UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

Form 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2008

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

For the transition period from           to

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		33126
(Address of Principal Executive Offices)		(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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of January 30, 2009, there were 134,593,313 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, 2008 and June 30, 2008 (unaudited)			3
Condensed Consolidated Statements of Income for the three and six months ended December 31, 2008 and 2007 (unaudited)			4
Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2008 and 2007 (unaudited)			5
Notes to Condensed Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			38
PART II – Other Information
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 4. Submission of Matters to a Vote of Security Holders			42
Item 6. Exhibits			43
Signatures			44
Index to Exhibits			45
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I – Financial Information

Item 1. Financial Statements

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

		As of
		December 31,				June 30,
		2008				2008
		(In millions, except share data)
Assets
Current assets:
Cash and cash equivalents		$	124			$	166
Trade and notes receivable, net			135				139
Prepaids and other current assets			57				54
Deferred income taxes, net			35				45
Total current assets			351				404
Property and equipment, net			958				961
Intangible assets, net			1,073				1,055
Goodwill			26				27
Net investment in property leased to franchisees			132				135
Other assets, net			97				105
Total assets		$	2,637			$	2,687
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts and drafts payable		$	78			$	130
Accrued advertising			79				77
Other accrued liabilities			215				242
Current portion of long term debt and capital leases			38				7
Total current liabilities			410				456
Term debt, net of current portion			867				869
Capital leases, net of current portion			66				71
Other deferrals and liabilities			350				360
Deferred income taxes, net			56				86
Total liabilities			1,749				1,842
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; 134,589,210 and 135,022,753 shares issued and outstanding at December 31, 2008 and June 30, 2008, respectively			1				1
Additional paid-in capital			614				601
Retained earnings			367				290
Accumulated other comprehensive income (loss)			(35	)			(8	)
Treasury stock, at cost; 2,872,325 and 2,042,887 shares, at December 31, 2008 and June 30, 2008, respectively			(59	)			(39	)
Total stockholders’ equity			888				845
Total liabilities and stockholders’ equity		$	2,637			$	2,687

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,
		2008				2007				2008				2007
						(In millions, except per share data)
Revenues:
Company restaurant revenues		$	473			$	448			$	970			$	889
Franchise revenues			134				134				280				265
Property revenues			27				31				58				61
Total revenues			634				613				1,308				1,215
Company restaurant expenses:
Food, paper and product costs			152				140				314				277
Payroll and employee benefits			144				132				295				263
Occupancy and other operating costs			112				106				234				211
Total company restaurant expenses			408				378				843				751
Selling, general and administrative expenses			120				125				245				244
Property expenses			14				16				29				30
Other operating (income) expense, net			6				(1	)			15				(1	)
Total operating costs and expenses			548				518				1,132				1,024
Income from operations			86				95				176				191
Interest expense			16				18				31				36
Interest income			(1	)			(2	)			(2	)			(4	)
Total interest expense, net			15				16				29				32
Income before income taxes			71				79				147				159
Income tax expense			27				30				53				61
Net income		$	44			$	49			$	94			$	98
Earnings per share:
Basic		$	0.33			$	0.36			$	0.70			$	0.72
Diluted		$	0.33			$	0.36			$	0.69			$	0.71
Weighted average shares outstanding:
Basic			134.6				135.3				134.8				135.2
Diluted			136.5				137.9				136.9				137.9
Dividends per common share		$	0.06			$	0.06			$	0.13			$	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,
		2008				2007
		(In millions)
Cash flows from operating activities:
Net income		$	94			$	98
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			49				44
Gain on hedging activities			(1	)			(1	)
Loss / (Gain) on remeasurement of foreign denominated transactions			60				(30	)
Gain on asset sales and release of unfavorable lease obligation			(1	)			(6	)
Bad debt expense, net of recoveries			3				(1	)
Stock-based compensation			8				5
Deferred income taxes			(15	)			20
Changes in current assets and liabilities, excluding acquisitions and dispositions:
Trade and notes receivables			(4	)			(11	)
Prepaids and other current assets			(7	)			15
Accounts and drafts payable			(45	)			(29	)
Accrued advertising			5				30
Other accrued liabilities			(14	)			5
Other long-term assets and liabilities			(3	)			(23	)
Net cash provided by operating activities			129				116
Cash flows from investing activities:
Payments for property and equipment			(83	)			(50	)
Proceeds from asset disposals and restaurant closures			2				13
Payments for acquired franchisee operations, net of cash acquired			(67	)			(1	)
Return of investment on direct financing leases			4				3
Other investing activities			(5	)			(3	)
Net cash used for investing activities			(149	)			(38	)
Cash flows from financing activities:
Repayments of term debt and capital leases			(2	)			(53	)
Borrowings under revolving credit facility			94				—
Repayments of revolving credit facility			(65	)			—
Dividends paid on common stock			(17	)			(17	)
Proceeds from stock option exercises			2				2
Excess tax benefits from stock-based compensation			3				3
Repurchases of common stock			(20	)			(6	)
Net cash used for financing activities			(5	)			(71	)
Effect of exchange rates on cash and cash equivalents			(17	)			6
Decrease in cash and cash equivalents			(42	)			13
Cash and cash equivalents at beginning of period			166				170
Cash and cash equivalents at end of period		$	124			$	183

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,
		2008				2007
		(In millions)
Supplemental cash flow disclosures:
Interest paid		$	30			$	20
Income taxes paid		$	70			$	41
Non-cash investing and financing activities:
Acquisition of property with capital lease obligations		$	1			$	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 December 31, 2008, the Company was approximately 32% owned by the private equity funds controlled by TPG Capital, the Goldman Sachs Funds and Bain Capital Partners (collectively, the “Sponsors”).

     The Company generates revenues from three sources: (i) retail sales at Company restaurants; (ii) franchise revenues, consisting of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; and (iii) property income from restaurants that the Company leases or subleases to franchisees.

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, 2008 filed with the SEC on August 28, 2008 (“2008 Form 10-K”). 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, 2008 do not necessarily indicate the results that may be expected for the full year ending June 30, 2009.

     Certain prior year amounts in the accompanying Financial Statements and Notes to the Financial Statements have been reclassified in order to be comparable with the current year classifications.  These reclassifications had no effect on previously reported Net Income.

     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.

Correction of Immaterial Error Related to Prior Periods

     During the year ended June 30, 2008, the Company identified an error related to its classification in the statement of cash flows of lease payments received under its direct financing leases. The Company determined that in accounting for such payments, it did not properly classify the portion of the lease payment representing the reduction in the net investment in the lease as cash flows from investing activities, as required by Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 95, “Statement of Cash Flows.” The Company reviewed the impact of this error on the prior periods in accordance with SEC Staff Accounting Bulletin No. 99, “Materiality,” and determined that the error was not material to the prior periods. However, the Company has corrected the statement of cash flows for the six months ended December 31, 2007 by increasing cash flows from investing activities and decreasing cash flows from operating activities by $3 million.

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 Company’s consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Change in Accounting Policy

     During the first quarter of fiscal year 2009, the Company changed its classification of transaction gains and losses resulting from the remeasurement of foreign deferred tax assets, reflected in its consolidated statements of income. In accordance with SFAS No.

109, “Accounting for Income Taxes” (“SFAS No. 109”), transaction gains and losses resulting from the remeasurement of foreign deferred tax assets or liabilities may be reported separately or included in deferred tax expense or benefit, if that presentation is considered more useful. In that regard, in order to (i) reduce complexity in financial reporting by mitigating the impact that fluctuations in exchange rates have on the calculation of the Company’s effective tax rate, (ii) provide clarity by reducing the impact attributable to fluctuations in exchange rates on the Company’s effective tax rate, leaving remaining differences between expected and actual tax expense primarily related to trends in earnings, and (iii) provide transparency to its financial statements by isolating foreign exchange transaction gains and losses within the same line in the consolidated statements of income, the Company believes it to be preferable to reclassify the foreign exchange transaction gains and losses attributable to the remeasurement of foreign deferred tax assets, previously included within income tax expense, to other operating (income) expense, net. For the three and the six months ended December 31, 2008, this change in accounting policy resulted in a decrease to income tax expense of $5 million and $8 million, respectively, with a corresponding increase in foreign exchange transaction losses included in other operating (income) expense, net. For the three and the six months ended December 31, 2007, the impact of this change in accounting policy was insignificant. This accounting policy change had no effect on net income for the periods presented.

Recently Adopted Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. In February 2008, the FASB issued Financial Statement of Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157,” which permits a one-year deferral for the implementation of SFAS No. 157 with regard to non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company elected to defer adoption of SFAS No. 157 for such items, which for the Company primarily includes long-lived assets, goodwill and intangibles for which fair value would be determined as part of the related impairment tests, intangible assets measured at fair value in conjunction with the Company’s acquisition of BKC on December 12, 2002, but not measured at fair value in subsequent periods, and asset retirement obligations initially measured at fair value under SFAS No. 143, “Accounting for Asset Retirement Obligations.” The Company does not currently anticipate that full adoption of SFAS No. 157 in fiscal year 2010 will materially impact the Company’s results of operations or financial condition. Also, in October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarified the application of SFAS No. 157 in a market that is not active and also provided an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 did not have an effect upon the Company’s adoption of SFAS No. 157.

     On July 1, 2008, the Company adopted the provisions of SFAS No. 157 related to its financial assets and financial liabilities. The following table presents the fair values for those assets and liabilities measured on a recurring basis as of December 31, 2008:

										Fair Value Measurements at December 31, 2008
																		Significant
										Quoted Prices in Active				Significant Other				Unobservable
		Carrying Value								Markets for Identical				Observable Inputs				Inputs
Description		Assets				Liabilities				Instruments (Level 1)				(Level 2)				(Level 3)
Foreign currency forward contracts		$	15			$	—			$	—			$	15			$	—
Other investments			17				—				17				—				—
		$	32			$	—			$	17			$	15			$	—
Foreign currency forward contracts		$	—			$	(15	)		$	—			$	(15	)		$	—
Interest rate swaps			—				(41	)			—				(41	)			—
		$	—			$	(56	)		$	—			$	(56	)		$	—

     The Company has entered into interest rate swap contracts with the objective of hedging the variability of the forecasted cash interest payments associated with its variable-rate debt. The Company enters into foreign currency forward contracts with the objective of reducing its exposure to cash flow volatility arising from currency exchange fluctuations associated with certain foreign currency-denominated intercompany loans and other assets. The fair values of the Company’s interest rate swaps and foreign currency forward contracts were determined based on the present value of expected future cash flows considering the risks involved, including nonperformance risk of the counterparty and of the Company, and using discount rates appropriate for the duration of these instruments. The Company presents the financial assets and financial liabilities related to interest rate swaps and foreign currency forward contracts with the same counterparty on a gross basis.

     The Other Investments consist of money market accounts and mutual funds held in a rabbi trust which the Company established to invest compensation deferred by participants in the Company’s Executive Retirement Plan and to fund future deferred compensation obligations.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and financial liabilities at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option is elected are reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.

     The Company adopted SFAS No. 159 on July 1, 2008. The Company did not elect to begin reporting any financial assets or financial liabilities at fair value that are not currently required to be measured at fair value upon adoption of SFAS No. 159.

Inventories

     Inventories, totaling $18 million and $16 million as of December 31, 2008 and June 30, 2008, 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

     In August 2008, the Company granted non-qualified stock options and performance-based restricted stock and performance-based restricted stock units (“PBRS”) covering approximately 1.2 million shares and 0.4 million shares, respectively, to eligible employees.

     The Company’s stock options generally vest ratably over a four-year service period. The grant date fair value of the stock options granted in August 2008 was $8.54 and was estimated using the Black-Scholes option pricing model based on the following input assumptions: risk-free interest rate of 3.33%; expected term of 6.25 years; expected volatility of 31.80%; and expected dividend yield of 0.96%.

     The amount of PBRS granted to each eligible employee in August 2008 was based on the Company achieving 100% of the performance target set for fiscal year 2009. PBRS generally vest after a three year service period from the grant date, which includes the performance period. The grant date fair value of each PBRS was $26.16, representing the closing share price of the Company’s common stock on the grant date.

     In November 2008, the Company granted approximately 41,000 deferred shares of restricted stock to non-employee members of the Company’s Board of Directors as an annual grant. The deferred shares vest in quarterly installments over a one-year period on the first day of each calendar quarter following the grant date. The deferred shares will settle and shares of common stock will be issued upon termination of service by the board member.

     The Company recorded $5 million and $8 million of stock-based compensation expense for the three and the six months ended December 31, 2008, respectively. The Company recorded $3 million and $5 million of stock-based compensation expense for the three and the six months ended December 31, 2007, respectively.

Note 3. Acquisitions, Closures and Dispositions

     Acquisitions

     All acquisitions of franchise restaurants are accounted for using the purchase method of accounting under SFAS No. 141, “Business Combinations” and the guidance under Emerging Issues Task Force (EITF) Issue No. 04-1, “Accounting for Preexisting Relationships between parties to a Business Combination.” For the six months ended December 31, 2008, these acquisitions are summarized as follows (in millions, except for number of restaurants):

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Number of restaurants acquired			2				12				76				16
Prepaids and other current assets		$	—			$	—			$	1			$	—
Property and equipment, net			—				1				14				1
Other intangible assets			—				1				55				1
Assumed liabilities			—				—				(3	)			—
Total purchase price		$	—			$	2			$	67			$	2

     The purchase price allocations for the acquisitions completed during the six months ended December 31, 2008, are subject to final adjustment. Other intangible assets primarily include reacquired franchise rights.

     Closures and Dispositions

     Gains and losses on closures and dispositions represent sales of Company properties and other costs related to restaurant closures and sales of Company restaurants to franchisees, referred to as “refranchisings,” and are recorded in other operating (income) expenses, net in the accompanying condensed consolidated statements of income (See Note 11). 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,
		2008				2007				2008				2007
Number of restaurant closures			4				7				6				12
Number of refranchisings			1				—				3				17
Net loss (gain) on restaurant closures, refranchisings, and dispositions of assets		$	(1	)		$	(3	)		$	—			$	(2	)

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,
		2008				2007				2008				2007
Numerator:
Numerator for basic and diluted earnings per share:
Net income		$	44,405,888			$	49,177,412			$	94,214,267			$	97,699,110
Denominator:
Weighted average shares — basic			134,566,769				135,275,453				134,787,340				135,235,468
Effect of dilutive securities			1,910,592				2,636,903				2,082,129				2,634,235
Weighted average shares — diluted			136,477,361				137,912,356				136,869,469				137,869,703
Basic earnings per share		$	0.33			$	0.36			$	0.70			$	0.72
Diluted earnings per share		$	0.33			$	0.36			$	0.69			$	0.71

     For the three months ended December 31, 2008 and 2007 there were 3.6 million and 1.2 million anti-dilutive stock options outstanding, respectively. For the six months ended December 31, 2008 and 2007 there were 2.2 million and 0.8 million 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,
		2008				2007				2008				2007
Net income		$	44			$	49			$	94			$	98
Translation adjustment			(6	)			(1	)			(5	)			(2	)
Cash flow hedges:
Net change in fair value of derivatives (1)			(19	)			(5	)			(21	)			(10	)
Amounts reclassified to earnings during the period			(1	)			—				(1	)			(1	)
Total other comprehensive (loss)			(26	)			(6	)			(27	)			(13	)
Total comprehensive income		$	18			$	43			$	67			$	85

Note 6. Other Accrued Liabilities and Other Deferrals and Liabilities

     Included in other accrued liabilities as of December 31, 2008 and June 30, 2008 were accrued payroll and employee-related benefit costs totaling $58 million and $84 million, respectively. The decrease in accrued payroll and employee-related benefit costs is primarily due to the payment of the Company’s annual incentive bonus to employees during the first quarter of fiscal 2009.

     Included in other deferrals and liabilities as of December 31, 2008 and June 30, 2008 were accrued pension liabilities of $41 and $50 million, respectively; casualty insurance reserves of $28 million for each period ended; retiree health benefits of $22 million and $21 million, respectively; and liabilities for unfavorable leases of $166 million and $190 million, respectively.

Note 7. Long-Term Debt

     As of December 31, 2008 and June 30, 2008, the Company had $900 million and $871 million of long-term debt outstanding, respectively. During the six months ended December 31, 2008, the Company borrowed $94 million and repaid $65 million under its revolving credit facility. The current portion of long-term debt was $33 million and $2 million as of December 31, 2008 and June 30, 2008, 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, 2008 was 5.5% and 5.4%, respectively, which included the benefit of interest rate swaps on 66% and 71% of our term debt, respectively (See Note 8).

Note 8. Derivative Instruments

     Interest rate swaps

     As of December 31, 2008, the Company had receive-variable, pay-fixed interest rate swap contracts outstanding with an aggregate notional value of $595 million, a decrease of $60 million from June 30, 2008, reflecting swap contracts that matured in September 2008. The swaps were being used to hedge 66% of the Company’s forecasted LIBOR-based interest payments on variable rate debt (hedged forecasted transaction) as of December 31, 2008. The Company has designated the swaps as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities, As Ammended.” At December 31, 2008, the fair values of these swaps are reflected in other deferrals and liabilities, with an offsetting unrealized loss in accumulated other comprehensive income (loss) (“AOCI”), in the accompanying condensed consolidated balance sheets.

     During the three and six months ended December 31, 2008, the Company recognized $1 million and $3 million, respectively, as additional interest expense related to the change in value of these swaps, reflecting a higher fixed rate paid to the counterparty compared to the variable rate received. There was no hedge ineffectiveness recorded in earnings during the three and six months ended December 31, 2008.

     In September 2006, the Company settled swaps that had been designated as a cash flow hedge, which had an aggregate fair value of $12 million, and terminated the hedges. This balance is recorded in AOCI and is being recognized as a reduction of interest expense over the remaining term of the debt underlying the terminated hedges. At December 31, 2008, $3 million remained in AOCI related to the terminated hedges.

     Foreign currency forward contracts

     The following table represents the gains and losses recorded in other operating (income) expense, net in the Company’s condensed consolidated statement of income resulting from the remeasurement of foreign currency-denominated intercompany loans and other assets and the change in fair value of foreign currency forward contracts used to economically hedge the foreign exchange risks associated with such items (in millions):

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
(Gain) loss on remeasurement of foreign denominated intercompany loans		$	10			$	(11	)		$	52			$	(30	)
Loss on remeasurement of foreign denominated other assets		$	5			$	—			$	8			$	—
(Gain) loss on change in fair value of foreign currency forward contracts		$	(14	)		$	11			$	(54	)		$	29

     The $1 million difference between the recognized losses on the remeasurement of foreign currency-denominated intercompany loans and other assets and the offsetting gains in the change in fair value of the foreign currency forward contracts for the three months ended December 31, 2008, represents $1 million of loss from the remeasurement of a portion of foreign denominated other assets that were not hedged during that period.

     There is no significant difference between the gain from the remeasurement of foreign currency-denominated intercompany loans and the change in fair value of the foreign currency forward contracts for the three months ended December 31, 2007.

     The $6 million difference between the losses on the remeasurement of foreign currency-denominated intercompany loans and assets and the offsetting gains in the change in fair value of the foreign currency forward contracts for the six months ended December 31, 2008, represents $2 million of loss from the change in fair value of the foreign currency forward contracts attributable to the difference in spot and forward contract rates and $4 million of loss from the remeasurement of a portion of foreign denominated assets that were not hedged during that period.

     The $1 million difference between the gain from the remeasurement of foreign currency-denominated intercompany loans and the change in fair value of the foreign currency forward contracts for the six months ended December 31, 2007, represents the change in fair value of the foreign currency forward contracts attributable to the difference in spot and forward contract 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,
		2008				2007				2008				2007
U.S. federal income tax rate			35.0	%			35.0	%			35.0	%			35.0	%
State income taxes, net of federal income tax benefit			2.7				2.6				2.7				2.8
Costs and taxes related to foreign operations			(1.3	)			(3.7	)			(1.9	)			0.7
Foreign tax differential			(4.6	)			0.0				(4.6	)			0.0
Foreign exchange differential on tax benefits			2.7				0.5				2.2				(0.1	)
Change in valuation allowance			2.3				2.0				1.7				(0.9	)
Change in accrual for tax uncertainties			1.1				1.7				1.0				1.3
Other			0.1				(0.1	)			(0.1	)			(0.4	)
Effective income tax rate			38.0	%			38.0	%			36.0	%			38.4	%

     As discussed further in the Company’s 2008 Form 10-K, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”) effective July 1, 2007. The amount of unrecognized tax benefits as of June 30, 2008 was approximately $23 million which, if recognized, would affect the effective income tax rate. During the three and six months ended December 31, 2008, 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.

     In the next twelve months, it is reasonably possible the Company will reduce unrecognized tax benefits by a range of approximately $4 million to $8 million, primarily as a result of the expiration of certain statutes of limitations and the completion of certain tax audits. Any increases in unrecognized tax benefits will result primarily from tax positions expected to be taken on tax returns for fiscal year 2009.

     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, 2008 was $4 million, which was included as a component of the $23 million unrecognized tax benefit at June 30, 2008. Potential interest and penalties associated with uncertain tax positions recognized during the six months ended December 31, 2008 were less than $1 million. 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, the Company is 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 U.S. Internal Revenue Service for the year ended June 30, 2006. The Company also has various state and foreign income tax returns in the process of examination. From time to time, these audits result in proposed assessments where the ultimate resolution may result in the Company owing additional taxes. The Company believes that its tax positions comply with applicable tax law and that it has adequately provided for these matters.

Note 10. Retirement Plan and Other Post Retirement Benefits

     The fair value of restricted investments held in a Rabbi trust (“the rabbi trust”), which the Company established to fund the Company’s current and future obligations under its Executive Retirement Plan, was $17 million and $20 million at December 31, 2008 and June 30, 2008, respectively.

     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):

		Pension and Other Post Retirement Benefits
		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Service cost-benefits earned during the period		$	1			$	1			$	1			$	1
Interest costs on projected benefit obligations			3				4				6				6
Expected return on plan assets			(2	)			(3	)			(5	)			(5	)
Recognized net actuarial loss			—				—				—				—
Net periodic benefit cost		$	2			$	2			$	2			$	2

     During the six months ended December 31, 2008, the Company contributed $13 million to the Company’s pension and post retirement plans.

Note 11. Other Operating (Income) Expense, Net

     Other operating expense, net for the three months ended December 31, 2008 was $6 million, compared to $1 million of income for the same period in the prior year. This $6 million expense includes $4 million of net losses on investments held in the rabbi trust, which were fully offset by a corresponding decrease in deferred compensation expense reflected in general and administrative expenses, and $2 million of net expense related to the remeasurement of foreign denominated assets and the expense related to the use of foreign currency forward contracts used to hedge the currency exchange impact on such assets.

     Other operating (income) expense, net for the three months ended December 31, 2007 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 expense, net for the six months ended December 31, 2008 was $15 million, compared to $1 million of income for the same period in the prior year. This $15 million expense includes $6 million of net losses on investments held in the rabbi trust, which were fully offset by a corresponding decrease in deferred compensation expense reflected in general and administrative expenses, $2 million of charges associated with the acquisition of franchise restaurants from a large franchisee in the U.S. and $7 million of net expense related to the remeasurement of foreign denominated assets and the expense related to the use of foreign currency forward contracts used to hedge the currency exchange impact on such assets.

     Other operating (income) expense, net for the six months ended December 31, 2007 was $1 million of income. 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.

Note 12. Commitments and Contingencies

     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 $69 million as of December 31, 2008, expiring over an average period of six years.

     Other commitments arising from normal business operations were $8 million as of December 31, 2008, of which $7 million was guaranteed under bank guarantee arrangements.

     Letters of Credit

     As of December 31, 2008, the Company had $26 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, 2008, no amounts had been drawn on any of these irrevocable standby letters of credit.

     As of December 31, 2008, the Company had posted bonds totaling $18 million, which related to promotional activities and 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, 2008, the Company estimates that it will take approximately 14 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, 2008 and June 30, 2008, the deferred amounts totaled $17 million. 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, 2008, the Company had $5 million in aggregate contractual obligations for the year ending June 30, 2009 with vendors providing information technology and telecommunication services under multiple arrangements. These contracts extend up to three years with a termination fee ranging from less than $1 million to $2 million during those years. The Company also has separate arrangements for telecommunication services with an aggregate contractual obligation of $5 million extending up to three years with no early termination fee.

     The Company also enters into commitments to purchase advertising. As of December 31, 2008, commitments to purchase advertising totaled $86 million. These commitments run through December 2011.

     Litigation

     On July 30, 2008, BKC was sued by four Florida franchisees over the Company’s decision to mandate extended operating hours in the United States. The plaintiffs seek damages, declaratory relief and injunctive relief. On November 3, 2008, the court granted the Company’s motion to dismiss, but provided the plaintiffs leave to file an amended complaint. The plaintiffs have filed an amended complaint, predicated on the same allegations as in the original complaint, and the Company has moved to dismiss the amended complaint. While the Company believes that it has the right under its franchise agreement to mandate extended operating hours, the Company is unable to predict the ultimate outcome of the litigation.

     On September 10, 2008, the Company and BKC were named as the defendants in a class action lawsuit filed in California federal district court. The complaint alleges that all Burger King^® restaurants in California leased by BKC and operated by franchisees violate accessibility requirements of the Americans with Disabilities Act (“ADA”) as well as the California Disabled Persons Act (“CDPA”) and the Unruh Civil Rights Act (“Unruh Act”). Plaintiff, on behalf of the class, seeks injunctive relief under the ADA, minimum statutory damages per offense of $4,000 under the Unruh Act and $1,000 per incident under the CDPA, as well as attorneys’ fees and costs. The Company intends to vigorously defend against all claims in this lawsuit. It is not possible at this time to determine the likelihood of class certification in this case or reasonably estimate the probability or amount of liability for monetary damages on a class wide basis.

     From time to time, the Company is involved in other legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over the Company’s

intellectual property. In the opinion of management, disposition of the matters will not materially affect the Company’s financial condition or results of operations.

     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 $0.5 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, 2008 and June 30, 2008, the Company had $36 million and $34 million in accrued liabilities to cover such claims, respectively.

Note 13. Segment Reporting

     The Company operates in the fast food hamburger category of the quick service segment of the restaurant industry. Revenues include retail sales at Company restaurants, franchise revenues, consisting of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees, and property revenues. The business is managed in three distinct geographic segments: (1) United States (“U.S.”) and Canada; (2) Europe, the Middle East and Africa and Asia Pacific (“EMEA/APAC”); and (3) 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,
		2008				2007				2008				2007
Revenues:
U.S. & Canada		$	435			$	385			$	882			$	777
EMEA/APAC			172				199				367				382
Latin America			27				29				59				56
Total revenues		$	634			$	613			$	1,308			$	1,215

     Other than the U.S. and Germany, no other individual country represented 10% or more of the Company’s total revenues. Revenues in the U.S. totaled $397 million and $801 million for the three and six months ended December 31, 2008, respectively, compared to $343 million and $693 million for the three and six months ended December 31, 2007, respectively. Revenues in Germany totaled $80 million and $166 million for the three and six months ended December 31, 2008 and 2007, respectively, compared to $93 million and $175 million for the three and six months ended December 31, 2007, respectively.

     The unallocated amounts reflected in the table below include corporate support costs in areas such as facilities, finance, human resources, information technology, legal, marketing and supply chain management which benefit all of the Company’s geographic segments and system-wide restaurants and are not allocated specifically to any of the geographic segments.

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Income from Operations:
U.S. & Canada		$	83			$	88			$	168			$	185
EMEA/APAC			23				27				46				47
Latin America			10				11				20				20
Unallocated			(30	)			(31	)			(58	)			(61	)
Total income from operations		$	86			$	95			$	176			$	191
Interest expense, net			15				16				29				32
Income before income taxes		$	71			$	79			$	147			$	159
Income tax expense			27				30				53				61
Net income		$	44			$	49			$	94			$	98

Note 14. Subsequent Events

     On January 26, 2009, the Company repaid $39 million of principal under the revolving credit facility, which increases the amount available under the revolving credit facility to $84 million.

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, 2008, our Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, and under Part II, Item 1A “Risk Factors,” and “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 or for the fiscal year and our key business measures, as discussed below, for any future period may decrease. Unless otherwise stated, sales growth, comparable sales growth and average restaurant sales are presented on a system-wide basis, which means they include sales at both Company restaurants and franchise restaurants. System-wide results are driven primarily by our franchise restaurants, as approximately 90% of our system-wide restaurants are franchised.

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. 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. As of December 31, 2008, we owned or franchised a total of 11,757 restaurants in 74 countries and U.S. territories, of which 7,516 were located in the U.S. and Canada. At that date, 1,444 restaurants were Company restaurants and 10,313 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 U.S. 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) retail sales at Company restaurants; (2) franchise revenues, consisting of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; and (3) property income from restaurants that we lease or sublease to franchisees. We do not record franchise sales as revenues.

Business Highlights

     Our strategic plan has four strategic global growth pillars: marketing, products, operations and development. Guided by our strategic plan and strong executive team leadership, our accomplishments and key activities since September 30, 2008 include:

	•		the opening of 125 net new restaurants worldwide in the second quarter of fiscal 2009 and 362 net new restaurants for the trailing 12-months ended December 31, 2008;
	•		the twentieth consecutive quarter of worldwide comparable sales growth, our best comparable sales growth trend in three decades, including comparable sales growth of 2.9% (in constant currencies) for the second quarter of fiscal 2009;
	•		the nineteenth consecutive quarter of comparable sales growth in the U.S. and Canada, including comparable sales growth of 1.9% (in constant currencies) for the second quarter of fiscal 2009;
	•		the opening of the first restaurant in the Czech Republic, which brings the number of countries and U.S territories in which we operate to 74;
	•		named by Ad Week magazine in December 2008 as one of the top three industry-changing advertisers in the last three decades along with NIKE® and Budweiser;
	•		promotional tie-ins with family focused marketing properties, such as iDog™ and Nintendo™; and
	•		the kick-off of the “Whopper® Virgins” marketing campaign, new product offerings such as the limited time offer Mushroom ‘N Swiss Steakhouse Burger and the re-introduction of the Italian and American Chicken sandwiches.

     Our focus continues to be on the following:

	•		driving further sales growth;
	•		enhancing restaurant profitability;
	•		expanding our large international platform;
	•		accelerating our new restaurant development and expansion;
	•		using proactive portfolio management, including closures of under-performing restaurants and strategic refranchisings and acquisitions, to drive financial performance and development; and
	•		employing innovative marketing strategies and expanding product offerings.

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.

Key Business Measures

     The following key business measures have been provided for the three and six months ended December 31, 2008 and 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 currency movements.

Comparable Sales Growth

     Comparable sales growth refers to the change in restaurant sales in one period from a comparable period in the prior year for restaurants that have been open for 13 months or longer as of the end of the most recent period. Company comparable sales growth refers to comparable sales growth for Company restaurants and franchise comparable sales growth refers to comparable sales growth for franchise restaurants, in each case by reportable segment. We believe comparable sales growth is a key indicator of our brand’s 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,
		2008				2007				2008				2007
						(In Constant Currencies)
Company Comparable Sales Growth:
U.S. & Canada			2.4	%			0.8	%			1.8	%			2.2	%
EMEA / APAC			1.6	%			4.3	%			2.5	%			3.5	%
Latin America			2.2	%			(1.1	)%			2.2	%			(0.8	)%
Total Company Comparable Sales Growth			2.1	%			1.8	%			2.0	%			2.5	%
Franchise Comparable Sales Growth:
U.S. & Canada			1.8	%			4.7	%			2.5	%			5.9	%
EMEA / APAC			5.5	%			5.7	%			5.2	%			5.3	%
Latin America			4.2	%			2.6	%			4.8	%			3.4	%
Total Franchise Comparable Sales Growth			3.0	%			4.8	%			3.5	%			5.6	%
Comparable Sales Growth:
U.S. & Canada			1.9	%			4.2	%			2.4	%			5.4	%
EMEA/APAC			5.0	%			5.5	%			4.9	%			5.1	%
Latin America			4.1	%			2.4	%			4.6	%			3.1	%
Total Worldwide Comparable Sales Growth			2.9	%			4.5	%			3.3	%			5.2	%

     Three and six months ended December 31, 2008

     Our worldwide comparable sales growth for the three and six months ended December 31, 2008 was driven by our strategic pricing initiatives, our barbell menu strategy of innovative indulgent products and value menu items as well as the continued social relevance of the Burger King® brand.

     During the three months ended December 31, 2008, positive comparable sales in the U.S. and Canada were driven primarily by successful product promotions such as the Mushroom ‘N Swiss Steakhouse Burger limited time offer, the re-introduction of the limited time offer Italian and American Chicken sandwiches and the kick-off of the Whopper® Virgins marketing campaign. Super Family promotions, such as The Simpsons™, iDog™ and Nintendo™ giveaway promotional tie-in with the BK® Crown Card aimed at driving holiday sales also contributed to positive comparable sales for the second quarter. Positive comparable sales during the first six months of fiscal 2009 were driven primarily by our strategic pricing initiatives as well as successful product promotions such as the Steakhouse Burger in the U.S and Canada, the introduction of the new BK® Kids Meal (including Kraft® Macaroni and Cheese and BK™ Fresh Apple Fries), the Spicy Chicken BK Wrapper™ and the promotions noted for the three month period.

     In EMEA/APAC comparable sales during the three month ended December 31, 2008 continued to improve in most major countries in this segment, including the U.K., Australia, Spain and South Korea, with continued focus on operational improvements, marketing and advertising and high quality indulgent offerings as well as successful product promotions, such as the Meat Beast Whopper® sandwich in the U.K. and the promotion of our four chicken sandwiches in Australia. Positive comparable sales for the first six months of fiscal 2009 were driven primarily by our strategic pricing initiatives as well as successful product promotions, such as Whopper® sandwich limited time offers throughout the region, BK Fusion™ Real Ice Cream, the Long Chicken sandwich limited time offers in Spain and the promotions noted for the three month period. SuperFamily promotions, such as The Simpsons™, iDog™ and Crayola™, also positively impacted comparable sales for the six month period.

     Latin America achieved strong results in comparable sales for the second quarter of fiscal 2009 driven by our barbell menu strategy featuring everyday value platforms and indulgent products, such as our new Mushroom ‘N Swiss Steakhouse Burger in Puerto Rico, Mexico and Central America, and the Xtra-Long Triple burger in Argentina and Chile, and dessert options, such as the Banana BK™ Bites and Chocolate Lava cake, which were featured in a number of markets across the region. In addition, our regional Latin Grammy’s music promotion with Coca-Cola in 11 markets in the region, and strong kids properties such as Pokeman™, Crayola™, and The Simpsons™ also positively impacted comparable sales. Positive comparable sales during the first six months of fiscal 2009 were driven primarily by the product promotions noted for the three month period, the Steakhouse Burger rolled out in Central America and the Caribbean as well as successful promotional tie-ins with movie properties such as Indiana Jones™ and the Kingdom of the Crystal Skull™ with our Adventure Whopper^® sandwich and Batman™ the Dark Knight with our Hero BBQ BK™ Stacker combo meal. The strong comparable sales were partially offset by softer performance in Mexico and Puerto Rico due to current economic conditions and the introduction of a VAT tax in Puerto Rico, which has negatively impacted disposable income.

     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 currency exchange rates. For the three and six months ended December 31, 2008, ARS was $312,000 and $656,000, respectively, compared to $322,000 and $649,000 for the three and six months ended December 31, 2007, a decrease of 3% and an increase of 1%, respectively. The trailing 12-month ARS increased to $1.31 million for the period ended December 31, 2008, as compared to $1.25 million for the period ended December 31, 2007, an increase of 5%.

     During the three months ended December 31, 2008, ARS decreased primarily as a result of a $19,000 unfavorable impact from the movement of currency exchange rates. Our ARS improvement during the first six months of fiscal 2009 was primarily due to improved worldwide comparable sales growth and the opening of new restaurants with higher than average sales volumes, offset by a $13,000 unfavorable impact from the movement of currency exchange rates. We and our franchisees opened 362 net restaurants during the twelve months ended December 31, 2008. We believe that continued improvement in the ARS of existing restaurants and strong sales at new restaurants, combined with the closure of under-performing restaurants, will result in financially stronger operators throughout our system.

     Sales Growth

     Sales growth refers to the change in sales at all Company and franchise restaurants from one period to another. Sales growth is an important indicator of the overall direction and trends of sales and income from operations on a system-wide basis. Sales growth is influenced by restaurant openings and closures and comparable sales growth, as well as the effectiveness of our advertising and marketing initiatives and featured products.

		For the								For the
		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
						(In Constant Currencies)
Sales Growth:
U.S. & Canada			2.6	%			4.4	%			3.1	%			5.6	%
EMEA/APAC			6.0	%			13.3	%			8.3	%			12.4	%
Latin America			6.2	%			8.9	%			11.2	%			11.6	%
Total System-wide Sales Growth			3.8	%			7.1	%			5.2	%			7.8	%

     Sales growth continued on a positive trend during the three and six months ended December 31, 2008, as comparable sales and restaurant count continued to increase on a system-wide basis. We expect net restaurant openings to accelerate in most regions.

     Our sales growth in the U.S. and Canada during the three and six months ended December 31, 2008 reflects positive comparable sales growth. We had 7,516 restaurants in the U.S. and Canada as of December 31, 2008, compared to 7,482 restaurants as of December 31, 2007.

     EMEA/APAC demonstrated sales growth during the three and six months ended December 31, 2008, reflecting openings of new restaurants and positive comparable sales in most major markets. We had 3,193 restaurants in EMEA/APAC as of December 31, 2008 compared to 2,958 restaurants as of December 31, 2007, reflecting an 8% increase in the number of restaurants.

     Latin America’s sales growth was driven by new restaurant openings and strong comparable sales during the three and six months ended December 31, 2008. We had 1,048 restaurants in Latin America as of December 31, 2008, compared to 955 restaurants as of December 31, 2007, reflecting a 10% increase in the number of restaurants.

Other Operating Data

		As of
		December 31,
		2008				2007
Restaurant Count Data:
Number of Company restaurants:
U.S. & Canada			1,065				914
EMEA/APAC(1)			293				308
Latin America(2)			86				81
Total Company restaurants			1,444				1,303
Number of franchise restaurants:
U.S. & Canada			6,451				6,568
EMEA/APAC(1)			2,900				2,650
Latin America(2)			962				874
Total franchise restaurants			10,313				10,092
Total system-wide restaurants			11,757				11,395

		For the Three Months Ended								For the Six Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Other Operating Data:
Comparable sales growth			2.9	%			4.5	%			3.3	%			5.2	%
Sales growth			3.8	%			7.1	%			5.2	%			7.8	%
Average restaurant sales (in thousands)		$	312			$	322			$	656			$	649
Segment Data:
Company restaurant revenues (in millions):
U.S. & Canada		$	333			$	284			$	673			$	574
EMEA/APAC(1)			125				147				263				282
Latin America(2)			15				17				34				33
Total Company restaurant revenues		$	473			$	448			$	970			$	889
Company restaurant expenses as a percentage of Company restaurant revenues (3):
U.S. & Canada
Food, paper and product costs			33.2	%			32.3	%			33.8	%			32.2	%
Payroll and employee benefits			31.0	%			30.2	%			30.7	%			30.4	%
Occupancy and other operating costs			23.0	%			22.3	%			23.0	%			22.2	%
Total Company restaurant expenses			87.2	%			84.8	%			87.5	%			84.8	%
EMEA/APAC(1)
Food, paper and product costs			28.6	%			28.5	%			28.1	%			28.3	%
Payroll and employee benefits			31.7	%			29.7	%			32.1	%			29.9	%
Occupancy and other operating costs			25.5	%			25.7	%			26.2	%			26.5	%
Total Company restaurant expenses			85.8	%			83.9	%			86.4	%			84.7	%
Latin America(2)
Food, paper and product costs			38.7	%			35.9	%			37.5	%			36.1	%
Payroll and employee benefits			12.0	%			11.4	%			12.2	%			11.9	%
Occupancy and other operating costs			25.3	%			27.0	%			29.2	%			27.5	%
Total Company restaurant expenses			76.0	%			74.3	%			78.9	%			75.5	%
Worldwide
Food, paper and product costs			32.1	%			31.2	%			32.4	%			31.1	%
Payroll and employee benefits			30.6	%			29.3	%			30.5	%			29.6	%
Occupancy and other operating costs			23.7	%			23.6	%			24.0	%			23.7	%
Total Company restaurant expenses			86.4	%			84.1	%			86.9	%			84.4	%
Franchise revenues (in millions):
U.S. & Canada		$	80			$	79			$	164			$	158
EMEA/APAC(1)			42				43				91				84
Latin America(2)			12				12				25				23
Total franchise revenues(4)		$	134			$	134			$	280			$	265
Income from operations (in millions):
U.S. & Canada		$	83			$	88			$	168			$	185
EMEA/APAC(1)			23				27				46				47
Latin America(2)			10				11				20				20
Unallocated(5)			(30	)			(31	)			(58	)			(61	)
Total Income from operations		$	86			$	95			$	176			$	191
EBITDA (in millions)(6)		$	109			$	118			$	225			$	235

	•		it does not include interest expense, net. Because we have borrowed money for general corporate purposes, interest expense is a necessary element of our costs and ability to generate profits and cash flows;
	•		it does not include depreciation and amortization expenses. Because we use capital assets, depreciation and amortization are necessary elements of our costs and ability to generate profits; and
	•		it does not include provision for taxes. The payment of taxes is a necessary element of our operations.

Management compensates for these limitations by using EBITDA as only one of its measures for evaluating the Company’s business performance. In addition, capital expenditures, which impact depreciation and amortization, interest expense and income tax expense, are reviewed separately by management. Management believes that EBITDA provides both management and investors with a more complete understanding of the underlying operating results and trends and an enhanced overall understanding of our financial performance and prospects for the future. EBITDA is not intended to be a measure of liquidity or cash flows from operations nor a measure comparable to net income, as it does not take into account certain requirements such as capital expenditures and related depreciation, principal and interest payments and tax payments.

     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,
		2008				2007				2008				2007
						(In millions)
Net income		$	44			$	49			$	94			$	98
Interest expense, net			15				16				29				32
Income tax expense			27				30				53				61
Depreciation and amortization			23				23				49				44
EBITDA		$	109			$	118			$	225			$	235

Results of Operations for the three months ended December 31, 2008 and 2007

     The following table presents our results of operations for the three months ended December 31, 2008 and 2007:

		For the Three Months Ended December 31,
		2008				2007
										Increase/
		Amount				Amount				(Decrease)
		(In millions, except per share data)
Revenues:
Company restaurant revenues		$	473			$	448				6	%
Franchise revenues			134				134				—	%
Property revenues			27				31				(13	)%
Total revenues			634				613				3	%
Company restaurant expenses			408				378				8	%
Selling, general and administrative expenses			120				125				(4	)%
Property expenses			14				16				(13	)%
Other operating (income) expense, net			6				(1	)		NM
Total operating costs and expenses			548				518				6	%
Income from operations			86				95				(9	)%
Interest expense			16				18				(11	)%
Interest income			(1	)			(2	)			(50	)%
Interest expense, net			15				16				(6	)%
Income before income taxes			71				79				(10	)%
Income tax expense			27				30				(10	)%
Net income		$	44			$	49				(10	)%
Earnings per share — basic (1)		$	0.33			$	0.36				(8	)%
Earnings per share — diluted (1)		$	0.33			$	0.36				(8	)%
Weighted average shares — basic			134.6				135.3
Weighted average shares — diluted			136.5				137.9

(1) — Earnings per share is calculated using whole dollars and shares.

NM- Not meaningful.

     Revenues

     Company restaurant revenues

     Company restaurant revenues increased by $25 million, or 6%, to $473 million during the three months ended December 31, 2008 compared to the same period in the prior year. This increase was primarily as a result of the addition of 141 Company restaurants (net of closures and sales of Company restaurants to franchisees, or “refranchisings”) during the twelve months ended December 31, 2008, which includes the net acquisition of 119 franchise restaurants, primarily in the U.S. and Canada, for the three month period. Company restaurant revenues also increased as a result of worldwide Company comparable sales growth of 2.1% (in constant currencies). These increases were partially offset by approximately $28 million due to the unfavorable impact from the significant movement of currency exchange rates.

     In the U.S. and Canada, Company restaurant revenues increased by $49 million, or 17%, to $333 million during the three months ended December 31, 2008 compared to the same period in the prior year. This increase was primarily as a result of a net increase of 151 Company restaurants during the twelve months ended December 31, 2008. Company restaurant revenues also increased as a result

of Company comparable sales growth of 2.4% (in constant currencies). These increases were partially offset by an $8 million unfavorable impact from the movement of currency exchange rates in Canada.

     In EMEA/APAC, Company restaurant revenues decreased by $22 million, or 15%, to $125 million during the three months ended December 31, 2008, compared to the same period in the prior year. This decrease was primarily due to a $17 million unfavorable impact from the movement of currency exchange rates and a decrease in revenues from a net reduction of 15 Company restaurants during the twelve months ended December 31, 2008. These decreases were partially offset by Company comparable sales growth of 1.6% (in constant currencies).

     In Latin America, Company restaurant revenues decreased by $2 million, or 12%, to $15 million during the three months ended December 31, 2008, compared to the same period in the prior year, primarily as a result of a $3 million unfavorable impact from the movement of currency exchange rates. This decrease was partially offset by a net increase of five Company restaurants during the twelve months ended December 31, 2008 and Company comparable sales growth of 2.2% (in constant currencies).

     Franchise revenues

     Total franchise revenues remained unchanged at $134 million for the three months ended December 31, 2008, compared to the same period in the prior year. Although the net number of franchise restaurants increased by 221 during the twelve months ended December 31, 2008 and the Company experienced worldwide franchise comparable sales growth of 3.0% (in constant currencies) and a higher effective royalty rate in the U.S. during the three month period, these factors were offset by an $8 million unfavorable impact from the movement of currency exchange rates.

     In the U.S. and Canada, franchise revenues increased by $1 million, or 1%, to $80 million during the three months ended December 31, 2008, compared to the same period in the prior year. This increase was primarily as a result of franchise comparable sales growth of 1.8% (in constant currencies) and a higher effective royalty rate in the U.S., partially offset by the loss of royalties from 117 fewer franchise restaurants compared to the same period in the prior year. The impact from the movement of currency exchange rates was not significant for the period.

     In EMEA/APAC, franchise revenues decreased by $1 million, or 2%, to $42 million during the three months ended December 31, 2008, compared to the same period in the prior year, primarily driven by a $7 million unfavorable impact from the movement of currency exchange rates. This decrease was partially offset by the benefit from a net increase of 250 franchise restaurants during the twelve months ended December 31, 2008 and franchise comparable sales growth of 5.5% (in constant currencies).

     Latin America franchise revenues remained unchanged at $12 million during the three months ended December 31, 2008, compared to the same period in the prior year. Although the net number of franchise restaurants increased by 88 during the twelve months ended December 31, 2008 and franchise comparable sales growth was 4.2% (in constant currencies), these factors were offset by a $1 million unfavorable impact from the movement of currency exchange rates.

     Property Revenues

     Total property revenues decreased by $4 million, or 13%, to $27 million, for the three months ended December 31, 2008, compared to the same period in the prior year. The decrease was primarily as a result of a $2 million unfavorable impact from the movement of currency exchange rates and a $1 million impact from the net effect of changes to our property portfolio, which includes the impact of the closure or acquisition of restaurants leased to franchisees. This decrease was partially offset by worldwide franchise comparable sales growth of 3.0% (in constant currencies) resulting in increased contingent rents.

     In the U.S. and Canada, property revenues remained unchanged at $22 million for the three months ended December 31, 2008, compared to the same period in the prior year. Increased contingent rents as a result of franchise comparable sales growth of 1.8% (in constant currencies) were offset by the impact of the closure or acquisition of restaurants leased to franchisees.

     In EMEA/APAC, property revenues decreased by $4 million, or 44%, to $5 million, for the three months ended December 31, 2008, compared to the same period in the prior year, primarily due to a $2 million unfavorable impact from the movement of currency exchange rates and a $1 million impact from the net effect of changes to our property portfolio, which includes the impact of the

closure or acquisition of restaurants leased to franchisees. This decrease was partially offset by increased contingent rents as a result of franchise comparable sales growth of 5.5% (in constant currencies).

     Operating Costs and Expenses

     Food, paper and product costs

     Total food, paper and product costs increased by $12 million, or 9%, to $152 million during the three months ended December 31, 2008, compared to the same period in the prior year, as a result of the net addition of 141 Company restaurants during the twelve months ended December 31, 2008 and a significant increase in commodity costs, partially offset by a $9 million favorable impact from the movement of currency exchange rates. As a percentage of Company restaurant revenues, food, paper and product costs increased by 0.9% to 32.1%, primarily due to the increase in commodity and other food costs across all segments, partially offset by benefits derived from positive Company comparable sales of 2.1% (in constant currencies). Although commodity and other food costs have increased significantly across all segments during the three month period as compared to the same period in the prior year, the cost of many of our core commodities reached historical highs during the first quarter of fiscal 2009 and has moderated since.

     In the U.S. and Canada, food, paper and product costs increased by $18 million, or 20%, to $110 million during the three months ended December 31, 2008, compared to the same period in the prior year, primarily as a result of the net addition of 151 Company restaurants during the twelve months ended December 31, 2008 as well as a significant increase in commodity costs, partially offset by a $3 million favorable impact from the movement of currency exchange rates. Food, paper and product costs as a percentage of Company restaurant revenues increased by 0.9% to 33.2%, primarily due to an increase in the cost of beef, cheese, chicken and other food costs, partially offset by benefits derived from positive Company comparable sales of 2.4% (in constant currencies).

     In EMEA/APAC, food, paper and product costs decreased by $6 million, or 14%, to $36 million for the three months ended December 31, 2008, compared to the same period in the prior year, with the impact from the net reduction of 15 Company restaurants during the twelve months ended December 31, 2008 and a $5 million favorable impact from the movement of currency exchange rates being offset by an increase in commodity costs. Food, paper and product costs as a percentage of Company restaurant revenues remained unchanged at 28.6%, with the benefits from positive Company comparable sales of 1.6% (in constant currencies) offset by a significant increase in commodity costs.

     In Latin America, food, paper and product costs remained relatively unchanged at $6 million for the three months ended December 31, 2008, compared to the same period in the prior year. Increases in commodity costs and a net increase of five Company restaurants during the twelve months ended December 31, 2008 were offset by the favorable impact from the movement of currency exchange rates of $1 million. Food, paper and product costs as a percentage of Company restaurant revenues increased by 2.8% to 38.7%, primarily as a result of an increase in commodity costs, partially offset by benefits derived from positive Company comparable sales of 2.2% (in constant currencies).

     Payroll and employee benefits costs

     Total payroll and employee benefits costs increased by $12 million, or 9%, to $144 million during the three months ended December 31, 2008, compared to the same period in the prior year. This increase was primarily due to the net addition of 141 Company restaurants during the twelve months ended December 31, 2008, government mandated and contractual increases in hourly wages in Germany as well as increased labor costs in the U.S. and Canada, partially offset by an $8 million favorable impact from the movement of currency exchange rates. As a percentage of Company restaurant revenues, payroll and employee benefits costs increased by 1.3% to 30.6%, primarily as a result of the increases noted above, partially offset by worldwide Company comparable sales growth of 2.1% (in constant currencies).

     In the U.S. and Canada, payroll and employee benefits costs increased by $17 million, or 20%, to $103 million during the three months ended December 31, 2008, compared to the same period in the prior year, primarily as a result of the net addition of 151 Company restaurants during the twelve months ended December 31, 2008 and increased labor costs, partially offset by a $3 million favorable impact from the movement of currency exchange rates. As a percentage of Company restaurant revenues, payroll and employee benefits costs increased by 0.8% to 31.0%, primarily as a result of the increases noted above, partially offset by Company comparable sales growth of 2.4% (in constant currencies).

     In EMEA/APAC, payroll and employee benefits costs decreased by $5 million, or 11%, to $39 million during the three months ended December 31, 2008, compared to the same period in the prior year, primarily as a result of the net reduction of 15 Company restaurants during the twelve months ended December 31, 2008, and a $5 million favorable impact from the movement of currency exchange rates, partially offset by government mandated and contractual increases in hourly wages in Germany. As a percentage of Company restaurant revenues, payroll and employee benefits costs increased by 2.0% to 31.7%, as a result of increases in hourly wages in Germany, partially offset by positive Company comparable sales growth of 1.6% (in constant currencies).

     There was no significant change in payroll and employee benefits costs in Latin America during the three months ended December 31, 2008 compared to the same period in the prior year.

     Occupancy and other operating costs

     Occupancy and other operating costs increased by $6 million, or 6%, to $112 million during the three months ended December 31, 2008, compared to the same period in the prior year. This increase is primarily attributable to the net addition of 141 Company restaurants during the twelve months ended December 31, 2008 and start-up costs related to new and acquired Company restaurants in the U.S., partially offset by a $7 million favorable impact from the movement of currency exchange rates. As a percentage of Company restaurant revenues, occupancy and other operating costs remained relatively unchanged benefiting primarily from positive Company comparable sales of 2.1% (in constant currencies), offset by increased rents, depreciation and start-up costs related to acquired Company restaurants.

     In the U.S. and Canada, occupancy and other operating costs increased by $13 million, or 21%, to $76 million during the three months ended December 31, 2008, compared to the same period in the prior year. This increase was primarily driven by the net addition of 151 Company restaurants during the twelve months ended December 31, 2008, which represents a 17% increase in the number of Company restaurants in this segment year over year, and start-up costs related to new and acquired Company restaurants, partially offset by a $2 million favorable impact from the movement of currency exchange rates. As a percentage of Company restaurant revenues, occupancy and other operating costs increased by 0.7% to 23.0% as a result of increased rents, depreciation and start-up costs related to acquired Company restaurants, partially offset by Company comparable sales growth of 2.4% (in constant currencies).

     In EMEA/APAC, occupancy and other operating costs decreased by $6 million, or 16%, to $32 million during the three months ended December 31, 2008, compared to the same period in the prior year, primarily due to the net reduction of 15 Company restaurants during the twelve months ended December 31, 2008, and a $4 million favorable impact from the movement of currency exchange rates, partially offset by increased rents. As a percentage of Company restaurant revenues, occupancy and other operating costs decreased by 0.2% to 25.5%, benefiting primarily from positive Company comparable sales of 1.6% (in constant currencies), partially offset by increased rents.

     In Latin America, occupancy and other operating costs decreased by $1 million, or 20%, to $4 million during the three months ended December 31, 2008, compared to the same period in the prior year, primarily attributable to a $1 million favorable impact from the movement of currency exchange rates, partially offset by the net addition of five Company restaurants during the twelve months ended December 31, 2008. As a percentage of Company restaurant revenues, occupancy and other operating costs decreased by 1.7% to 25.3% primarily as a result of Company comparable sales growth of 2.2% (in constant currencies).

     Selling, general and administrative expenses

     Selling expenses remained unchanged at $24 million for the three months ended December 31, 2008, compared to the same period in the prior year. Although sales and promotion expenses increased by $1 million due to increased sales, this increase was offset by a $1 million favorable impact from the movement of currency exchange rates.

     General and administrative expenses decreased by $5 million, or 5%, to $96 million for the three months ended December 31, 2008, compared to the same period in the prior year. The decrease is primarily attributable to a $4 million favorable impact from the movement of currency exchange rates, a $4 million decrease in deferred compensation expense, which was fully offset by net losses on investments held in a rabbi trust recorded in other operating (income) expense, net, and $3 million in cost savings. These factors were partially offset by $2 million in bad debt expense, $2 million in bad debt recoveries during the same period in the prior year and $2 million in stock-based compensation.

     Property Expenses

     Total property expenses decreased by $2 million, or 13%, to $14 million for the three months ended December 31, 2008 compared to the same period in the prior year, primarily attributable to a $2 million favorable impact from the movement of currency exchange rates and the net effect of changes to our property portfolio, which includes the impact of closures or acquisitions of restaurants leased to franchisees, partially offset by an increase in contingent rent expense generated by worldwide comparable franchise sales growth of 3.0% (in constant currencies).

     Other operating (income) expense, net

     Other operating expense, net for the three months ended December 31, 2008 was $6 million, compared to $1 million of income for the same period in the prior year. This $6 million expense includes $4 million of net losses on investments held in the rabbi trust, which were fully offset by a corresponding decrease in deferred compensation expense reflected in general and administrative expenses, and $2 million of net expense related to the remeasurement of foreign denominated assets and the expense related to the use of foreign currency forward contracts used to hedge the currency exchange impact on such assets.

     Income from Operations

		Three Months Ended
		December 31,
		2008				2007
Income from Operations:
U.S. & Canada		$	83			$	88
EMEA/APAC			23				27
Latin America			10				11
Unallocated			(30	)			(31	)
Total income from operations		$	86			$	95

     Income from operations decreased by $9 million, or 9%, to $86 million during the three months ended December 31, 2008 compared to the same period in the prior year, primarily as a result of a decrease in Company restaurant margin of $5 million, a decrease in net property income of $2 million, and an increase in other operating expense, net of $7 million. The decrease in income from operations was partially offset by a $5 million decrease in selling, general and administrative expenses. (See Note 13 to our unaudited condensed consolidated financial statements for segment information disclosed in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”).

     Our international operations are impacted by fluctuations in currency exchange rates.  In Company markets located outside of the U.S., we generate revenues and incur expenses denominated in local currencies.  The translated values of these revenues and expenses are impacted by changes in currency exchange rates.  In many of our franchise markets, our franchisees pay royalties to us in currencies other than the local currency in which they operate; however, as the royalties are calculated based on local currency sales, our revenues are still impacted by fluctuations in currency exchange rates.   Although we attempt to mitigate the unfavorable impact of fluctuations in currency exchange rates on our cash flows through certain hedging activities, our use of such hedging activities will not offset the adverse impact on revenues and expenses of unfavorable movements in currency exchange rates.  For the three months ended December 31, 2008, the unfavorable impact on revenues from the movement of currency exchange rates was partially offset by the favorable impact of currency exchange rates on Company restaurant expenses and selling, general and administrative expenses, resulting in a net unfavorable impact on income from operations of $7 million.   We expect that continuing uncertainties in the currency markets may continue to adversely impact our operating results.

     In the U.S. and Canada, income from operations decreased by $5 million, or 6%, to $83 million during the three months ended December 31, 2008, compared to the same period in the prior year, primarily as a result of an increase in other operating expenses, net of $8 million, partially offset by a $1 million increase in franchise revenues, reflecting franchise comparable sales growth of 1.8% (in constant currencies) and an increase in the effective royalty rate in the U.S and a $2 million decrease in selling, general and administrative expenses.

     In EMEA/APAC, income from operations decreased by $4 million, or 15%, to $23 million during the three months ended December 31, 2008, compared to the same period in the prior year, primarily as a result of a decrease in Company restaurant margin of $4 million, a decrease in net property income of $1 million, and a $1 million decrease in franchise revenues, partially offset by $2 million decrease in selling, general and administrative expenses. These factors reflect a $6 million unfavorable impact from the movement of currency exchange rates.

     In Latin America, income from operations decreased by $1 million, or 9%, to $10 million during the three months ended December 31, 2008, compared to the same period in the prior year, primarily as result of a decrease in Company restaurant margin of $1 million, which reflects a $1 million unfavorable impact from the movement of currency exchange rates.

     Interest Expense, net

     Interest expense, net decreased by $1 million during the three months ended December 31, 2008 compared to the same period in the prior year, reflecting a decrease in rates paid on borrowings during the period. The weighted average interest rates for the three months ended December 31, 2008 and 2007 were 5.5% and 6.7%, respectively, which included the impact of interest rate swaps on 66% and 46% of our term debt, respectively.

     Income Tax Expense

     Income tax expense was $27 million for the three months ended December 31, 2008, resulting in an effective tax rate of 38.0% primarily due to currency fluctuations and the current mix of income from multiple tax jurisdictions.

     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.

     Net Income

     Our net income decreased by $5 million, or 10%, to $44 million during the three months ended December 2008 compared to the same period in the prior year, primarily as a result of a decrease in Company restaurant margin of $5 million, a net change of $7 million in other operating expense, net and a decrease in net property income of $2 million. These factors were partially offset by a $5 million decrease in selling, general and administrative expenses, a $3 million decrease in income tax expense and the benefit from a $1 million decrease in interest expense, net.

Results of Operations for the six months ended December 31, 2008 and 2007

     The following table presents our results of operations for the six months ended December 31, 2008 and 2007:

		For the Six Months Ended December 31,
		2008				2007
										Increase/
		Amount				Amount				(Decrease)
		(In millions, except per share data)
Revenues:
Company restaurant revenues		$	970			$	889				9	%
Franchise revenues			280				265				6	%
Property revenues			58				61				(5	)%
Total revenues			1,308				1,215				8	%
Company restaurant expenses			843				751				12	%
Selling, general and administrative expenses			245				244				0	%
Property expenses			29				30				(3	)%
Other operating (income) expense, net			15				(1	)		NM
Total operating costs and expenses			1,132				1,024				11	%
Income from operations			176				191				(8	)%
Interest expense			31				36				(14	)%
Interest income			(2	)			(4	)			(50	)%
Interest expense, net			29				32				(9	)%
Income before income taxes			147				159				(8	)%
Income tax expense			53				61				(13	)%
Net income		$	94			$	98				(4	)%
Earnings per share — basic (1)		$	0.70			$	0.72				(3	)%
Earnings per share — diluted (1)		$	0.69			$	0.71				(3	)%
Weighted average shares — basic			134.8				135.2
Weighted average shares — diluted			136.9				137.9