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 March 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		(I.R.S. Employer
Incorporation or Organization)		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 o		Accelerated filer þ		Non-Accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     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 April 30, 2008, there were 134,806,013 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 March 31, 2008 and June 30, 2007 (unaudited)			3
		Condensed Consolidated Statements of Income for the three and nine months ended March 31, 2008 and 2007 (unaudited)			4
		Condensed Consolidated Statements of Cash Flows for the nine months ended March 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			16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			35
Item 4.		Controls and Procedures			36
PART II — Other Information
Item 1A.		Risk Factors			38
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 5		Other Information			39
Item 6.		Exhibits			39
		Signatures			40
		Index to Exhibits			41
EX-10.47 Form of Restricted Stock Unit Agreement
EX-10.48 Employment Agreement dated March 5, 2008 (Peter Tan)
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 906 Certification of CFO

PART I — Financial Information

Item 1. Financial Statements

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

		As of
		March 31,				June 30,
		2008				2007
		(In millions, except share data)
Assets
Current assets:
Cash and cash equivalents		$	167			$	170
Trade and notes receivable, net			128				125
Prepaids and other current assets			53				66
Deferred income taxes, net			55				43
Total current assets			403				404
Property and equipment, net			892				879
Intangible assets, net			1,023				986
Goodwill			23				23
Net investment in property leased to franchisees			135				142
Other assets, net			104				83
Total assets		$	2,580			$	2,517
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts and drafts payable		$	79			$	106
Accrued advertising			95				64
Other accrued liabilities			258				259
Current portion of long term-debt and capital leases			5				5
Total current liabilities			437				434
Term debt, net of current portion			821				871
Capital leases, net of current portion			70				67
Other deferrals and liabilities			377				334
Deferred income taxes, net			86				95
Total liabilities			1,791				1,801
Commitments and Contingencies (See Note 13)
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; 134,795,103 and 135,217,470 shares issued and outstanding at March 31, 2008 and June 30, 2007, respectively			1				1
Restricted stock units			—				3
Additional paid-in capital			596				574
Retained earnings			248				134
Accumulated other comprehensive income			(17	)			8
Treasury stock, at cost; 2,050,974 and 673,430 shares, at March 31, 2008 and June 30, 2007, respectively			(39	)			(4	)
Total stockholders’ equity			789				716
Total liabilities and stockholders’ equity		$	2,580			$	2,517

See accompanying notes to condensed consolidated financial statements.

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
		(in millions, execpt per share data)
Revenues:
Company restaurant revenues		$	436			$	403			$	1,325			$	1,225
Franchise revenues			129				109				394				334
Property revenues			29				27				90				85
Total revenues			594				539				1,809				1,644
Company restaurant expenses:
Food, paper and product costs			135				120				412				367
Payroll and employee benefits			133				121				396				363
Occupancy and other operating costs			110				105				321				310
Total company restaurant expenses			378				346				1,129				1,040
Selling, general and administrative expenses			126				115				370				346
Property expenses			15				14				45				45
Other operating (income) expense, net			(6	)			2				(7	)			(6	)
Total operating costs and expenses			513				477				1,537				1,425
Income from operations			81				62				272				219
Interest expense			17				18				53				56
Interest income			(1	)			(1	)			(5	)			(5	)
Total interest expense, net			16				17				48				51
Loss on early extinguishment of debt			—				—				—				1
Income before income taxes			65				45				224				167
Income tax expense			24				11				85				55
Net income		$	41			$	34			$	139			$	112
Earnings per share:
Basic		$	0.30			$	0.25			$	1.03			$	0.84
Diluted		$	0.30			$	0.25			$	1.01			$	0.82
Weighted average shares outstanding:
Basic			135.2				134.4				135.2				133.7
Diluted			137.5				137.2				137.7				136.6
Dividends per common share		$	0.06			$	0.06			$	0.19			$	0.06

See accompanying notes to condensed consolidated financial statements.

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

		Nine Months Ended
		March 31,
		2008				2007
		(In millions)
Cash flows from operating activities:
Net income		$	139			$	112
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			70				65
Gain on hedging activities			(2	)			(3	)
Gain on remeasurement of foreign denominated transactions			(57	)			(17	)
Gain on asset sales and release of unfavorable lease obligation			(17	)			(8	)
Bad debt recoveries, net of provisions			(2	)			(4	)
Loss on early extinguishment of debt			—				1
Stock-based compensation			8				4
Deferred income taxes			(1	)			(15	)
Changes in current assets and liabilities, excluding acquisitions and dispositions:
Trade and notes receivables			1				(1	)
Prepaids and other current assets			14				(13	)
Accounts and drafts payable			(30	)			(26	)
Accrued advertising			29				13
Other accrued liabilities			9				(80	)
Other long-term assets and liabilities			(11	)			13
Net cash provided by operating activities			150				41
Cash flows from investing activities:
Purchases of available-for-sale securities			—				(318	)
Proceeds from sale of available-for-sale securities			—				318
Payments for property and equipment			(88	)			(48	)
Proceeds from asset disposals and restaurant closures			26				18
Payments for acquired franchisee operations			(4	)			(12	)
Return of investment on direct financing leases			5				5
Other investing activities			(1	)			(2	)
Net cash used for investing activities			(62	)			(39	)
Cash flows from financing activities:
Proceeds from term debt and credit facility			—				1
Repayments of term debt, credit facility and capital leases			(54	)			(130	)
Dividends paid on common stock			(25	)			(8	)
Proceeds from stock option exercises			2				7
Excess tax benefits from stock-based compensation			7				10
Repurchases of common stock			(35	)			(1	)
Net cash used for financing activities			(105	)			(121	)
Effect of exchange rates on cash and cash equivalents			14				2
Decrease in cash and cash equivalents			(3	)			(117	)
Cash and cash equivalents at beginning of period			170				259
Cash and cash equivalents at end of period		$	167			$	142

See accompanying notes to condensed consolidated financial statements.

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

		Nine Months Ended
		March 31,
		2008				2007
		(In millions)
Supplemental cash flow disclosures:
Interest paid (1)		$	50			$	44
Income taxes paid (2)		$	67			$	140
Non-cash investing and financing activities:
Acquisition of property with capital lease obligations		$	6			$	6

See accompanying notes to condensed consolidated financial statements.

BURGER KING HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Organization and Basis of Presentation

     Burger King Holdings, Inc. (“BKH” or the “Company”) is a Delaware corporation formed on July 23, 2002. The Company is the parent of Burger King Corporation (“BKC”), a Florida corporation that franchises and operates fast food hamburger restaurants, principally under the Burger King^® brand. As of June 30, 2007, the Company was approximately 58% owned by private equity funds controlled by TPG Capital, the Goldman Sachs Funds and Bain Capital Partners (collectively, the “Sponsors”). The percentage ownership of the private equity funds controlled by the Sponsors has been reduced to approximately 43% as of March 31, 2008, as a result of the sale of 20.7 million shares of the Company’s common stock in November 2007 through a secondary offering, including the underwriters’ exercise of the over-allotment option (“the secondary offering”) and the sale of 0.7 million shares of the Company’s common stock in February 2008 on the open market by Bain Capital Integral Investors, LLC, one of the private equity funds controlled by Bain Capital Partners. The Company received no proceeds from either the secondary offering or the sale by Bain Capital Integral Investors, LLC of shares.

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

Basis of Presentation and Consolidation

     The Company has prepared the accompanying Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007 filed with the SEC on September 7, 2007. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for the nine months ended March 31, 2008 do not necessarily indicate the results that may be expected for the full year ending June 30, 2008.

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

Correction of Immaterial Error Related to Prior Periods

     In the course of preparing its financial statements as of and for the nine months ended March 31, 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 FASB No. 95, “Statement of Cash Flows”. The Company reviewed the impact of this error on the prior periods in accordance with Staff Accounting Bulletin No. 99, “Materiality” (“SAB 99”), and determined that the error was not material to the prior periods. However, the Company has corrected the statement of cash flows for the nine-month period ended March 31, 2007 by increasing cash flows from investing activities and decreasing cash flows from operating activities by $5 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 Financial Statements and accompanying notes. Actual results could differ from those estimates.

Restricted Assets

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

     The investment securities in the Rabbi trust have been designated by the Company as trading in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, and are

carried at fair value in other assets, net in the accompanying condensed consolidated balance sheets, with unrealized trading gains and losses recorded in earnings. The fair value of the investment securities held in the Rabbi trust was $21 million as of March 31, 2008. Net unrealized trading losses of $1 million were recorded during the nine months ended March 31, 2008 and are reflected in other operating (income) expense, net in the accompanying condensed consolidated statements of income. These net unrealized trading losses are offset by a benefit in compensation expense related to the deferred compensation plans, which are reflected in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.

Inventories

     Inventories, totaling $15 million as of both March 31, 2008 and June 30, 2007, are stated at the lower of cost (first-in, first-out) or net realizable value, and consist primarily of restaurant food items and paper supplies. Inventories are included in prepaids and other current assets in the accompanying condensed consolidated balance sheets.

Note 2. Stock-based Compensation

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

     The Company recorded $3 million and $8 million of stock-based compensation expense for the three and nine months ended March 31, 2008, respectively. The Company recorded $2 million and $4 million of stock-based compensation expense for the three and nine months ended March 31, 2007, respectively.

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

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

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

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

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

     In November 2007, the Company granted approximately 57,000 deferred shares to non-employee members of the Company’s Board of Directors as an annual grant and a portion as payment for the quarterly retainer and committee fees that certain Board

members elected to receive in deferred shares rather than cash. The deferred shares granted as an annual grant vest in quarterly installments over a one-year period on the first day of each calendar quarter following the grant date. The deferred shares granted in lieu of cash for quarterly retainer and committee fees were fully vested on the grant date. The deferred shares will settle and shares of common stock will be issued upon termination of board service.

     Options, restricted shares and PBRS awards granted during the quarter ended March 31, 2008 were not significant.

Note 3. Acquisitions, Closures and Dispositions

Acquisitions

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

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
Number of restaurants acquired			2				13				18				59
Prepaids and other current assets		$	—			$	—			$	—			$	1
Property and equipment, net			—				2				1				7
Goodwill and other intangible assets			3				3				4				9
Assumed liabilities			(1	)			(2	)			(1	)			(6	)
Total purchase price		$	2			$	3			$	4			$	11

Asset and Business Dispositions

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

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
Number of restaurant closures			6				4				18				12
Number of refranchisings			11				8				28				12
Net loss (gain) on restaurant closures, refranchisings, and dispositions of assets		$	(11	)		$	—			$	(13	)		$	(4	)

     Included in the gain on restaurant closures, refranchisings, and dispositions of assets for the three and nine months ended March 31, 2008 is a $9 million gain from the refranchising of Company restaurants in Germany. Included in the gain on restaurant closures, refranchisings, and dispositions of assets for the nine months ended March 31, 2007 is a $5 million gain from the sale of an investment in a non-consolidated joint venture in New Zealand.

Note 4. Earnings Per Share

     Basic and diluted earnings per share are calculated as follows:

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
Numerator:
Numerator for basic and diluted earnings per share:
Net income		$	41,214,474			$	34,238,444			$	138,913,584			$	112,465,515
Denominator:
Weighted average shares — basic			135,207,243				134,447,569				135,231,195				133,694,093
Effect of dilutive securities			2,304,074				2,721,127				2,495,644				2,868,775
Weighted average shares — diluted			137,511,317				137,168,696				137,726,839				136,562,868
Basic earnings per share		$	0.30			$	0.25			$	1.03			$	0.84
Diluted earnings per share		$	0.30			$	0.25			$	1.01			$	0.82

     For the three months ended March 31, 2008 and 2007, there were 935,454 and 707,184 anti-dilutive stock options outstanding, respectively. For the nine months ended March 31, 2008 and 2007, there were 970,879 and 736,191 anti-dilutive stock options outstanding, respectively.

Note 5. Comprehensive Income

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

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
Net income		$	41			$	34			$	139			$	112
Translation adjustment			(2	)			(1	)			(4	)			(6	)
Cash flow hedges:
Net change in fair value of derivatives			(10	)			(2	)			(20	)			(10	)
Amounts reclassified to earnings during the period			—				(1	)			(1	)			(3	)
Total other comprehensive loss			(12	)			(4	)			(25	)			(19	)
Total comprehensive income		$	29			$	30			$	114			$	93

Note 6. Other Accrued Liabilities and Other Deferrals and Liabilities

     Included in other accrued liabilities as of March 31, 2008 and June 30, 2007 were accrued payroll and employee-related benefit costs totaling $80 million and $99 million, respectively, and income taxes payable of $15 million and $17 million as of March 31, 2008 and June 30, 2007, respectively.

     Included in other deferrals and liabilities as of March 31, 2008 and June 30, 2007 were unfavorable lease obligations with a net book value of $193 million and $209 million, respectively.

Note 7. Long-Term Debt

     As of March 31, 2008 and June 30, 2007, the Company had $821 million and $871 million, respectively, of long-term debt outstanding. During the nine months ended March 31, 2008, the Company prepaid $50 million of term debt. The current portion of long-term debt was less than $1 million and $1 million as of March 31, 2008 and June 30, 2007, respectively. The next scheduled principal payment on the Company’s long-term debt is June 30, 2009. The weighted average interest rate for the three and nine months ended March 31, 2008 was 6.33% and 6.62%, respectively, which included the benefit of interest rate swaps on 46% and 48% of our term debt, respectively (See Note 8).

Note 8. Derivative Instruments

Interest rate swaps

     As of March 31, 2008, the Company had interest rate swap contracts outstanding with a notional value of $655 million, a net increase of $215 million from June 30, 2007 reflecting swap contracts that matured in September 2007 with a notional value of $60 million and new swap contracts that were entered into in January 2008 and which became effective in March 2008 with an aggregate notional value of $275 million. The Company has designated the swaps as cash flow hedges under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities, as revised (“SFAS No. 133”). The remaining swaps were entered into in September 2006 and January 2008 and mature through December 2011. The swaps are being used to hedge forecasted LIBOR-based interest payments on variable rate debt (hedged forecasted transaction). The fair value of these swaps is reflected in other deferrals and liabilities, with an offsetting unrealized loss in accumulated other comprehensive income (AOCI), in the accompanying condensed consolidated balance sheets. During the three and nine months ended March 31, 2008, amounts reclassified from AOCI into earnings were not significant, and were recorded within interest expense in the accompanying condensed consolidated statements of income. During the three and nine months ended March 31, 2007, $1 million and $5 million were reclassified from AOCI into earnings, respectively, and are recorded within interest expense in the accompanying condensed consolidated statements of income. There was no ineffectiveness recorded in earnings during the three and nine months ended March 31, 2008 and 2007 related to these swaps.

     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 hedge. This balance is recognized into earnings as a reduction of interest expense over the remaining term of debt underlying the terminated hedge. During the three months ended March 31, 2008 and 2007, less than $1 million and $1 million, respectively, were recognized into pretax earnings as a reduction to interest expense in the accompanying condensed consolidated statements of income. During the nine months ended March 31, 2008 and 2007, $2 million and $5 million, respectively, was recognized into earnings as a reduction to interest expense in the accompanying condensed consolidated statements of income. Less than an additional $1 million of pretax gain is expected to be recognized into earnings during the remainder of fiscal year 2008.

Foreign currency forward contracts

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

     During the three months ended March 31, 2008 and 2007, the Company recorded gains of $27 million and $4 million, respectively, from the remeasurement of the outstanding balances of intercompany loans. These gains were offset by losses of $27 million and $2 million, respectively, for each three month period, from the change in the fair value of the forward contracts. The net activity for each period represents the portion of the change in fair value of the forward currency contracts attributable to the difference in spot and contract forward rates.

     During the nine months ended March 31, 2008 and 2007, the Company recorded gains of $57 million and $17 million, respectively, from remeasurement of the outstanding balances of intercompany loans. These gains were offset by losses of $55 million and $12 million, respectively, for each nine month period, from the change in the fair value of the forward contracts. The net gain for each period represents the portion of the change in fair value of the forward currency contracts attributable to the difference in spot and contract forward rates.

Note 9. Income Taxes

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

		Three Months Ended								Nine Months Ended
		March 31,								March 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			2.6				2.2				2.7				2.5
Benefit and taxes related to foreign operations			(4.2	)			(14.2	)			(0.8	)			(6.0	)
Foreign exchange differential on tax benefits			0.7				0.1				0.2				(1.6	)
Change in valuation allowance			4.2				3.2				0.4				2.8
Change in accrual for tax uncertainties			0.8				(4.6	)			1.1				(0.3	)
Other			(2.2	)			2.7				(0.7	)			0.5
Effective income tax rate			36.9	%			24.4	%			37.9	%			32.9	%

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

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

     The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of accrued interest and penalties at June 30, 2007 was $3 million, which was included as a component of the $19 million unrecognized tax benefit noted above. Potential interest and penalties associated with uncertain tax positions recognized during the nine months ended March 31, 2008 were not significant, and are included as a component of the $2 million unrecognized tax benefit noted above. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

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

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

Note 10. Related Party Transactions

     Under the Company’s shareholders’ agreement with the Sponsors, the Company agreed to pay all expenses relating to the secondary offering other than underwriting commissions and discounts. As a result, the Company recorded less than $1 million of general and administrative expenses during the nine months ended March 31, 2008 related to its secondary offering in the second quarter of fiscal 2008.

Note 11. Retirement Plan and Other Postretirement Benefits

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

		Retirement Benefits
		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
Service cost-benefits earned during the period		$	—			$	1			$	1			$	2
Interest costs on projected benefit obligations			3				2				8				7
Expected return on plan assets			(2	)			(2	)			(7	)			(6	)
Net periodic benefit cost		$	1			$	1			$	2			$	3

     Other benefits costs were less than $1 million for each of the three months ended March 31, 2008 and 2007. Other benefits costs were $1 million for each of the nine months ended March 31, 2008 and 2007.

Note 12. Other Operating (Income) Expense, Net

     Other operating (income) expense, net for the three months ended March 31, 2008 was $6 million of income, compared to $2 million of expense for the same period in the prior year. Other operating (income) expense, net for the three months ended March 31, 2008 includes a net gain of $11 million from the disposal of real estate and other assets, primarily from the refranchising of Company restaurants in Germany, partially offset by $3 million in losses from vacant property provisions recorded in the U.S. and U.K. and $1 million of franchise system distress costs in the U.K.

     Other operating (income) expense, net for the three months ended March 31, 2007 includes expenses of $2 million associated with franchise system distress, primarily in the U.K., and a loss of $1 million from restaurant closures primarily in the U.S. and the U.K., partially offset by a net gain of $1 million from forward currency contracts used to hedge intercompany loans denominated in foreign currencies.

     Other operating (income) expense, net for the nine months ended March 31, 2008 was $7 million of income compared to $6 million of income for the same period in the prior year. Other operating (income) expense, net for the nine months ended March 31, 2008 includes net gains of $16 million from the disposal of real estate and other assets, primarily in Germany and the U.S. (which includes the refranchising of Company restaurants in Germany), and a gain of $2 million on forward currency contracts used to hedge intercompany loans denominated in foreign currencies. These gains were partially offset by $4 million in losses from vacant property provisions recorded in the U.S and U.K., $3 million of franchise system distress costs in the U.K. which includes a $1 million payment made to our sole distributor, $2 million of foreign currency transaction losses and $1 million in charges for litigation reserves.

     Other operating (income) expense, net for the nine months ended March 31, 2007 includes a gain of $5 million from the sale of an investment in a joint venture in New Zealand, a gain of $5 million on forward currency contracts used to hedge intercompany loans denominated in foreign currencies and a $4 million net gain on the disposal of assets primarily in the U.S., offset by $3 million of restaurant closure expenses primarily in the U.K. and $4 million associated with franchise system distress primarily in the U.K.

Note 13. Commitments and Contingencies

Franchisee Restructuring Program

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

     In order to assist certain franchisees in making capital improvements to franchisee-owned restaurants in need of remodeling, the Company has provided loans to fund capital expenditures (“Capex Loans”). Capex Loans are typically unsecured, bear interest, and have 10-year terms. In addition, the Company has made capital improvements related to restaurant properties that the Company leases to franchisees. During the three and nine months ended March 31, 2008, the Company funded less than $1 million and $1 million in Capex Loans to franchisees, respectively, and made less than $1 million and $2 million in improvements to restaurant properties that the Company leases to franchisees, respectively. As of March 31, 2008, the Company had commitments remaining to provide future Capex Loans of $4 million and to make up to $7 million of improvements to properties that the Company leases to franchisees. These commitments extend over a period of up to four years.

     During the three months ended March 31, 2008 and 2007, temporary reductions in rent (“rent relief”) for certain franchisees that lease restaurant properties from the Company were less than $1 million.  The Company provided approximately $1 million and $2 million in rent relief during the nine months ended March 31, 2008 and 2007, respectively.  As of March 31, 2008, the Company has potential commitments remaining to provide future rent relief of up to an aggregate of $6 million extending over a period of up to 16 years.

     Contingent cash flow subsidies represent potential commitments by the Company to provide future cash grants to certain franchisees for limited periods in the event of failure to achieve their debt service coverage ratio. For the three and nine months ended March 31, 2008 and 2007, contingent cash flow subsidies provided to franchisees were not significant. The maximum contingent cash flow subsidy commitment for future periods as of March 31, 2008 is $1 million, extending over a period of up to four years. Upon funding, in most instances, the subsidies will be added to the franchisee’s existing note balance. 

Guarantees

     The Company guarantees certain lease payments of franchisees arising from leases assigned in connection with sales of Company restaurants to franchisees, by remaining secondarily liable for base and contingent rents under the assigned leases of varying terms. The maximum contingent rent amount is not determinable as the amount is based on future revenues. In the event of default by the franchisees, the Company has typically retained the right to acquire possession of the related restaurants, subject to landlord consent. The aggregate contingent obligation arising from these assigned lease guarantees, excluding contingent rents, was $102 million as of March 31, 2008, expiring over an average period of seven years.

     Other commitments arising out of normal business operations were $15 million as of March 31, 2008, of which $7 million was guaranteed under bank guarantee arrangements.

Letters of Credit

     As of March 31, 2008, the Company had $27 million in irrevocable standby letters of credit outstanding, which were issued primarily to certain insurance carriers to guarantee payments of deductibles for various insurance programs, such as health and commercial liability insurance. Such letters of credit are secured by the collateral under the Company’s senior secured credit facility. As of March 31, 2008, no amounts had been drawn on any of these irrevocable standby letters of credit.

     As of March 31, 2008, the Company had posted bonds totaling $3 million, which related to certain utility deposits.

Vendor Relationships

     In fiscal 2000, the Company entered into long-term, exclusive contracts with The Coca-Cola Company and with Dr Pepper/Seven Up, Inc. to supply the Company and its franchise restaurants with their products and obligating Burger King^® restaurants in the United States to purchase a specified number of gallons of soft drink syrup. These volume commitments are not subject to any time limit. As of March 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 March 31, 2008 and June 30, 2007, the deferred amounts totaled $18 million and $21 million, respectively. These deferred amounts are amortized as a reduction to food, paper and product costs in the accompanying condensed consolidated statements of income.

     As of March 31, 2008, the Company had $3 million in aggregate contractual obligations for the year ending June 30, 2008 with vendors providing information technology and telecommunication services under eight separate arrangements. These contracts extend up to four years with a termination fee ranging from less than $1 million to $2 million during those years. The Company also has two separate arrangements for telecommunication services with an aggregate contractual obligation of $5 million over 4 years with no early termination fee.

     The Company also enters into commitments to purchase advertising. As of March 31, 2008, commitments to purchase advertising totaled $63 million.  These commitments run through October 2011.

Other

     The Company carries insurance programs to cover claims such as workers’ compensation, general liability, automotive liability, executive risk and property and is self-insured for healthcare claims for eligible participating employees. Through the use of insurance program deductibles (ranging from $.5 million to $1 million) and self insurance, the Company retains a significant portion of the expected losses under these programs. Insurance reserves have been recorded based on the Company’s estimate of the anticipated ultimate costs to settle all claims, both reported and incurred-but-not-reported (IBNR), and such reserves include judgments and independent actuarial assumptions about economic conditions, the frequency or severity of claims and claim development patterns, and claim reserve, management and settlement practices. As of March 31, 2008 and June 30, 2007, the Company had $35 million and $37 million in accrued liabilities to cover such claims.

Note 14. Segment Reporting

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

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

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
Revenues:
United States and Canada		$	380			$	346			$	1,157			$	1,070
EMEA/APAC			186				169				568				499
Latin America			28				24				84				75
Total revenues		$	594			$	539			$	1,809			$	1,644

     Other than the United States and Germany, no other individual country represented 10% or more of the Company’s total revenues. Revenues in the United States totaled $342 and $1,035 million for the three and nine months ended March 31, 2008, respectively, compared to $314 and $961 million for the three and nine months ended March 31, 2007, respectively. Revenues in Germany totaled $87 and $262 million for the three and nine months ended March 31, 2008, respectively, compared to $76 and $228 million for the three and nine months ended March 31, 2007, respectively.

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

		Three Months Ended								Three Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
Income from Operations:
United States and Canada		$	79			$	78			$	264			$	249
EMEA/APAC			26				10				73				43
Latin America			9				8				29				26
Unallocated			(33	)			(34	)			(94)				(99	)
Total income from operations		$	81			$	62			$	272			$	219
Interest expense, net			16				17				48				51
Loss on early distinguishment of debt			—				—				—				1
Income before income taxes		$	65			$	45			$	224			$	167
Income tax expense			24				11				85				55
Net income		$	41			$	34			$	139			$	112

Note 15. Subsequent Event

     On April 30, 2008, the Company acquired 56 restaurants in North and South Carolina from one of its largest franchisees for a purchase price of $49 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, 2007, and under Part II, Item 1A “Risk Factors”, “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this report. Unless the context otherwise requires, all references to “we”, “us”, “our” and “Company” refer to Burger King Holdings, Inc. and its subsidiaries.

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

Overview

     We operate in the fast food hamburger restaurant, or FFHR, category of the quick service restaurant, or QSR, segment of the restaurant industry. Our system of restaurants includes restaurants owned by us, as well as our franchisees. We are the second largest FFHR chain in the world as measured by the number of restaurants and system-wide sales. System-wide sales include sales at Company restaurants and franchise restaurants. We do not record franchise restaurant sales as revenues; however, our royalty revenues are calculated based on a percentage of franchise restaurant sales. We track our results of operations and manage our business by using three key business measures: comparable sales growth, average restaurant sales and sales growth. As of March 31, 2008, we owned or franchised a total of 11,455 restaurants in 70 countries and U.S. territories, of which 7,497 were located in the United States and Canada. At that date, 1,294 restaurants were Company-owned and 10,161 were owned by our franchisees. Our restaurants feature flame-broiled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks and other reasonably-priced food items.

     Our business operates in three reportable segments: (1) the United States and Canada; (2) Europe, the Middle East, Africa and Asia Pacific, or EMEA/APAC; and (3) Latin America. We generate revenues from three sources: (1) sales at our Company restaurants; (2) royalties and franchise fees paid to us by our franchisees; and (3) property income from restaurants that we lease or sublease to franchisees.

Business Highlights

     Our strategic plan has four guiding principles: Grow Profitably (a market plan); Fund the Future (a financial plan); Fire up the Guest (a product plan); and Working Together (a people plan). Guided by our strategic plan and strong executive team leadership, our accomplishments and key activities since December 31, 2007 include:

	•		the opening of 60 net restaurants worldwide in the third quarter and 254 net restaurants for the trailing 12-months ended March 31, 2008;
	•		the seventeenth consecutive quarter of positive system-wide comparable sales growth, our best comparable sales growth trend in more than a decade, including comparable sales growth of 5.8% for the third quarter of fiscal 2008;
	•		the sixteenth consecutive quarter of positive comparable sales growth in the United States and Canada, including comparable sales growth of 5.4% for the third quarter of fiscal 2008;
	•		all-time high average restaurant sales of $1.27 million for the trailing 12-months ended March 31, 2008;
	•		Opening of the first restaurant in Colombia, which represents the 70th country and U.S territory in which we operate;

	•		promotional tie-ins with the National Football League and with family focused marketing properties, such as Snoopy®, Cabbage Patch Kids™ Minis and SpongeBob’s Pest of the West™;
	•		new product offerings such as The Steakhouse Burger and Cheesy Bacon BK™ Wrapper, which were both introduced in March 2008;
	•		successful product promotions such as the Whopper® Freakout media campaign which, according to advertising industry researcher IAG, was twice as effective as the Company’s competitors on consumer recall and likeability;
	•		continued improvement in our U.K. business demonstrated by higher comparable sales and traffic, as a result of our continued focus on premium products; and
	•		payment of our fifth quarterly cash dividend as a public company of $0.0625 cents per share.

     Our focus continues to be on the following:

	•		driving further sales growth and profitability;
	•		expanding our large international platform;
	•		accelerating new restaurant development;
	•		increased emphasis on Company restaurant remodels and rebuilds;
	•		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 nine months ended March 31, 2008. Comparable sales growth and sales growth are provided by reportable segment and are analyzed on a constant currency basis, which means they are calculated using the same exchange rates over the periods under comparison to remove the effects of currency fluctuations from these trend analyses. We believe these constant currency measures provide a more meaningful analysis of our business by identifying the underlying business trends, without distortion from the effect of foreign currency movements. System-wide data represents measures for both Company-owned and franchise restaurants. Unless otherwise stated, comparable sales growth, average restaurant sales and sales growth are presented on a system-wide basis. System-wide results are driven primarily by our franchise restaurants as approximately 90% of our system-wide restaurants are franchised.

Comparable Sales Growth

     Comparable sales growth refers to the change in restaurant sales in one period from a comparable period in the prior year for restaurants that have been open for thirteen months or longer as of the end of the most recent period. Company comparable sales growth refers to comparable sales growth for Company restaurants and franchise comparable sales growth refers to comparable sales growth for franchise restaurants, in each case by reportable segment. We believe comparable sales growth is a key indicator of our performance, as influenced by our strategic initiatives and those of our competitors.

		For the								For the
		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
		(In constant currencies)
Company Comparable Sales Growth:
United States & Canada			3.5	%			0.6	%			2.6	%			2.1	%
EMEA / APAC			5.3	%			4.3	%			4.0	%			2.1	%
Latin America			6.2	%			(0.5	)%			1.4	%			1.1	%
Total Company Comparable Sales Growth			4.1	%			1.6	%			3.0	%			2.0	%
Franchise Comparable Sales Growth:
United States & Canada			5.7	%			2.9	%			5.8	%			3.3	%
EMEA / APAC			7.0	%			5.4	%			5.9	%			2.7	%
Latin America			5.7	%			2.9	%			4.2	%			4.5	%
Total Franchise Comparable Sales Growth			6.1	%			3.5	%			5.7	%			3.2	%
Comparable Sales Growth:
United States and Canada			5.4	%			2.6	%			5.4	%			3.2	%
EMEA/APAC			6.8	%			5.3	%			5.6	%			2.6	%
Latin America			5.8	%			2.7	%			4.0	%			4.3	%
Total System-wide Comparable Sales Growth			5.8	%			3.2	%			5.4	%			3.1	%

     Our comparable sales growth for the three and nine months ended March 31, 2008 was driven by the continued positive impact of the BK™ Value Menu, the BK™ Breakfast Value Menu and extended late night hours, successful product promotions such as the Whopper^® 50^th anniversary promotion featuring the Whopper^® Freakout media campaign in the United States and the Whopper^® Superiority promotion, successful promotional tie-ins with The Simpsons™ Movie, The Transformers™ Movie, SpongeBob’s Atlantis Squarepantis™ and Snoopy^®, and the offering of premium products such as the Ultimate Double Whopper^® sandwich, the BBQ Bacon Tendercrisp^® chicken sandwich and Homestyle Melts. In addition, comparable sales growth for the three and nine months benefited from one additional day (a Friday) compared to the same periods of the prior year, due to 2008 being a leap year.

     Three Months Ended March 31, 2008

     In the United States and Canada, our comparable sales growth performance remained strong in the third quarter of fiscal 2008 fueled by improvements in our operations, the continued positive impact of the BK™ Value Menu and BK™ Breakfast Value Menu, strong promotional tie-ins with the NFL and entertainment properties such as Snoopy^®, Cabbage Patch Kids™ Minis, and Monster Jam™ aimed at increasing family traffic, as well as successful product promotions, such as the Whopper^® Superiority promotion.

     In EMEA/APAC, comparable sales continued to improve in most major markets, including the U.K., Australia, Spain and South Korea, with continued focus on operational improvements, marketing and advertising and on high quality premium offerings, such as the limited time offer Angus Burgers, as well as the continued success of dessert offerings in the U.K. and the King Ahorro value menu in Spain.

     Latin America demonstrated positive results for the third quarter fueled primarily by our performance in Central America and South America, due to aggressive value promotions and Whopper^® sandwich limited time offers.

     Nine Months Ended March 31, 2008

     In the United States and Canada, our comparable sales growth performance remained strong during the nine months ended March 31, 2008, fueled by improvements in our operations, the continued positive impact of the BK™ Value Menu and BK™ Breakfast Value Menu, strong promotional tie-ins with the NFL and entertainment properties, such as The Simpsons™ Movie, The Transformers™ Movie, SpongeBob’s Atlantis Squarepantis™ and Snoopy^®, successful product promotions, such as the Whopper^® 50^th anniversary promotion featuring the Whopper^® Freakout campaign and the Whopper^® Superiority promotion, the offering of premium products such as the Ultimate Double Whopper^® sandwich, the BBQ Bacon Tendercrisp^® chicken sandwich and Homestyle Melts, and the introduction of the Spicy Chick’N Crisp™ sandwich to the BK™ Value Menu.

     In EMEA/APAC, comparable sales continued to improve during the nine months ended March 31, 2008 in most major markets, including the U.K., Australia, Spain and South Korea, due to our continued focus on operational improvements, marketing and advertising and on high quality premium offerings such as the limited time offer Angry Whopper^® sandwich and Aberdeen Angus

Burger, the continued success of the King Ahorro value menu in Spain and the BK Fusions™ Real Dairy Ice Cream offerings in the United Kingdom.

     Latin America demonstrated positive results for the nine months ended March 31, 2008, fueled primarily by our performance in Central America and South America, where higher margin indulgent products, such as the BK™ Stacker sandwich, aggressive value promotions and successful promotional tie-ins with the The Simpsons™ Movie, The Transformers™ Movie, Scooby Doo™ and Snoopy^® drove traffic and sales. These positive results were partially offset by softer performance in Puerto Rico, where current economic conditions affected sales for the nine months ended March 31, 2008.

Average Restaurant Sales

     Average restaurant sales, or ARS, is an important measure of the financial performance of our restaurants and changes in the overall direction and trends of sales. ARS is influenced mostly by comparable sales performance and restaurant openings and closures and includes the impact of movement in foreign currency exchange rates. For the three and nine months ended March 31, 2008, ARS was $313,000 and $963,000 respectively, compared to $284,000 and $881,000 for the three and nine months ended March 31, 2007, an increase of 10% and 9%, respectively. The trailing 12-month ARS reached a record high of $1.27 million for the period ended March 31, 2008, as compared to $1.17 million for the trailing 12-months ended March 31, 2007, an increase of 9%. As of March 31, 2008, the last 50 free-standing restaurants that opened in the United States and have operated for at least 12 months generated ARS of $1.5 million, which is approximately 19% higher than the current U.S. system average.

     Our ARS improvement during the first nine months of fiscal 2008 was primarily due to improved worldwide comparable sales, the opening of new restaurants with higher than average sales volumes and, to a lesser extent, the closure of under-performing restaurants. Our worldwide comparable sales were 5.4% for the nine months ended March 31, 2008, driven primarily by the continued positive impact of the BK™ Value Menu, the BK™ Breakfast Value Menu and three full quarters of extended late night hours, successful product promotions such as the Whopper^® Superiority campaign and the Whopper^® 50^th anniversary promotion featuring the Whopper^® Freakout media campaign in the United States, successful promotional tie-ins with The Simpsons™ Movie, The Transformers™ Movie, SpongeBob’s Atlantis Squarepantis™ and Snoopy^®, and the offering of premium products such as the Ultimate Double Whopper^® sandwich, the BBQ Bacon Tendercrisp^® chicken sandwich and Homestyle Melts. We and our franchisees opened 254 net restaurants, during the twelve months ended March 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-owned and franchise restaurants from one period to another. Sales growth is an important indicator of the overall direction and trends of sales and income from operations on a system-wide basis. Sales growth is influenced by restaurant openings and comparable sales as well as the effectiveness of our advertising and marketing initiatives and featured products.

		For the								For the
		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
		(In constant currencies)
Sales Growth:
United States and Canada			6.4	%			2.0	%			5.9	%			2.4	%
EMEA/APAC			14.6	%			9.2	%			13.1	%			6.5	%
Latin America			14.1	%			12.1	%			12.4	%			13.9	%
Total System-wide Sales Growth			9.2	%			4.4	%			8.2	%			4.2	%

     Sales growth continued on a positive trend during the three and nine months ended March 31, 2008, as comparable sales and the number of restaurants continued to increase on a worldwide basis. We expect restaurant closures to continue to decline and restaurant openings to accelerate in most regions, with the exception of the United Kingdom, where we continue to work with certain franchisees to help them improve their financial health.

     Our sales growth in the United States and Canada during the three and nine months ended March 31, 2008 reflects positive comparable sales growth. We had 7,497 restaurants in the United States and Canada as of March 31, 2008, compared to 7,483 restaurants as of March 31, 2007, reflecting less than a 1% increase in the number of restaurants compared to the prior year.

     EMEA/APAC demonstrated sales growth during the three and nine months ended March 31, 2008, reflecting openings of new restaurants and positive comparable sales in most major markets. We had 2,989 restaurants in EMEA/APAC as of March 31, 2008 compared to 2,844 restaurants as of March 31, 2007, reflecting an approximate 5% increase in the number of restaurants compared to the prior year.

     Latin America’s sales growth was driven by new restaurant openings and strong comparable sales during the three and nine months ended March 31, 2008. We had 969 restaurants in Latin America as of March 31, 2008, compared to 874 restaurants as of March 31, 2007, reflecting an approximate 11% increase in the number of restaurants compared to the prior year.

Other Operating Data

		As of
		March 31,
		2008				2007
Restaurant Count Data:
Number of Company restaurants:
United States and Canada			918				891
EMEA/APAC(1)			294				332
Latin America(2)			82				73
Total Company restaurants			1,294				1,296
Number of franchise restaurants:
United States and Canada			6,579				6,592
EMEA/APAC(1)			2,695				2,512
Latin America(2)			887				801
Total franchise restaurants			10,161				9,905
Total system-wide restaurants			11,455				11,201

		For the Three Months Ended								For the Nine Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
Other Operating Data:
Comparable sales growth			5.8	%			3.2	%			5.4	%			3.1	%
Sales growth			9.2	%			4.4	%			8.2	%			4.2	%
Average restaurant sales (in thousands)		$	313			$	284			$	963			$	881
Segment Data:
Company restaurant revenues (in millions):
United States and Canada		$	283			$	260			$	857			$	801
EMEA/APAC(1)			136				129				418				379
Latin America(2)			17				14				50				45
Total Company restaurant revenues		$	436			$	403			$	1,325			$	1,225
Franchise revenues (in millions):
United States and Canada		$	76			$	66			$	234			$	206
EMEA/APAC(1)			42				33				126				98
Latin America(2)			11				10				34				30
Total franchise revenues(3)		$	129			$	109			$	394			$	334
Company restaurant margins:
United States and Canada			13.1	%			15.6	%			14.5	%			15.2	%
EMEA/APAC(1)			12.0	%			9.7	%			14.2	%			13.5	%
Latin America(2)			23.6	%			23.6	%			24.2	%			25.8	%
Total Company restaurant margins			13.2	%			14.0	%			14.8	%			15.1	%
Income from operations (in millions):
United States and Canada		$	79			$	78			$	264			$	249
EMEA/APAC(1)			26				10				73				43
Latin America(2)			9				8				29				26
Unallocated(4)			(33	)			(34	)			(94	)			(99	)
Total income from operations		$	81			$	62			$	272			$	219
EBITDA (in millions)(5)		$	107			$	84			$	342			$	284

While EBITDA is not a recognized measure under generally accepted accounting principles (“GAAP”), management uses it to evaluate and forecast our business performance. This non-GAAP financial measure has certain material limitations, including:

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

Management believes that EBITDA provides both management and investors with a more complete understanding of the underlying operating results and trends and an enhanced overall understanding of our financial performance and prospects for the future. EBITDA is not intended to be a measure of liquidity or cash flows from operations nor a measure comparable to net income.

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

		For the Three Months Ended								For the Nine Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
		(In millions)
Net income		$	41			$	34			$	139			$	112
Interest expense, net			16				17				48				51
Loss on early extinguishment of debt			—				—				—				1
Income tax expense			24				11				85				55
Depreciation and amortization			26				22				70				65
EBITDA		$	107			$	84			$	342			$	284

Results of Operations for the three months ended March 31, 2008

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

		For the Three Months Ended March 31,
		2008				2007
										Increase/
		Amount				Amount				(Decrease)
		(Dollars in millions, except percentages and per share data)
Revenues:
Company restaurant revenues		$	436			$	403				8	%
Franchise revenues			129				109				18	%
Property revenues			29				27				7	%
Total revenues			594				539				10	%
Company restaurant expenses			378				346				9	%
Selling, general and administrative expenses			126				115				10	%
Property expenses			15				14				7	%
Other operating (income) expense, net (1)			(6	)			2			NM
Total operating costs and expenses			513				477				8	%
Income from operations			81				62				31	%
Interest expense			17				18				(6	)%
Interest income			(1	)			(1	)			—	%
Interest expense, net			16				17				(6	)%
Income before income taxes			65				45				44	%
Income tax expense			24				11				118	%
Net income		$	41			$	34				21	%
Earnings per share — basic (2)		$	0.30			$	0.25				20	%
Earnings per share — diluted (2)		$	0.30			$	0.25				20	%
Weighted average shares — basic			135.2				134.4
Weighted average shares — diluted			137.5				137.2

Revenues

     Company restaurant revenues

     Total Company restaurant revenues increased by 8% to $436 million during the three months ended March 31, 2008, compared to the same period in the prior year, primarily as a result of positive worldwide Company comparable sales of 4.1% and the favorable impact from the movement in foreign currency exchanges rates. Approximately $19 million, or 58%, of the increase in Company restaurant revenues was generated by the favorable impact from the movement of foreign currency exchange rates primarily in EMEA.

     In the United States and Canada, Company restaurant revenues increased by 9% to $283 million during the three months ended March 31, 2008, compared to the same period in the prior year, primarily from positive Company comparable sales in this segment of 3.5% and the addition of 27 Company restaurants (net of closures and refranchisings) during the twelve months ended March 31, 2008. Approximately $5 million, or 22%, of the increase in Company restaurant revenues was due to the favorable impact in the movement of foreign currency exchange rates in Canada.

     In EMEA/APAC, Company restaurant revenues increased by $7 million, or 5%, to $136 million during the three months ended March 31, 2008, compared to the same period in the prior year, primarily as a result of the favorable impact from the movement of foreign currency exchange rates in EMEA, which contributed $14 million of the increase, and Company comparable sales of 5.3% in this segment. This improvement was partially offset by a net reduction of 38 Company restaurants, primarily in the U.K. and Germany, during the twelve months ended March 31, 2008.

     In Latin America, Company restaurant revenues increased by 21% to $17 million during the three months ended March 31, 2008 compared to the same period in the prior year, primarily as a result of nine additional Company restaurants (net of closures) during the twelve months ended March 31, 2008 and positive Company comparable sales in this segment of 6.2%. The impact on Company restaurant revenues from foreign currency exchange rates was not significant in this segment.

     Franchise revenues

     Total franchise revenues increased by 18% to $129 million during the three months ended March 31, 2008, compared to the same period in the prior year, driven by positive worldwide franchise comparable sales of 6.1% during the quarter, an increase in the effective royalty rate in the U.S., and a net increase of 256 in the number of franchise restaurants (net of closures) during the twelve months ended March 31, 2008. Approximately $5 million, or 25%, of the increase in franchise revenues was due to the favorable impact from the movement of foreign currency exchange rates.

     In the United States and Canada, franchise revenues increased by 15% to $76 million during the three months ended March 31, 2008, compared to the same period in the prior year, primarily as a result of positive franchise comparable sales in this segment of 5.7% and an increase in the effective royalty rate in the U.S., partially offset by the elimination of royalties from a net reduction of 13 franchise restaurants (net of closures and acquisitions of franchise restaurants by the Company) during the twelve months ended March 31, 2008. The impact on franchise revenues from foreign currency exchange rates was not significant in this segment.

     In EMEA/APAC, franchise revenues increased by 27% to $42 million during the three months ended March 31, 2008, compared to the same period in the prior year, driven by an increase of 183 franchise restaurants (net of closures) during the twelve months ended March 31, 2008 and positive franchise comparable sales in this segment of 7.0% during the quarter. Approximately $5 million, or 56%, of the increase in franchise revenues was due to favorable impact from the movement of foreign currency exchange rates.

     Latin America franchise revenues increased by 10% to $11 million during the three months ended March 31, 2008, compared to the same period in the prior year, as a result of positive franchise comparable sales in this segment of 5.7% and the addition of 86 franchise restaurants (net of closures) during the twelve months ended March 31, 2008. The impact on franchise revenues from foreign currency exchange rates was not significant in this segment.

     Property Revenues

     Total property revenues increased by $2 million, or 7%, for the three months ended March 31, 2008, compared to the same period in the prior year, primarily as a result of an increase in worldwide franchise comparable sales of 6.1%, partially offset by the effect of closing or acquiring restaurants leased to franchisees.

     In the United States and Canada, property revenues increased by $1 million for the three months ended March 31, 2008, compared to the same period in the prior year, primarily due to increased contingent rents as a result of an increase in franchise comparable sales in this segment of 5.7%, offset by the effect of closing or acquiring restaurants leased to franchisees.

     In EMEA/APAC, property revenues increased by $1 million or 14% for the three months ended March 31, 2008, compared to the same period in the prior year, primarily due to increased contingent rents as a result of an increase in franchise comparable sales in this segment of 7.0%, partially offset by the effect of closing or acquiring restaurants leased to franchisees.

Operating Costs and Expenses

     Food, paper and product costs

     Total food, paper and product costs increased by 13% to $135 million during the three months ended March 31, 2008, compared to the same period in the prior year, as a result of an increase in sales and a significant increase in commodity costs and the unfavorable impact of foreign currency exchange rates, primarily in EMEA. As a percentage of Company restaurant revenues, food, paper and product costs increased by 1.4% to 31.1%, primarily due to the increase in commodity and other food costs in the U.S and Canada.

     In the United States and Canada, food, paper and product costs increased by 16% to $90 million for the three months ended March 31, 2008, compared to the same period in the prior year, primarily as a result of an increase in sales in this segment, an increase in the number of Company restaurants, and an increase in commodity costs. Food, paper and product costs as a percentage of Company restaurant revenues increased by 1.9% to 31.9%, primarily due to an increase in beef, cheese, chicken and other food costs, partially offset by sales of higher margin products.

     In EMEA/APAC, food, paper and product costs increased by 6% to $39 million for the three months ended March 31, 2008, compared to the same period in the prior year, primarily as a result of the unfavorable impact of foreign currency exchange rates, partially offset by a reduction in the number of Company restaurants. Food, paper and product costs as a percentage of Company restaurant revenues increased by 0.5% to 28.8% for the three months ended March 31, 2008, reflecting the unfavorable impact from product mix and commodity pressures during the period as compared to the same period in the prior year.

     In Latin America, food, paper and product costs increased by 23% to $7 million for the three months ended March 31, 2008, compared to the same period in the prior year, primarily as a result of an increase in sales in this segment. Food, paper and product costs as a percentage of Company restaurant revenues increased by 0.6% to 37.4%, reflecting the unfavorable impact from commodity pressures compared to the same period in the prior year.

     Payroll and employee benefits costs

     Total payroll and employee benefits costs increased by 10% to $133 million during the three months ended March 31, 2008, compared to the same period in the prior year. This increase was primarily due to inflationary increases in average wages and salaries and the unfavorable impact of foreign currency exchange rates. As a percentage of Company restaurant revenues, payroll and employee benefits costs increased by 0.4% to 30.5% for the three months ended March 31, 2008, with the benefits derived from increased Company comparable sales offset by higher wages and an increase in headcount.

     In the United States and Canada, payroll and employee benefits costs increased by 11% to $88 million during the three months ended March 31, 2008, compared to the same period in the prior year, primarily as a result of the addition of 27 Company restaurants (net of closures and refranchisings) during the twelve months ended March 31, 2008, additional labor needed to service increased traffic and inflationary increases in wages and salaries. As a percentage of Company restaurant revenues, payroll and employee benefits costs increased by 0.6% to 31.1% for the three months ended March 31, 2008, due to inflationary increases in wages and salaries partially offset by increased Company comparable sales.

     In EMEA/APAC, payroll and employee benefits costs increased by 6% to $43 million for the three months ended March 31, 2008, compared to the same period in the prior year, primarily as a result of additional labor needed to service increased traffic, inflationary increases in wages and salaries and the unfavorable impact of foreign currency exchange rates. Payroll and employee benefits costs increased by 0.4% to 31.6% of Company restaurant revenues in EMEA/APAC for the three months ended March 31, 2008, compared to the same period in the prior year, as a result of inflationary increases in wages and salaries, increased fringe benefit costs and temporary staffing, partially offset by increased Company comparable sales.

     There was no significant change in payroll and employee benefits costs in Latin America during the three months ended March 31, 2008.

     Occupancy and other operating costs

     Occupancy and other operating costs increased by 4% to $110 million during the three months ended March 31, 2008, compared to the same period in the prior year. This increase was primarily attributable to the unfavorable impact of foreign currency exchange rates and accelerated depreciation expense related to the remodeling and rebuilding of Company restaurants in the U.S and Canada, which was partially offset by the benefits realized from the new flexible batch broiler (including lower depreciation expense). Occupancy and other operating costs decreased by 1.1% to 25.2% of Company restaurant revenues during the three months ended March 31, 2008, compared to the same period in the prior year, reflecting increased comparable sales and lower rent from the closure of under-performing restaurants and the refranchising of Company restaurants in EMEA, primarily in the U.K., offset by an increase in accelerated depreciation expense related to the remodeling and rebuilding of Company restaurants in the U.S and Canada.

     In the United States and Canada, occupancy and other operating costs increased by 9% to $68 million during the three months ended March 31, 2008, compared to the same period in the prior year, driven by the addition of 27 Company restaurants (net of closures and refranchisings) during the twelve months ended March 31, 2008 and accelerated depreciation expense of $3 million related to the remodeling and rebuilding of Company restaurants, which was partially offset by the benefits realized from the new flexible batch broilers (including lower depreciation expense). As a percentage of Company restaurant revenues, occupancy and other

operating costs remained relatively unchanged at 23.9% for the three months ended March 31, 2008 with the unfavorable impact from accelerated depreciation expense on Company remodels and rebuilds offset by positive Company comparable sales.

     In EMEA/APAC, occupancy and other operating costs decreased by 7% to $37 million during the three months ended March 31, 2008, compared to the same period in the prior year, primarily due to lower rent and utility costs driven by closures and refranchisings, partially offset by the unfavorable impact of foreign currency exchange rates. As a percentage of Company restaurant revenues, occupancy and other operating costs decreased by 3.2% to 27.6% for the three months ended March 31, 2008, compared to the same period in the prior year, benefiting primarily from the closure of under-performing restaurants and the refranchising of Company restaurants in EMEA, primarily in the U.K., as well as positive Company comparable sales in the region.

     In Latin America, occupancy and other operating costs increased by 21% to $5 million during the three months ended March 31, 2008, compared to the same period in the prior year, primarily attributable to the addition of nine new Company restaurants during the twelve months ended March 31, 2008. As a percentage of Company restaurant revenues, occupancy and other operating costs decreased by 0.9% to 26.9% for the three months ended March 31, 2008, compared to the same period in the prior year, primarily as a result of positive Company comparable sales, partially offset by an increase in rent, utility costs, property taxes, and depreciation from the new restaurants.

     Selling, general and administrative expenses

     Selling expenses increased by $3 million for the three months ended March 31, 2008, compared to the same period in the prior year. The increase in selling expenses for the three months ended March 31, 2008 is primarily attributable to additional sales promotions and advertising expenses generated by higher Company restaurant revenues, as well as a reduction in the amount of bad debt recoveries as compared to the prior year. The overall net change in selling expenses reflects the unfavorable impact from the movement in foreign currency exchange rates of $1 million for the three months ended March 31, 2008.

     General and administrative expenses increased by $8 million to $104 million for the three months ended March 31, 2008, compared to the same period in the prior year. This net increase was driven by an increase in corporate salary, fringe benefits and other employee-related costs of $3 million and an increase in stock based compensation expense of $1 million. The overall net increase of $8 million also reflects the unfavorable impact of $5 million from the movement in foreign currency exchange rates.

     Property Expenses

     Total property expenses increased $1 million to $15 million for the three months ended March 31, 2008, compared to the same period in the prior year, primarily due to an increase in rents related to the increase in sales for the period offset by the effect of closing or acquiring restaurants leased to franchisees.

     Other operating (income) expense, net

     Other operating (income) expense, net for the three months ended March 31, 2008 was $6 million of income, compared to $2 million of expense for the same period in the prior year. Other operating (income) expense, net for the three months ended March 31, 2008 includes a net gain of $11 million from the disposal of real estate and other assets, primarily from the refranchising of Company restaurants in Germany, partially offset by $3 million in losses from vacant property provisions recorded in the U.S. and U.K. and $1 million of franchise system distress costs in the U.K.

     Other operating (income) expense, net for the three months ended March 31, 2007 includes expenses of $2 million associated with franchise system distress primarily in the U.K. and a loss of $1 million from restaurant closures primarily in the U.S. and the U.K., partially offset by a net gain of $1 million from forward currency contracts used to hedge intercompany loans denominated in foreign currencies.

Income from Operations

		Three Months Ended
		March31,
		2008				2007
Income from Operations:
United States and Canada		$	79			$	78
EMEA/APAC			26				10
Latin America			9				8
Unallocated			(33	)			(34	)
Total income from operations		$	81			$	62

     Total income from operations increased by $19 million, or 31%, to $81 million during the three months ended March 31, 2008, compared to the same period in the prior year, primarily due to an increase in franchise revenues of $20 million driven by worldwide franchise comparable sales of 6.1% for the quarter. The favorable impact that the movement in foreign currency exchange rates had on total revenues was partially offset by the unfavorable impact on operating costs and expenses resulting in a $2 million favorable impact on income from operations. See Note 14 to our unaudited condensed consolidated financial statements contained in this report for income from operations by segment.

     In the United States and Canada, income from operations increased by $1 million to $79 million for the three months ended March 31, 2008, compared to the same period in the prior year, primarily as a result of an increase in franchise revenues of $10 million reflecting an increase in comparable sales of 5.7% for franchise restaurants in this segment and an increase in the effective royalty rate in the U.S. These increases were partially offset by a $3 million reduction in Company restaurant margin, as a result of increases in commodity costs and accelerated depreciation expense, a $3 million increase in selling, general and administrative expenses driven by increased salary and fringe benefit costs and increased stock based compensation expense and by $2 million in expenses from other operating (income) expense, net.

     In EMEA/APAC, income from operations increased by $16 million, or 160% to $26 million during the three months ended March 31, 2008, compared to the same period in the prior year, primarily as a result of an increase in franchise revenues of $9 million reflecting an increase in comparable sales of 7.0% for franchise restaurants in this segment and the net increase of 183 franchise restaurants during the twelve months ended March 31, 2008. In addition, we benefited from $8 million in income from other operating (income) expense, net primarily from the gain recognized on the refranchising of Company restaurants in Germany. The favorable impact that the movement in foreign currency exchange rates had on revenues was partially offset by the unfavorable impact on operating costs and expenses resulting in a $3 million favorable impact on income from operations.

     In Latin America, income from operations increased by $1 million, or 13%, to $9 million during the three months ended March 31, 2008, compared to the same period in the prior year, primarily as a result of an increase in franchise revenues of $1 million reflecting an increase in comparable sales of 5.7% for franchise restaurants in this segment and the net addition of 86 franchise restaurants during the twelve months ended March 31, 2008.

     Our unallocated corporate expenses did not change significantly during the three months ended March 31, 2008, compared to the same period in the prior year.

Interest Expense, net

     Interest expense, net decreased by $1 million during the three months ended March 31, 2008, compared to the same period in the prior year, reflecting a reduction in the amount of borrowings outstanding due to early prepayments of our debt and a decrease in rates paid on borrowings during the period. The weighted average interest rates for the three months ended March 31, 2008 and 2007 were 6.33% and 6.88%, which included the impact of interest rate swaps on 46% and 50% of our term debt, respectively.

Income Tax Expense

     Income tax expense was $24 million for the three months ended March 31, 2008, resulting in an effective tax rate of 36.9%. During the three months ended March 31, 2008, we recorded a tax charge of $2 million primarily related to the resolution of a foreign audit and law changes.

     Income tax expense was $11 million for the three months ended March 31, 2007 resulting in an effective tax rate of 24.4%. During the three months ended March 31, 2007, we realized a tax benefit as a result of the realignment of the European and Asian businesses and resolution of certain tax audit matters.

Net Income

     Our net income increased by $7 million to $41 million during the three months ended March 31, 2008, compared to the same period in the prior year, primarily as a result of a net increase in restaurants and strong comparable sales which increased franchise revenues by $20 million, Company restaurant margin by $1 million, and net property revenues by $1 million. We also benefited from an increase in income from other operating (income) expense of $8 million and a reduction in interest expense of $1 million. These increases were partially offset by an increase in selling, general and administrative expenses of $11 million and a $13 million increase in income tax expense.

Results of Operations for the nine months ended March 31, 2008

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

		For the Nine Months Ended March 31,
		2008				2007
										Increase/
		Amount				Amount				(Decrease)
		(Dollars in millions, except percentages and per share data)
Revenues:
Company restaurant revenues		$	1,325			$	1,225				8	%
Franchise revenues			394				334				18	%
Property revenues			90				85				6	%
Total revenues		$	1,809			$	1,644				10	%
Company restaurant expenses			1,129				1,040				9	%
Selling, general and administrative expenses			370				346				7	%
Property expenses			45				45				—	%
Other operating income, net			(7	)			(6	)			17	%
Total operating costs and expenses		$	1,537			$	1,425				8	%
Income from operations			272				219				24	%
Interest expense			53				56				(5	)%
Interest income			(5	)			(5	)			—	%
Interest expense, net			48				51				(6	)%
Loss on early extinguishment of debt			—				1				NM
Income before income taxes		$	224			$	167				34	%
Income tax expense			85				55				55	%
Net income		$	139			$	112				24	%
Earnings per share — basic (1)		$	1.03			$	0.84				23	%
Earnings per share — diluted (1)		$	1.01			$	0.82				23	%
Weighted average shares — basic			135.2				133.7				1	%
Weighted average shares — diluted			137.7				136.6				1	%