 2007 and 2006, there were 1,205,789 and 750,530 anti-dilutive stock options outstanding, respectively. For the six months ended December 31, 2007 and 2006, there were 848,843 and 1,198,416 anti-dilutive stock options outstanding, respectively.

Note 5. Comprehensive Income

     The components of total comprehensive income are as follows (in millions):

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Net income		$	49			$	38			$	98			$	78
Translation adjustment			(1	)			(7	)			(2	)			(5	)
Cash flow hedges:
Net change in fair value of derivatives			(5	)			—				(10	)			(8	)
Amounts reclassified to earnings during the period			—				(1	)			(1	)			(2	)
Total other comprehensive loss			(6	)			(8	)			(13	)			(15	)
Total comprehensive income		$	43			$	30			$	85			$	63

Note 6. Other Accrued Liabilities and Other Deferrals and Liabilities

     Included in other accrued liabilities as of December 31, 2007 and June 30, 2007 were accrued payroll and employee-related benefit costs totaling $67 million and $99 million, respectively, and income taxes payable of $15 million and $17 million at December 31, 2007 and June 30, 2007, respectively.

     Included in other deferrals and liabilities as of December 31, 2007 and June 30, 2007 were unfavorable leases obligations with a net book value of $200 million and $209 million, respectively.

Note 7. Long-Term Debt

     As of December 31, 2007 and June 30, 2007, the Company had $821 million and $871 million, respectively, of long-term debt outstanding. During the six months ended December 31, 2007, the Company prepaid $50 million of term debt. The current portion of long-term debt was less than $1 million and $1 million as of December 31, 2007 and June 30, 2007, respectively. The next scheduled principal payment on the Company’s long-term debt is June 30, 2009. The weighted average interest rate for the three and six months ended December 31, 2007 was 6.7% and 6.8%, respectively, which included the benefit of interest rate swaps on 46% and 49% of our term debt, respectively (See Note 8).

Note 8. Derivative Instruments

Interest rate swaps

     As of December 31, 2007, the Company had interest rate swap contracts outstanding with a notional value of $380 million, a decrease of $60 million from June 30, 2007 due to swap contracts that matured in September 2007. The Company has designated the swaps as cash flow hedges under SFAS No. 133. “Accounting for Derivative Instruments and Hedging Activities, as revised” (“SFAS No. 133”). These swaps were entered into in September 2006 and mature through September 2011 and are being used to hedge forecasted LIBOR-based interest payments on variable rate debt (hedged forecasted transaction). The fair value of these swaps is reflected in other deferrals and liabilities, with an offsetting unrealized loss in accumulated other comprehensive income (AOCI), in the accompanying condensed consolidated balance sheets. During the three and six months ended December 31, 2007, less than $1 million was reclassified from AOCI into earnings for each period, and is recorded as a reduction of interest expense in the accompanying condensed consolidated statements of income. There was no ineffectiveness recorded in earnings during the three and six months ended December 31, 2007 related to these swaps.

     In September 2006, the Company settled swaps that had been designated as cash flow hedges, which had a fair value of $12 million and terminated the hedge. Upon termination of the hedge, the balance in AOCI represented the after-tax unrealized gain from the change in fair value of the swaps through the termination date. This balance is recognized into earnings as a reduction of interest expense over the remaining term of debt underlying the terminated hedge. During the three months ended December 31, 2007 and 2006, less than $1 million and $1 million, respectively, was recognized into pretax earnings as a reduction to interest expense in the accompanying condensed consolidated statements of income. During the six months ended December 31, 2007 and 2006, $1 million and $3 million, respectively, was recognized into earnings as a reduction to interest expense in the accompanying condensed consolidated statements of income. An additional $1 million of pretax gain is expected to be recognized into earnings during the remainder of fiscal year 2008.

Foreign currency forward contracts

     The Company enters into foreign currency forward contracts as economic hedges to offset the impact on earnings from the remeasurement of outstanding balances of intercompany loans denominated in foreign currencies. Remeasurement represents changes in the expected amount of cash flows to be received or paid upon settlement of the intercompany loans resulting from a change in foreign exchange rates. The change in fair value of the forward contracts, together with the remeasurement gains and losses on the intercompany loans, are recorded in other operating (income) expense, net in the Company’s condensed consolidated statements of income.

     During the three months ended December 31, 2007 and 2006, the Company recorded gains of $11 million and $16 million, respectively, from the remeasurement of the outstanding balances of intercompany loans. These gains were offset by losses of $11 million and $15 million, respectively, for each three month period, from the change in the fair value of the forward contracts. The net gain for each period represents the portion of the change in fair value of the forward currency contracts attributable to the difference in spot and contract forward rates.

     During the six months ended December 31, 2007 and 2006, the Company recorded gains of $30 million and $12 million, respectively, from remeasurement of the outstanding balances of intercompany loans. These gains were offset by losses of $29 million and $9 million, respectively, for each six month period, from the change in the fair value of the forward contracts. The net gain for each period represents the portion of the change in fair value of the forward currency contracts attributable to the difference in spot and contract forward rates.

Note 9. Income Taxes

     The U.S. Federal tax statutory rate reconciles to the effective tax rate as follows:

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
U.S. federal income tax rate			35.0	%			35.0	%			35.0	%			35.0	%
State income taxes, net of federal income tax benefit			2.6				2.6				2.8				2.6
Benefit and taxes related to foreign operations			(3.7	)			(1.1	)			0.7				(3.0	)
Foreign exchange differential on tax benefits			0.5				(3.6	)			(0.1	)			(2.2	)
Change in valuation allowance			2.0				2.7				(0.9	)			2.7
Change in accrual for tax uncertainties			1.7				(0.3	)			1.3				1.3
Other			(0.1	)			(0.8	)			(0.4	)			(0.3	)
Effective income tax rate			38.0	%			34.5	%			38.4	%			36.1	%

     Effective July 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of SFAS No. 109, “Accounting for Income Taxes.” FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.

     Upon adoption, the Company had no material change to its unrecognized tax benefits as of July 1, 2007. The amount of unrecognized tax benefits at July 1, 2007 was approximately $19 million which, if recognized, would affect the effective income tax rate. During the three and six months ended December 31, 2007, the amount of additional unrecognized tax benefit was approximately $1 million and $2 million, respectively, which, if recognized, would affect the effective income tax rate.

     The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of accrued interest and penalties at June 30, 2007 was $3 million, which was included as a component of the $19 million unrecognized tax benefit noted above. Potential interest and penalties associated with uncertain tax positions recognized during the six months ended December 31, 2007 were not significant, and are included as a component of the $2 million unrecognized tax benefit noted above. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

     The Company files income tax returns, including returns for its subsidiaries, with federal, state, local and foreign jurisdictions. Generally we are subject to routine examination by taxing authorities in these jurisdictions, including significant international tax jurisdictions such as the United Kingdom, Germany, Spain, Switzerland, Singapore and Mexico. None of the foreign jurisdictions is individually material. The Company is currently under audit by the Internal Revenue Service for fiscal years 2005 and 2006. The Company also has various state income tax returns in the process of examination.

     The Company does not anticipate that the total unrecognized tax benefits will significantly change due to the settlement of audits and the expiration of statute of limitations within the next 12 months.

Note 10. Related Party Transactions

     Under the Company’s shareholders’ agreement with the Sponsors, the Company agreed to pay all expenses relating to the secondary offering other than underwriting commissions and discounts. As a result, the Company recorded less than $1 million of general and administrative expenses related to the secondary offering in the three months ended December 31, 2007.

Note 11. Retirement Plan and Other Postretirement Benefits

     A summary of the components of net periodic benefit cost for the Company’s pension plans (retirement benefits) and postretirement plans (other benefits) is presented below (in millions):

		Retirement Benefits
		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Service cost-benefits earned during the period		$	1			$	—			$	1			$	1
Interest costs on projected benefit obligations			3				3				5				5
Expected return on plan assets			(3	)			(2	)			(5	)			(4	)
Recognized net actuarial loss			—				—				—				—
Net periodic benefit cost		$	1			$	1			$	1			$	2

     Other benefits costs were less than $1 million and $1 million for the three months ended December 31, 2007 and 2006, respectively. Other benefits costs were $1 million for each of the six months ended December 31, 2007 and 2006, respectively.

Note 12. Other Operating (Income) Expense, Net

     Other operating (income) expense, net for each of the three months ended December 31, 2007 and 2006 was $1 million of income. Other operating (income) expense, net for the three months ended December 31, 2007 includes a net gain of $3 million from the disposal of real estate and other assets, offset by a $1 million loss from foreign currency transactions, a $1 million loss from vacant property provisions, and $1 million in losses derived from settlement losses recorded on the acquisition of franchise restaurants and unrealized losses on investment securities.

     Other operating (income) expense, net for the three months ended December 31, 2006 includes a gain of $1 million from forward currency contracts used to hedge intercompany loans denominated in foreign currencies and a net gain of $1 million from the disposal of assets, offset by $2 million of expenses associated with franchise system distress in the U.K.

     Other operating (income) expense, net for the six months ended December 31, 2007 was $1 million of income, compared to $8 million of income for the same period in the prior year. Other operating (income) expense, net for the six months ended December 31, 2007 includes a net gain of $2 million from the disposal of assets, offset by a $1 million charge for a payment made to our sole distributor in the United Kingdom and a $1 million charge for litigation reserves.

     Other operating (income) expense, net for the six months ended December 31, 2006 includes a $5 million gain from the sale of the Company’s investment in a joint venture in New Zealand and a gain on forward currency contracts of $3 million, partially offset by $2 million of expenses associated with franchise system distress in the U.K.

Note 13. Commitments and Contingencies

Franchisee Restructuring Program

     During fiscal 2003, the Company initiated a program designed to provide financial assistance to franchisees in the United States and Canada experiencing financial difficulties. Under this program, the Company worked with franchisees meeting certain operational criteria, their lenders, and other creditors to attempt to strengthen the franchisees’ financial condition.

     In order to assist certain franchisees in making capital improvements to franchisee-owned restaurants in need of remodeling, the Company has provided loans to fund capital expenditures (“Capex Loans”). Capex Loans are typically unsecured, bear interest, and have 10-year terms. In addition, the Company has made capital improvements related to restaurant properties that the Company leases to franchisees. During the three and six months ended December 31, 2007, the Company funded less than $1 million and $1 million in Capex Loans to franchisees, respectively, and made $1 million and $2 million in improvements to restaurant properties that the Company leases to franchisees respectively. As of December 31, 2007, the Company had commitments remaining to provide future Capex Loans of $5 million and to make up to $8 million of improvements to properties that the Company leases to franchisees. These commitments extend over a period of up to four years.

     During the three months ended December 31, 2007 and 2006, temporary reductions in rent (“rent relief”) for certain franchisees that leased restaurant properties from the Company were not significant. The Company provided less than $1 million and $1 million in rent relief during the six months ended December 31, 2007 and 2006, respectively. As of December 31, 2007, the Company has potential commitments remaining to provide future rent relief of up to an aggregate of $6 million extending over a period of up to 16 years.

     Contingent cash flow subsidies represent potential commitments by the Company to provide future cash grants to certain franchisees for limited periods in the event of failure to achieve their debt service coverage ratio. For the three and six months ended December 31, 2007 and 2006, contingent cash flow subsidies provided to franchisees were not significant. The maximum contingent cash flow subsidy commitment for future periods as of December 31, 2007 is $2 million, extending over a period of up to four years. Upon funding, in most instances, the subsidies will be added to the franchisee’s existing note balance.

Guarantees

     The Company guarantees certain lease payments of franchisees arising from leases assigned in connection with sales of Company restaurants to franchisees, by remaining secondarily liable for base and contingent rents under the assigned leases of varying terms. The maximum contingent rent amount is not determinable as the amount is based on future revenues. In the event of default by the franchisees, the Company has typically retained the right to acquire possession of the related restaurants, subject to landlord consent. The aggregate contingent obligation arising from these assigned lease guarantees, excluding contingent rents, was $99 million as of December 31, 2007, expiring over an average period of seven years.

     Other commitments arising out of normal business operations were $12 million as of December 31, 2007, of which $8 million was guaranteed under bank guarantee arrangements.

Letters of Credit

     As of December 31, 2007, the Company had $27 million in irrevocable standby letters of credit outstanding, which were issued primarily to certain insurance carriers to guarantee payments of deductibles for various insurance programs, such as health and commercial liability insurance. Such letters of credit are secured by the collateral under the Company’s senior secured credit facility. As of December 31, 2007, no amounts had been drawn on any of these irrevocable standby letters of credit.

     As of December 31, 2007, the Company had posted bonds totaling $3 million, which related to certain utility deposits.

Vendor Relationships

     In fiscal 2000, the Company entered into long-term, exclusive contracts with The Coca-Cola Company and with Dr Pepper/Seven Up, Inc. to supply the Company and its 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 December 31, 2007, the Company estimates that it will take approximately 15 years to complete the Coca-Cola and Dr Pepper/Seven Up, Inc. purchase commitments. In the event of early termination of these arrangements, the Company may be required to make termination payments that could be material to the Company’s results of operations and financial position. Additionally, in connection with these contracts, the Company received upfront fees, which are being amortized over the term of the contracts. As of December 31, 2007 and June 30, 2007, the deferred amounts totaled $18 million and $21 million, respectively. These deferred amounts are amortized as a reduction to food, paper and product costs in the accompanying condensed consolidated statements of income.

     As of December 31, 2007, the Company had $8 million in aggregate contractual obligations for the year ending June 30, 2008 with vendors providing information technology and telecommunication services under seven separate arrangements. These contracts extend up to four years with a termination fee ranging from less than $1 million to $2 million during those years. The Company also has two separate arrangements for telecommunication services with an aggregate contractual obligation of $6 million over 4 years with no early termination fee.

     The Company also enters into commitments to purchase advertising. As of December 31, 2007, commitments to purchase advertising totaled $82 million. These commitments run through October 2011.

Other

     The Company carries insurance programs to cover claims such as workers’ compensation, general liability, automotive liability, executive risk and property and is self-insured for healthcare claims for eligible participating employees. Through the use of insurance program deductibles (ranging from $.5 million to $1 million) and self insurance, the Company retains a significant portion of the expected losses under these programs. Insurance reserves have been recorded based on the Company’s estimate of the anticipated ultimate costs to settle all claims, both reported and incurred-but-not-reported (IBNR), and such reserves 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. As of December 31, 2007, the Company had a balance of $34 million in accrued liabilities to cover such claims.

Note 14. Segment Reporting

     The Company operates in the fast food hamburger restaurant category of the quick service segment of the restaurant industry. Revenues include sales at Company-owned restaurants, franchise revenues and property revenues. The business is managed in three distinct geographic segments: United States and Canada; Europe, the Middle East, Africa and Asia Pacific (“EMEA/APAC”); and Latin America.

     The following tables present revenues and income from operations by geographic segment (in millions):

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Revenues:
United States and Canada		$	385			$	362			$	777			$	724
EMEA/APAC			199				171				382				330
Latin America			29				26				56				51
Total revenues		$	613			$	559			$	1,215			$	1,105

     Other than the United States and Germany, no other individual country represented 10% or more of the Company’s total revenues. Revenues in the United States totaled $343 and $693 million for the three and six months ended December 31, 2007, respectively, compared to $323 and $647 million for the three and six months ended December 31, 2006, respectively. Revenues in Germany totaled $93 and $175 million for the three and six months ended December 31, 2007, respectively, compared to $79 and $152 million for the three and six months ended December 31, 2006, respectively.

     The unallocated amount reflected in the income from operations table below includes corporate support costs in areas such as facilities, finance, human resources, information technology, legal, marketing and supply chain management.

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Income from Operations:
United States and Canada		$	88			$	84			$	185			$	171
EMEA/APAC			27				13				47				33
Latin America			11				10				20				18
Unallocated			(31	)			(32	)			(61	)			(65	)
Total income from operations		$	95			$	75			$	191			$	157
Interest expense, net			16				17				32				34
Loss on early distinguishment of debt			—				—				—				1
Income before income taxes		$	79			$	58			$	159			$	122
Income tax expense			30				20				61				44
Net income		$	49			$	38			$	98			$	78

Note 15. Subsequent Event

On January 30, 2008, the Company entered into interest rate swaps with a notional value of $275 million, which become effective on March 31, 2008 and mature on December 31, 2011. The purpose of these swap contracts is to hedge forecasted LIBOR-based interest payments on variable rate debt. The Company has designated these swaps as cash flow hedges under SFAS No. 133. As of January 31, 2008, the Company had $655 million of LIBOR-based interest rate swap contracts outstanding, including the $275 million forward starting interest rate swaps described above, and had $819 million of LIBOR-based variable rate debt outstanding.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

     You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 “Financial Statements”. 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 in our Annual Report on Form 10-K for the year ended June 30, 2007, and under Part II, Item 1A “Risk Factors”, “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this report. Unless the context otherwise requires, all references to “we”, “us”, “our” and “Company” refer to Burger King Holdings, Inc. and its subsidiaries.

     Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter and our key business measures, as discussed below, for any future period may decrease.

Overview

     We operate in the fast food hamburger restaurant, or FFHR, category of the quick service restaurant, or QSR, segment of the restaurant industry. Our system of restaurants includes restaurants owned by us as well as our franchisees. We are the second largest FFHR chain in the world as measured by the number of restaurants and system-wide sales. System-wide sales includes sales at Company restaurants and franchise restaurants. As of December 31, 2007 we owned or franchised a total of 11,395 restaurants in 69 countries and U.S. territories, of which 7,482 were located in the United States and Canada. At that date, 1,303 restaurants were Company-owned and 10,092 were owned by our franchisees. Our restaurants feature flame-broiled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks and other reasonably-priced food items.

     Our business operates in three reportable segments: (1) the United States and Canada; (2) Europe, the Middle East, Africa and Asia Pacific, or EMEA/APAC; and (3) Latin America. We generate revenues from three sources: (1) sales at our Company restaurants; (2) royalties and franchise fees paid to us by our franchisees; and (3) property income from restaurants that we lease or sublease to franchisees. We do not record franchise restaurant sales as revenues; however, our royalty revenues are calculated based on a percentage of franchise restaurant sales. 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.

Business Highlights

     Our strategic plan has four guiding principles: Grow Profitably (a market plan); Fund the Future (a financial plan); Fire up the Guest (a product plan); and Working Together (a people plan). Guided by our strategic plan and strong executive team leadership, our accomplishments since September 30, 2007 include:

	•		the opening of 105 net restaurants worldwide, representing the highest quarterly net restaurant growth in seven years;
	•		the sixteenth consecutive quarter of positive system-wide comparable sales growth, our best comparable sales growth trend in more than a decade, including comparable sales growth of 4.5% for the second quarter of fiscal 2008;
	•		the fifteenth consecutive quarter of positive comparable sales growth in the United States and Canada, including comparable sales growth of 4.2% for the second quarter of fiscal 2008;
	•		all-time high average restaurant sales of $1.25 million for the trailing 12-months ended December 31, 2007;
	•		entering into development agreements with new franchisees for Colombia, Brazil, and Romania;
	•		promotional tie-ins with the National Football League and with family focused marketing properties such as SpongeBob’s Atlantis Squarepantis ™ and i-Dog™;
	•		new product offerings such as Homestyle Melts;
	•		successful product promotions such as the Whopper® 50th anniversary promotion featuring the Whopper® Freakout media campaign which, according to advertising industry researcher IAG, was twice as effective as the Company’s competitors on consumer recall and likeability;

	•		further improvement in our U.K. business demonstrated by higher comparable sales and traffic as a result of our continued focus on premium products;
	•		further reduction in debt of $25 million to $821 million as of December 31, 2007; and
	•		payment of our fourth quarterly cash dividend as a public company of $0.0625 cents per share.

     Our focus continues to be on the following:

	•		driving further sales growth and profitability;
	•		expanding our large international platform;
	•		accelerating new restaurant development;
	•		increased emphasis on Company restaurant remodelings and rebuilds; and
	•		employing innovative marketing strategies and expanding product offerings.

Key Business Measures

     The following key business measures have been provided for the three and six months ended December 31, 2007. Comparable sales growth and sales growth are provided by reportable segment and are analyzed on a constant currency basis, which means they are calculated using the same exchange rates 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. System-wide data represents measures for both Company-owned and franchise restaurants. Unless otherwise stated, comparable sales growth, average restaurant sales and sales growth are presented on a system-wide basis. System-wide results are driven primarily by our franchise restaurants as approximately 90% of our system-wide restaurants are franchised.

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 thirteen months or longer as of the end of the most recent period. 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								For the
		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
						(In constant currencies)
Comparable Sales Growth:
United States and Canada			4.2	%			4.4	%			5.4	%			3.5	%
EMEA/APAC			5.5	%			1.7	%			5.1	%			1.4	%
Latin America			2.4	%			4.1	%			3.1	%			5.1	%
Total			4.5	%			3.7	%			5.2	%			3.0	%

     Our comparable sales growth for the three and six months ended December 31, 2007 was driven by our strategic initiatives related to operational excellence, innovative advertising featuring promotional tie-ins with global marketing properties such as The Simpsons™ Movie, innovative media campaigns such as Whopper^® Freakout, our continued focus on the BK™ Value Menu and the promotion of premium products, such as the Ultimate Double Whopper^® sandwich, BBQ Bacon TenderCrisp^® and Homestyle Melts.

     Three Months Ended December 31, 2007

     In the United States and Canada, our comparable sales growth performance remained strong in the second quarter of fiscal 2008 fueled by improvements in our operations, the continued positive impact of the BK™ Value Menu and BK™ Breakfast Value Menu, strong promotional tie-ins with the NFL and entertainment properties such as SpongeBob’s Atlantis Squarepantis™, i-Dog™ and Viva Piñata™ aimed at increasing family traffic, as well as successful product promotions such as Homestyle Melts, the Italian Chicken Sandwich and the Whopper^® 50^th anniversary promotion featuring the Whopper^® Freakout media campaign.

     In EMEA/APAC, comparable sales continued to improve in most major markets including the U.K., Australia, Spain and South Korea, with continued focus on operational improvements, marketing and advertising and on high quality premium offerings, such as the limited time offer Angry Whopper^® sandwich and Aberdeen Angus Burger, which generated higher margins, as well as the continued success of dessert offerings in the U.K. and the introduction of the King Ahorros value menu in Spain.

     Latin America demonstrated positive results for the second quarter fueled primarily by our performance in Central America and South America, where higher margin indulgent products, such as the BK™ Stacker, aggressive promotion of our value menu, and successful promotions featuring global marketing properties such as The Simpsons™ Movie drove traffic and sales. These positive results were offset by softer performance in Mexico and Puerto Rico where strong prior year product promotions and current economic conditions affected sales for the three months ended December 31, 2007.

     Six Months Ended December 31, 2007

     In the United States and Canada, our comparable sales growth performance remained strong during the six months ended December 31, 2007, fueled by improvements in our operations, the continued positive impact of the BK™ Value Menu and BK™ Breakfast Value Menu, strong promotional tie-ins with the NFL and entertainment properties such as The Simpsons™ Movie, The Transformers™ Movie,and SpongeBob’s Atlantis Squarepantis™, successful product promotions such as the Whopper^® 50^th anniversary promotion featuring the Whopper^® Freakout campaign, the offering of premium products such as the Ultimate Double Whopper^® sandwich, the BBQ Bacon Tendercrisp^® chicken sandwich and Homestyle Melts and the introduction of the Spicy Chick’N Crisp™ sandwich to the BK™ Value Menu.

     In EMEA/APAC, comparable sales continued to improve during the six months ended December 31, 2007 in most major markets including the U.K., Australia, Spain and South Korea, due to our continued focus on operational improvements, marketing and advertising and on high quality premium offerings which generated higher margins, such as the limited time offer Angry Whopper^® sandwich and Aberdeen Angus Burger, the introduction of the King Ahorros value menu in Spain and the launch of the BK Fusions™ Real Dairy Ice Cream offerings in the United Kingdom.

     Latin America demonstrated positive results for the six months ended December 31, 2007 fueled primarily by our performance in Central America and South America, where higher margin indulgent products, such as the BK™ Stacker sandwich, aggressive value menu promotion and successful promotional tie-ins with the The Simpsons™ Movie, The Transformers™ Movie, and Scooby Doo™ drove traffic and sales. These positive results were offset by softer performance in Mexico and Puerto Rico, where strong prior year product promotions and current economic conditions affected sales for the six months ended December 31, 2007.

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 includes the impact of movement in foreign currency exchange rates. For the three and six months ended December 31, 2007, ARS was $322,000 and $649,000, respectively, compared to $297,000 and $597,000 for the three and six months ended December 31, 2006, an increase of 8% and 9%, respectively. The trailing 12-month ARS reached a record high of $1.25 million for the period ended December 31, 2007, as compared to $1.16 million for the trailing 12 months ended December 31, 2006, an increase of 8%. As of December 31, 2007 the last 50 free-standing restaurants that opened in the United States and have operated for at least 12 months generated ARS of $1.5 million, which is approximately 21% higher than the current U.S. system average.

     Our ARS improvement during the first six months of fiscal 2008 was primarily due to improved worldwide comparable sales, the opening of new restaurants with higher than average sales volumes and, to a lesser extent, the closure of under-performing restaurants. Our worldwide comparable sales were 5.2% for the six months ended December 31, 2007, driven primarily by the positive continued impact of the BK™ Value Menu, two full quarters of extended late night hours and the BK™ Breakfast Value Menu, the Whopper^® 50^th anniversary promotion featuring the Whopper^® Freakout media campaign in the United States, successful promotional tie-ins with The Simpsons™ Movie, The Transformers™ Movie and, SpongeBob’s Atlantis Squarepantis™ and the offering of premium products such as the Ultimate Double Whopper^® sandwich, the BBQ Bacon Tendercrisp^® chicken sandwich and Homestyle Melts. We and our franchisees opened 480 new restaurants and closed 269 restaurants for a net of 211 restaurants opened during the twelve months ended December 31, 2007. 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.

Sales Growth

     Sales growth refers to the change in sales at all Company-owned 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 system-wide basis. Sales growth is influenced by restaurant openings and comparable sales as well as the effectiveness of our advertising and marketing initiatives and featured products.

		For the								For the
		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
						(In constant currencies)
Sales Growth:
United States and Canada			4.4	%			3.7	%			5.6	%			2.6	%
EMEA/APAC			13.3	%			5.1	%			12.4	%			5.3	%
Latin America			8.9	%			14.2	%			11.6	%			14.8	%
Total			7.1	%			4.7	%			7.8	%			4.0	%

     Sales growth continued on a positive trend during the three and six months ended December 31, 2007, as comparable sales and the number of restaurants continued to increase on a worldwide basis. We expect restaurant closures to continue to decline and restaurant openings to accelerate in most regions, with the exception of the United Kingdom, where we continue to work with certain franchisees to help them improve their financial health.

     Our sales growth in the United States and Canada during the three and six months ended December 31, 2007 reflects positive comparable sales growth and an increase in the number of newly built restaurants, offset by a net reduction in restaurant count. We had 7,482 restaurants in the United States and Canada as of December 31, 2007, compared to 7,502 restaurants as of December 31, 2006, reflecting less than a 1% decrease in the number of restaurants compared to the prior year.

     EMEA/APAC demonstrated sales growth during the three and six months ended December 31, 2007 reflecting openings of new restaurants and positive comparable sales in most major markets. We had 2,958 restaurants in EMEA/APAC as of December 31, 2007 compared to 2,823 restaurants as of December 31, 2006, reflecting an approximate 5% increase in the number of restaurants compared to the prior year.

     Latin America’s sales growth was driven by new restaurant openings and strong comparable sales during the three and six months ended December 31, 2007. We had 955 restaurants in Latin America as of December 31, 2007 compared to 859 restaurants as of December 31, 2006, reflecting an approximate 11% increase in the number of restaurants compared to the prior year.

Other Operating Data

		As of
		December 31,
		2007				2006
Restaurant Count Data:
Number of Company restaurants:
United States and Canada			914				888
EMEA/APAC(1)			308				331
Latin America(2)			81				71
Total Company restaurants			1,303				1,290
Number of franchise restaurants:
United States and Canada			6,568				6,614
EMEA/APAC(1)			2,650				2,492
Latin America(2)			874				788
Total franchise restaurants			10,092				9,894
Total system-wide restaurants			11,395				11,184

		For the Three Months Ended								For the Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Other Operating Data:
Comparable sales growth			4.5	%			3.7	%			5.2	%			3.0	%
Sales growth			7.1	%			4.7	%			7.8	%			4.0	%
Average restaurant sales (in thousands)		$	322			$	297			$	649			$	597
Segment Data:
Company restaurant revenues (in millions):
United States and Canada		$	284			$	270			$	574			$	541
EMEA/APAC(1)			147				131				282				250
Latin America(2)			17				16				33				31
Total Company restaurant revenues		$	448			$	417			$	889			$	822
Franchise revenues (in millions):
United States and Canada		$	79			$	70			$	158			$	140
EMEA/APAC(1)			43				32				84				65
Latin America(2)			12				10				23				20
Total franchise revenues		$	134			$	112			$	265			$	225
Company restaurant margins:
United States and Canada			15.2	%			15.3	%			15.2	%			15.0	%
EMEA/APAC(1)			16.1	%			15.7	%			15.3	%			15.5	%
Latin America(2)			25.7	%			28.8	%			24.5	%			26.9	%
Total Company restaurant margins			15.9	%			15.9	%			15.6	%			15.6	%
Income from operations (in millions):
United States and Canada		$	88			$	84			$	185			$	171
EMEA/APAC(1)			27				13				47				33
Latin America(2)			11				10				20				18
Unallocated(3)			(31	)			(32	)			(61	)			(65	)
Total from operations		$	95			$	75			$	191			$	157
Franchise sales (in millions)(4)		$	3,173			$	2,876			$	6,399			$	5,790
EBITDA (in millions)(5)		$	118			$	96			$	235			$	200

	•		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. Therefore, any measure that excludes interest expense has material limitations;
	•		it does not include depreciation and amortization expenses. Because we use capital assets, depreciation and amortization are a necessary element of our costs and ability to generate profits. Therefore any measure that excludes depreciation and amortization expenses has material limitations; and
	•		it does not include provision for taxes. Because the payment of taxes is a necessary element of our operations, any measure that excludes tax expense has material limitations.

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.

     The following table is a reconciliation of our net income to EBITDA:

		For the Three Months Ended								For the Six Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
		(In millions)
Net income		$	49			$	38			$	98			$	78
Interest expense, net			16				17				32				34
Loss on early extinguishment of debt			—				—				—				1
Income tax expense			30				20				61				44
Depreciation and amortization			23				21				44				43
EBITDA		$	118			$	96			$	235			$	200

Results of Operations for the three months ended December 31, 2007

     The following table presents our results of operations for the three months ended December 31, 2007 and 2006:

		For the Three Months Ended December 31,
		2007				2006
										Increase/
		Amount				Amount				(Decrease)
		(Dollars in millions, except percentages and per share data)
Revenues:
Company restaurant revenues		$	448			$	417				7	%
Franchise revenues			134				112				20	%
Property revenues			31				30				3	%
Total revenues			613				559				10	%
Company restaurant expenses			378				351				8	%
Selling, general and administrative expenses			125				119				5	%
Property expenses			16				15				7	%
Other operating (income) expense, net			(1	)			(1	)			—	%
Total operating costs and expenses			518				484				7	%
Income from operations			95				75				27	%
Interest expense			18				19				(5	)%
Interest income			(2	)			(2	)			—	%
Interest expense, net			16				17				(6	)%
Income before income taxes			79				58				36	%
Income tax expense			30				20				50	%
Net income		$	49			$	38				29	%
Earnings per share — basic (1)		$	0.36			$	0.28				29	%
Earnings per share — diluted (1)		$	0.36			$	0.28				29	%
Weighted average shares — basic			135.3				133.5
Weighted average shares — diluted			137.9				136.5

Seasonality

     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.

Revenues

     Company restaurant revenues

     Total Company restaurant revenues increased by 7% to $448 million during the three months ended December 31, 2007 compared to the same period in the prior year, primarily as a result of an increase in net restaurants, positive worldwide Company comparable sales of 1.8% and the favorable impact from the movement in foreign currency exchange rates. During the twelve months ended December 31, 2007, we added 13 Company restaurants (net of closures and refranchisings). Approximately $20 million, or 65%, 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 $284 million during the three months ended December 31, 2007 compared to the same period in the prior year, primarily from positive Company comparable sales in this segment of 0.8% and the addition of 26 Company restaurants (net of closures and refranchisings) during the twelve months ended December 31, 2007. Approximately $5 million, or 36%, of the increase in Company restaurant revenues was due to the favorable impact in the movement of foreign currency exchange rates in Canada.

     In EMEA/APAC, Company restaurant revenues increased by 12% to $147 million during the three months ended December 31, 2007 compared to the same period in the prior year, primarily as a result of the favorable impact from the movement of foreign currency exchange rates in EMEA which contributed $14 million, or 88%, of the increase. Company restaurant revenues in EMEA/APAC also increased due to positive Company comparable sales in this segment of 4.3% but this improvement was offset by a net reduction of 23 Company restaurants primarily in the U.K. during the twelve months ended December 31, 2007.

     In Latin America, Company restaurant revenues increased by 6% to $17 million during the three months ended December 31, 2007 compared to the same period in the prior year, primarily as a result of 10 additional Company restaurants (net of closures and refranchisings) during the twelve months ended December 31, 2007 offset by negative Company comparable sales in this segment of 1.1% which were driven by highly successful product promotions featured in the prior year in Mexico. The impact on Company restaurant revenues from foreign currency exchange rates was not significant in this segment.

     Franchise revenues

     Total franchise revenues increased by 20% to $134 million during the three months ended December 31, 2007 compared to the same period in the prior year, driven by positive worldwide franchise comparable sales of 4.8% during the quarter, an increase in effective royalty rates in the U.S., and a net increase of 198 in the number of franchise restaurants (net of restaurant closures and acquisitions of franchise restaurants by the Company) during the twelve months ended December 31, 2007. Approximately $4 million, or 18%, of the increase in franchise revenues was due to the favorable impact from the movement of foreign currency exchange rates.

     In the United States and Canada, franchise revenues increased by 13% to $79 million during the three months ended December 31, 2007 compared to the same period in the prior year, primarily as a result of positive franchise comparable sales in this segment of 4.7% and an increase in effective royalty rates in the U.S., partially offset by the elimination of royalties from a net reduction of 46 franchise restaurants during the twelve months ended December 31, 2007. The impact on franchise revenues from foreign currency exchange rates was not significant in this segment.

     In EMEA/APAC, franchise revenues increased by 34% to $43 million during the three months ended December 31, 2007 compared to the same period in the prior year, driven by an increase of 158 franchise restaurants (net of closures and acquisitions of franchise restaurants by the Company) during the twelve months ended December 31, 2007 and positive franchise comparable sales in this segment of 5.7% during the quarter. Approximately $4 million, or 36%, of the increase in franchise revenues, was due to favorable impact from the movement of foreign currency exchange rates.

     Latin America franchise revenues increased by 20% to $12 million during the three months ended December 31, 2007 compared to the same period in the prior year, as a result of positive franchise comparable sales in this segment of 2.6% and the addition of 86 franchise restaurants (net of closures) during the twelve months ended December 31, 2007. The impact on franchise revenues from foreign currency exchange rates was not significant in this segment.

     Property Revenues

     Total property revenues increased by $1 million, or 3%, for the three months ended December 31, 2007 compared to the same period in the prior year, primarily as a result of an increase in worldwide franchise comparable sales of 4.8% partially offset by the effect of closing or acquiring restaurants leased to franchisees.

     In the United States and Canada, property revenues remained unchanged at $22 million for the three months ended December 31, 2007 compared to the same period in the prior year, primarily due to increased contingent rents as a result of an increase in franchise comparable sales in this segment of 4.7%, offset by the effect of closing or acquiring restaurants leased to franchisees.

     In EMEA/APAC, property revenues increased by $1 million or 13% for the three months ended December 31, 2007 compared to the same period in the prior year, primarily due to increased contingent rents as a result of an increase in franchise comparable sales in this segment of 5.7% partially offset by the effect of closing or acquiring restaurants leased to franchisees.

Operating Costs and Expenses

     Food, paper and product costs

     Total food, paper and product costs increased by 12% to $140 million during the three months ended December 31, 2007 compared to the same period in the prior year, as a result of an increase in sales and in the number of Company restaurants, an increase in commodity costs and the unfavorable impact of foreign currency exchange rates, primarily in EMEA. As a percentage of Company restaurant revenues, food, paper and product costs increased 1.2% to 31.2% 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 10% during the three months ended December 31, 2007 compared to the same period in the prior year, primarily as a result of an increase in sales in this segment, an increase in the number of Company restaurants, and an increase in commodity costs. Food, paper and product costs as a percentage of Company restaurant revenues increased 1.4% to 32.3% 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 17% during the three months ended December 31, 2007 compared to the same period in the prior year, primarily as a result of an increase in sales, and the unfavorable impact of foreign currency exchange rates offset by a reduction in the number of Company restaurants. Food, paper and product costs as a percentage of Company restaurant revenues increased by 1% to 28.5% for the three months ended December 31, 2007, reflecting the unfavorable impact from product mix and commodity pressures during the period as compared to the same period in the prior year.

     There was no significant change in food, paper and product costs in Latin America during the three months ended December 31, 2007.

     Payroll and employee benefits costs

     Total payroll and employee benefits costs increased by 7% to $132 million during the three months ended December 31, 2007 compared to the same period in the prior year. This increase was primarily due to the addition of 13 Company restaurants (net of closures and refranchisings) during the twelve months ended December 31, 2007, and the unfavorable impact of foreign currency exchange rates. As a percentage of Company restaurant revenues, payroll and employee benefits costs remained unchanged at 29.3% as a result of the benefits derived from labor efficiencies and lower fringe benefit costs offset by higher wages and an increase in headcount.

     In the United States and Canada, payroll and employee costs increased by 4% to $86 million during the three months ended December 31, 2007 compared to the same period in the prior year, primarily as a result of additional labor needed to service increased traffic and the addition of 26 Company restaurants (net of closures and refranchisings) during the twelve months ended December 31, 2007. As a percentage of Company restaurant revenues, payroll and employee benefits did not change significantly, with the benefits derived from labor efficiencies offset by inflationary increases in wages and salaries.

     In EMEA/APAC, payroll and employee benefits costs increased by 15% during the three months ended December 31, 2007 compared to the same period in the prior year, primarily as a result of additional labor needed to service increased traffic, and the unfavorable impact of foreign currency exchange rates. Payroll and employee benefits increased by 0.5% to 29.7% of Company restaurant revenues in EMEA/APAC for the three months ended December 31, 2007, compared to the same period in the prior year as a result of inflationary increases in wages and salaries, increased fringe benefit costs and temporary staffing.

     There was no significant change in payroll and employee benefits costs in Latin America during the three months ended December 31, 2007.

     Occupancy and other operating costs

     Occupancy and other operating costs increased by 3% to $106 million during the three months ended December 31, 2007 compared to the same period in the prior year. This increase is primarily attributable to the addition of 13 Company restaurants (net of closures and refranchisings) during the twelve months ended December 31, 2007, and the unfavorable impact of foreign currency exchange rates. Occupancy and other operating costs were 23.6% of Company restaurant revenues during the three months ended December 31, 2007 compared to 24.7% during the three months ended December 31, 2006, reflecting the benefits realized from the new flexible batch broilers in the United States and Canada and lower rent from the closure of underperforming restaurants and the refranchising of Company restaurants in EMEA, primarily in the U.K.

     In the United States and Canada, occupancy and other operating costs increased by 1% to $64 million during the three months ended December 31, 2007 compared to the same period in the prior year, driven by higher rent and property taxes partially offset by the benefits realized from the new flexible batch broilers, including lower utility costs and depreciation expense, and positive Company comparable sales in the region. As a percentage of Company restaurant revenues, occupancy and other operating costs decreased to 22.3% compared to 23.2% during the three months ended December 31, 2006 for the reasons discussed above.

     In EMEA/APAC, occupancy and other operating costs increased by 5% to $38 million during the three months ended December 31, 2007 compared to the same period in the prior year, due to increased utility and repair and maintenance costs and the unfavorable impact of foreign currency exchange rates. As a percentage of Company restaurant revenues, occupancy and other operating costs decreased to 25.7% compared to 27.6% during the three months ended December 31, 2006, benefiting primarily from the closure of under-performing restaurants and the refranchising of Company restaurants in EMEA, primarily in the U.K., as well as positive Company comparable sales in the region.

     In Latin America, occupancy and other operating costs increased by 18% to $4 million during the three months ended December 31, 2007 compared to the same period in the prior year, primarily attributable to the addition of ten new Company restaurants during the twelve months ended December 31, 2007. As a percentage of Company restaurant revenues, occupancy and other operating costs increased to 27% during the three months ended December 31, 2007 compared to 24.4% during the three months ended December 31, 2006, primarily as a result of an increase in rent, utility costs, property taxes, and depreciation from the new restaurants.

     Selling, general and administrative expenses

     Selling expenses decreased by $3 million for the three months ended December 31, 2007 compared to the same periods in the prior year. The decrease in selling expenses for the three months is primarily attributable to a discretionary Company contribution to the U.K. marketing fund of $7 million made in the prior year, offset by additional sales promotions and advertising expenses generated by higher Company restaurant revenues. The overall net decrease in selling expenses reflects the unfavorable impact of $1 million from the movement in foreign currency exchange rates, primarily due to the strengthening of the Euro and the British Pound against the U.S. dollar.

     General and administrative expenses increased by $9 million to $103 million for the three months ended December 31, 2007, compared to the same period in the prior year. This net increase was primarily driven by an increase in corporate salary, fringe benefits and other employee-related costs of $7 million and an increase in stock based compensation expense of $2 million. The overall net increase of $9 million also reflects the unfavorable impact of $4 million from the movement in foreign currency exchange rates, primarily due to the strengthening of the Euro and the British Pound against the U.S. dollar.

     Property Expenses

     Total property expenses increased $1 million to $16 million for the three months ended December 31, 2007 compared to the same period in the prior year, primarily due to an increase in rents related to the increase in sales for the period offset by the effect of closing or acquiring restaurants leased to franchisees.

     Other operating (income) expense, net

     Other operating (income) expense, net for the three months ended December 31, 2007 and 2006 was $1 million of income. Other operating (income) expense for the current period includes a net gain of $3 million from the disposal of real estate and other assets, offset by a $1 million loss on foreign currency transactions, a $1 million loss from vacant property provisions and $1 million in losses derived from settlement losses recorded on the acquisition of franchise restaurants and unrealized losses on investment securities.

     Other operating (income) expense, net for the three months ended December 31, 2006 includes a gain of $1 million from forward currency contracts used to hedge intercompany loans denominated in foreign currencies and a net gain of $1 million from the disposal of assets, partially offset by $2 million of expenses associated with franchise system distress in the U.K.

Income from Operations

		Three Months Ended
		December 31,
		2007				2006
Income from Operations:
United States and Canada		$	88			$	84
EMEA/APAC			27				13
Latin America			11				10
Unallocated			(31	)			(32	)
Total income from operations		$	95			$	75

     Total income from operations increased by $20 million to $95 million during the three months ended December 31, 2007 compared to the same period in the prior year, primarily due to an increase in franchise revenues of $22 million driven by worldwide franchise comparable sales of 4.8% for the quarter, an increase in the effective royalty rate and the net addition of 198 franchise restaurants during the twelve months ended December 31, 2007. In addition, we benefited from an increase in Company restaurant margin of $4 million which was primarily driven by the net addition of 13 Company restaurants during the twelve months ended December 31, 2007 and an increase in Company comparable sales. These benefits were partially offset by an increase in selling, general and administrative expenses of $6 million, primarily attributable to increased salary and fringe benefit costs and increased stock based compensation, offset by a decrease in selling expenses which was primarily driven by the discretionary Company contribution made to the U.K. marketing fund in the prior year. 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 $2 million impact on income from operations. See Note 14 to our unaudited condensed consolidated financial statements contained in this report for income from operations by segment.

     In the United States and Canada, income from operations increased by $4 million to $88 million during the three months ended December 31, 2007 compared to the same period in the prior year, primarily as a result of an increase in franchise revenues of $9 million reflecting an increase in comparable sales for franchise restaurants in this segment and an increase in the effective royalty rate. In addition, we benefited from an increase in Company restaurant margin of $2 million, driven by the net increase of 26 Company restaurants during the twelve months ended December 31, 2007 and an increase in Company comparable sales for the quarter. These increases were partially offset by an increase in selling, general and administrative expenses of $7 million driven by increased salary and fringe benefit costs and increased stock based compensation expense.

     In EMEA/APAC, income from operations increased by $14 million to $27 million during the three months ended December 31, 2007 compared to the same period in the prior year, primarily as a result of an increase in franchise revenues of $11 million reflecting an increase in comparable sales for franchise restaurants in this segment and the net increase of 158 franchise restaurants during the twelve months ended December 31, 2007. In addition, we benefited from an increase in Company restaurant margin of $2 million, driven by an increase in comparable sales; an increase in net property revenues of $1 million, reflecting both an increase in comparable sales offset by a decrease in the number of properties that we lease or sublease to franchisees; and a decrease in selling, general and administrative expenses of $1 million driven by the discretionary Company contribution made to the U.K. marketing fund in the prior year. These increases were partially offset by higher advertising expenses as a result of the increase in sales, higher salary and fringe benefits and professional fees and by a $1 million decrease in other operating (income) expense, net.

     In Latin America, income from operations increased by $1 million to $11 million during the three months ended December 31, 2007 compared to the same period in the prior year, primarily as a result of an increase in franchise revenues of $2 million reflecting an increase in comparable sales for franchise restaurants in this segment and the net addition of 86 franchise restaurants during the twelve months ended December 31, 2007, partially offset by higher selling, general and administrative expenses.

     Our unallocated corporate expenses decreased by $1 million during the three months ended December 31, 2007 compared to the same period in the prior year.

Interest Expense, net

     Interest expense, net decreased by $1 million during the three months ended December 31, 2007 compared to the same period in the prior year, 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 rate for the three months ended December 31, 2007 was 6.7%, which included the benefit of interest rate swaps on 46% of our term debt.

Income Tax Expense

     Income tax expense was $30 million for the three months ended December 31, 2007 resulting in an effective tax rate of 38%. During the three months ended December 31, 2007, we recorded a tax charge of $1 million primarily related to legal changes in various jurisdictions.

     Income tax expense was $20 million for the three months ended December 31, 2006 resulting in an effective tax rate of 34.5%. During the three months ended December 31, 2006, we realized a tax benefit as a result of the realignment of the European and Asian businesses.

Net Income

     Our net income increased by $11 million to $49 million during the three months ended December 31, 2007 compared to the same period in the prior year, primarily as a result of a net increase in restaurants and strong comparable sales which increased franchise revenues by $22 million, increased Company restaurant margin by $4 million and increased net property revenues by $1 million. These increases were partially offset by an increase in selling, general and administrative expenses of $6 million and a $10 million increase in income tax expense.

Results of Operations for the six months ended December 31, 2007

     The following table presents our results of operations for the six months ended December 31, 2007 and 2006:

		For the Six Months Ended December 31,
		2007				2006
										Increase/
		Amount				Amount				(Decrease)
		(Dollars in millions, except percentages and per share data)
Revenues:
Company restaurant revenues		$	889			$	822				8	%
Franchise revenues			265				225				18	%
Property revenues			61				58				5	%
Total revenues		$	1,215			$	1,105				10	%
Company restaurant expenses			751				694				8	%
Selling, general and administrative expenses			244				231				6	%
Property expenses			30				31				(3	)%
Other operating income, net			(1	)			(8	)			(88	)%
Total operating costs and expenses		$	1,024			$	948				8	%
Income from operations			191				157				22	%
Interest expense			36				38				(5	)%
Interest income			(4	)			(4	)			—	%
Interest expense, net			32				34				(6	)%
Loss on early extinguishment of debt			—				1			NM
Income before income taxes		$	159			$	122				30	%
Income tax expense			61				44				39	%
Net income		$	98			$	78				26	%
Earnings per share — basic (1)		$	0.72			$	0.59				22	%
Earnings per share — diluted (1)		$	0.71			$	0.57				25	%
Weighted average shares — basic			135.2				133.3
Weighted average shares — diluted			137.9				136.1