UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2006

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

For the transition period from                      to                     

Commission file number: 001-32875

BURGER KING HOLDINGS, INC.

Delaware		75-3095469
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
5505 Blue Lagoon Drive, Miami, Florida		33126
(Address of principal executive offices)		(Zip Code)

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

Large accelerated filer o            Accelerated filer o            Non-accelerated filer þ

     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 26, 2007, there were 133,886,235 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, 2006 and June 30, 2006 (unaudited)			3
		Condensed Consolidated Statements of Income for the three and six months ended December 31, 2006 and 2005 (unaudited)			4
		Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2006 and 2005 (unaudited)			5
		Notes to Condensed Consolidated Financial Statements (unaudited)			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			35
Item 4.		Controls and Procedures			35
PART II – Other Information
Item 1A.		Risk Factors			37
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 4.		Submission of Matters to a Vote of Security Holders			38
Item 6.		Exhibits			38
		Signatures			39
		Index to Exhibits			40
EX-10.36 Form of Retainer Stock Award Agreement
EX-10.37 Form of Annual Deferred Stock Award Agreement
EX-10.38 Employment Agreement
EX-31.1 Section 302 CEO Certification
EX-31.2 Section 302 CFO Certification
EX-32.1 Section 906 CEO Certification
EX-32.2 Section 906 CFO Certification

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,
		2006				2006
		(In millions, except share data)
Assets
Current assets:
Cash and cash equivalents		$	135			$	259
Trade and notes receivable, net			117				109
Prepaids and other current assets, net			51				40
Deferred income taxes, net			38				45
Total current assets			341				453
Property and equipment, net			866				886
Intangible assets, net			980				975
Goodwill			22				20
Net investment in property leased to franchisees			146				148
Other assets, net			76				70
Total assets		$	2,431			$	2,552
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts and drafts payable		$	73			$	100
Accrued advertising			54				49
Other accrued liabilities			253				338
Current portion of debt and capital leases			5				5
Total current liabilities			385				492
Long term debt			896				997
Capital leases, net of current portion			64				63
Other deferrals and liabilities			342				349
Deferred income taxes, net			106				84
Total liabilities			1,793				1,985
Commitments and Contingencies (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; 133,805,018 and 133,058,640 shares issued and outstanding at December 31, 2006 and June 30, 2006, respectively			1				1
Restricted stock units			5				5
Additional paid-in capital			554				545
Retained earnings			81				3
Accumulated other comprehensive income			—				15
Treasury stock, at cost; 643,698 and 590,841 shares, at December 31, 2006 and June 30, 2006, respectively			(3	)			(2	)
Total stockholders’ equity			638				567
Total liabilities and stockholders’ equity		$	2,431			$	2,552

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,
		2006				2005				2006				2005
		(In millions, except per share data)
Revenues:
Company restaurant revenues		$	417			$	379			$	822			$	754
Franchise revenues			112				104				225				209
Property revenues			30				29				58				57
Total revenues			559				512				1,105				1,020
Company restaurant expenses:
Food, paper and product costs			125				119				247				237
Payroll and employee benefits			123				109				242				219
Occupancy and other operating costs			103				93				205				184
Total Company restaurant expenses			351				321				694				640
Selling, general and administrative expenses			119				106				231				207
Property expenses			15				14				31				28
Fees paid to affiliates			—				3				—				6
Other operating income, net			(1	)			(2	)			(8	)			(3	)
Total operating costs and expenses			484				442				948				878
Income from operations			75				70				157				142
Interest expense			19				18				38				37
Interest income			(2	)			(1	)			(4	)			(3	)
Total interest expense, net			17				17				34				34
Loss on early extinguishment of debt			—				—				1				13
Income before income taxes			58				53				122				95
Income tax expense			20				26				44				46
Net income		$	38			$	27			$	78			$	49
Earnings per share:
Basic		$	0.28			$	0.25			$	0.59			$	0.45
Diluted		$	0.28			$	0.24			$	0.57			$	0.43
Weighted average shares outstanding:
Basic			133.5				106.9				133.3				106.8
Diluted			136.5				112.9				136.1				112.9

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,
		2006				2005
		(In millions)
Cash flows from operating activities:
Net income		$	78			$	49
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization			43				42
Gain on hedging activities			(2	)			—
Gain on remeasurement of foreign denominated transactions			(13	)			—
Gain on asset disposals			(7	)			(1	)
Pension curtailment gain			—				(6	)
Loss on early extinguishment of debt			1				13
Stock-based compensation			2				—
Deferred income tax expense			8				31
Changes in current assets and liabilities, net of acquisitions:
Trade and notes receivables			(7	)			1
Prepaids and other current assets			(10	)			(12	)
Accounts and drafts payable			(28	)			(20	)
Accrued advertising			5				8
Other accrued liabilities			(86	)			(27	)
Payment of interest on PIK notes			—				(103	)
Other long-term assets and liabilities			14				27
Net cash (used for) provided by operating activities		$	(2	)		$	2
Cash flows from investing activities:
Purchases of available-for-sale securities			(308	)			—
Proceeds from sale of available-for-sale securities			308				—
Payments for property and equipment			(31	)			(30	)
Proceeds from asset disposals and restaurant closures			15				10
Payments for acquired franchisee operations			(8	)			(7	)
Investment in franchisee debt			(4	)			(3	)
Collections on franchisee debt			1				1
Net cash used for investing activities		$	(27	)		$	(29	)
Cash flows from financing activities:
Proceeds from term debt and credit facility			1				1,047
Repayments of term debt, credit facility and capital leases			(103	)			(1,229	)
Payments for financing costs			—				(16	)
Proceeds from sale of common stock			2				—
Excess tax benefits from stock-based compensation			4				—
Treasury stock purchases			(1	)			—
Net cash used for financing activities		$	(97	)		$	(198	)
Effect of exchange rates on cash and cash equivalents			2				—
Decrease in cash and cash equivalents			(124	)			(225	)
Cash and cash equivalents at beginning of period			259				432
Cash and cash equivalents at end of period		$	135			$	207

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,
		2006				2005
		(In millions)
Supplemental cash flow disclosures:
Interest paid (1)		$	27			$	139
Income taxes paid (2)		$	114			$	7
Non-cash investing and financing activities:
Acquisition of property with capital lease obligations		$	5			$	10

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. It 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, 2006, the Company was approximately 75% owned by private equity funds controlled by Texas Pacific Group, the Goldman Sachs Funds and Bain Capital Partners (collectively, the “Sponsors”).

     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 the franchise restaurants that the Company leases or subleases to franchisees. The Company receives monthly royalties and advertising contributions from franchisees based on a percentage of restaurant sales.

  Basis of Presentation and Consolidation

     The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2006. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. The results for the three and six months ended December 31, 2006 do not necessarily indicate the results that may be expected for the full year.

     The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Investments in affiliates where the Company owns between 20% and 50% are accounted for under the equity method, except as discussed below.

     In December 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46R, Consolidation of Variable Interest Entities — an interpretation of ARB No. 51 (“FIN 46R”). FIN 46R establishes guidance to identify variable interest entities (“VIE’s”). FIN 46R requires VIE’s to be consolidated by the primary beneficiary who is exposed to the majority of the VIE’s expected losses, expected residual returns, or both. FIN 46R excludes from its scope operating businesses unless certain conditions exist.

     A majority of franchise entities meet the definition of an operating business and, therefore, are exempt from the scope of FIN 46R. Additionally, there are a number of franchise entities which do not meet the definition of a business, as a result of leasing arrangements and other forms of subordinated financial support provided by the Company, including certain franchise entities that participated in the franchisee financial restructuring program (see Note 13) and, therefore, are considered VIE’s. However, the Company is not exposed to the majority of expected losses in any of these arrangements and, therefore, is not the primary beneficiary required to consolidate any of these franchisee entities.

     The Company has consolidated one joint venture created in fiscal 2005 that operates restaurants where the Company is a 49% partner, but is deemed to be the primary beneficiary, as the joint venture agreement provides protection to the joint venture partner from absorbing expected losses. The results of operations of this joint venture are not material to the Company’s results of operations or financial position.

  Use of Estimates

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

  Reclassifications

     Certain reclassifications have been made to the prior periods to conform to the current period’s presentation. The reclassifications had no effect on previously reported net income or stockholders’ equity.

  Inventories

     Inventories, totaling $17 million and $14 million as of December 31, 2006 and June 30, 2006, 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

     Prior to February 16, 2006, the date the Company filed its Form S-1 registration statement with the Securities and Exchange Commission (the initial public offering was effective on May 17, 2006), the Company accounted for stock-based compensation in accordance with the intrinsic-value method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). Under the intrinsic value method of APB No. 25, stock options were granted by the Company at fair value, with no compensation cost being recognized in the financial statements over the vesting period. In addition, the Company issued restricted stock units (“RSU’s”) under APB No. 25 and recognized compensation cost over the vesting period of the awards. For pro forma disclosure required by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), compensation expense for stock options was measured using the minimum value method, which assumed no volatility of the Company’s common stock in the Black-Scholes model used to calculate the option’s fair value.

     As a result of filing the Form S-1 registration statement, the Company transitioned from a nonpublic entity to a public entity as defined by Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”). Since the Company applied SFAS No. 123 pro forma disclosure for stock options using the minimum value method prior to becoming a public entity, SFAS No. 123R requires that the Company adopt SFAS No. 123R, using a combination of the prospective and modified prospective transition methods. The Company applied the prospective transition method for those awards granted prior to the Form S-1 filing date that were measured at minimum value. The unrecognized compensation cost relating to these awards is recognized in the financial statements subsequent to the adoption of SFAS No. 123R, using the same method of recognition and measurement originally applied to those awards. As there was no compensation cost recognized by the Company in the financial statements for these awards under APB No. 25, no compensation cost has been or will be recognized for these awards after the Company’s adoption of SFAS No. 123R on July 1, 2006, unless such awards are modified after that date. For those awards granted subsequent to the Form S-1 filing date, but prior to the adoption date of July 1, 2006, the Company applied the modified prospective transition method, under which compensation expense is recognized for any unvested portion of the awards granted between the Form S-1 filing date and the adoption date of SFAS 123R over the remaining vesting period of the awards beginning on the adoption date of July 1, 2006.

     On July 1, 2006, the Company adopted 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 forfeitures, over the employee’s requisite service period.

     Non-qualified stock option awards (“NQSO”) granted by the Company expire ten years from the grant date and generally vest ratably over a five-year service period commencing on the grant date. RSU’s granted by the Company generally vest ratably over a two to five year service period commencing on the grant date. For those vested and unvested RSU’s granted prior to the Company’s initial public offering, settlement of these awards (i.e., the issuance of shares of the Company’s common stock to the recipients) will occur on December 31, 2007 or upon termination of the holder’s employment, if earlier. For the six months ended December 31, 2006, the Company granted performance-based restricted stock (“PBRS”) awards of 706,422 shares to eligible employees as long-term incentive compensation. The actual number of shares earned by the employee depends on specific performance criteria of the Company during the one-year performance period ended June 30, 2007 and will be adjusted at the end of the performance period. The PBRS awards have a three or four-year vesting period from the grant date, depending on the employee, which includes the one-year performance period.

     The Company recorded $1 million and $2 million of pre-tax stock-based compensation expense for the three and six months ended December 31, 2006, respectively.

  Equity Incentive Plan and 2006 Omnibus Incentive Plan

     The Company’s Equity Incentive Plan and 2006 Omnibus Incentive Plan (collectively, “the Plans”) permit the grant of stock-based compensation awards including NQSO’s, RSU’s and PBRS awards to eligible employees for up to 20.8 million shares of the Company’s common stock. Awards are granted with an exercise price equal to the closing price of the Company’s common stock on the date of grant. The number of shares available to be granted under the Plans totaled 8.4 million as of December 31, 2006.

     The Company also maintains Deferred Stock Award arrangements under the 2006 Omnibus Incentive Plan for non-employee members of the Board of Directors. Pursuant to these arrangements, non-employee directors receive an annual grant of deferred shares of the Company’s common stock and may elect to receive their quarterly retainer and Committee fees in deferred shares in lieu of cash. In November 2006, the Company granted 59,193 deferred shares as an annual grant to non-employee directors. 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 common shares will be issued at the time the non-employee director no longer provides services to the Board.

     The fair value of each stock option granted under the Plans during the quarter ended December 31, 2006 was estimated on the date of grant using the Black-Scholes option pricing model based on the following weighted average assumptions:

Risk-free interest rate			4.59	%
Expected term (in years)			6.25
Expected volatility			33.01	%
Expected dividend yield			0.00	%

     A summary of NQSO activity under the Plans as of December 31, 2006 and changes during the three and six months ended December 31, 2006 is as follows:

		Number				Weighted Average				Weighted Average
		of Options				Exercise Price Per				Remaining
		(in 000’s)				Share ($)				Contractual Life
Outstanding at June 30, 2006			7,408			$	7.75				7.06
Granted			81				14.05				—
Exercised			(5	)			3.80				—
Forfeited			(255	)			6.42				—
Outstanding at September 30, 2006			7,229				7.87				6.65
Granted			150				15.96				—
Exercised			(623	)			3.86				—
Forfeited			(89	)			9.11				—
Outstanding at December 31, 2006			6,667				8.41				6.86
Exercisable at December 31, 2006			2,516			$	5.07				4.67

     The aggregate intrinsic value as of December 31, 2006 for outstanding and exercisable NQSO awards was $85 million and $40 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. For the six months ended December 31, 2006, the total intrinsic value of stock options exercised was $9 million and proceeds from stock options exercised was $2 million. For the six months ended December 31, 2006, actual tax benefits realized for tax deductions from stock options exercised was $4 million.

     A summary of RSU activity under the Plans as of December 31, 2006 and changes during the three and six months ended December 31, 2006 is as follows:

		Number				Weighted Average
		of RSU’s				Grant Date Fair
		(in 000’s)				Value ($)
Outstanding at June 30, 2006			957			$	12.11
Granted			—				—
Exercised			151				5.54
Forfeited			—				—
Outstanding at September 30, 2006			806				9.65
Granted			—				—
Exercised			(20	)			6.83
Forfeited			(9	)			10.25
Outstanding at December 31, 2006			777				9.85
Exercisable at December 31, 2006			441			$	5.93

     As of December 31, 2006, there was $8 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements (NQSO’s and RSU awards) granted under the Plans. That cost is expected to be recognized over a weighted-average period of 4.3 years. The total fair value of shares vested during six months ended December 31, 2006 was $14 million.

     In August 2006, the Company granted PBRS awards under the 2006 Omnibus Incentive Plan, as long-term incentive compensation to selected executives and other key employees. PBRS awards are based on an individual’s total annual long-term incentive target award. The performance measure of PBRS awards is the Company’s profit before taxes for fiscal year 2007.

     The fair value of the PBRS awards was the closing price of the Company’s common stock on the grant date and assumes that the target performance will be achieved. The number of PBRS awards earned by an employee may be adjusted up or down each reporting period during the performance period, based on the Company’s probable performance over the performance period. At the end of the one-year performance period, the value of the PBRS awards will be adjusted to the actual awards earned based on the performance of the Company. The PBRS awards have a 3 or 4-year vesting requirement from the grant date, depending on the employee.

     A summary of PBRS activity under the 2006 Omnibus Incentive Plan as of December 31, 2006 and changes during the three and six months ended December 31, 2006 is as follows:

		Number				Weighted Average
		of PBRS				Grant Date Fair
		(in 000’s)				Value ($)
Outstanding at June 30, 2006			—			$	—
Granted			706				14.05
Exercised			—				—
Forfeited			(4	)			14.05
Outstanding at September 30, 2006			702				14.05
Granted			—				—
Exercised			—				—
Forfeited			(16	)			14.05
Outstanding at December 31, 2006			686				14.05
Exercisable at December 31, 2006			—			$	—

     As of December 31, 2006, there was $9 million of total unrecognized compensation cost related to PBRS awards granted under the 2006 Omnibus Incentive Plan. That cost is expected to be recognized over a weighted average period of 2.6 years. No performance

shares vested during the six months ended December 31, 2006. Compensation expense recorded during the six months ended December 31, 2006 for performance shares was $1 million.

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”). These acquisitions are summarized as follows:

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2006				2005				2006				2005
Number of restaurant acquisitions			41				28				46				38
Prepaids and other current assets		$	1			$	—			$	1			$	—
Property and equipment, net			5				1				5				2
Goodwill and other intangible assets			6				4				6				6
Assumed liabilities			(4	)			(1	)			(4	)			(1	)
Total purchase price		$	8			$	4			$	8			$	7

     Asset and Business Dispositions

     Gains and losses on asset closures and dispositions represent sales of Company-owned properties related to restaurant closures and sales of Company-owned restaurants to franchisees, or “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 that occurred in previous periods.

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2006				2005				2006				2005
Number of restaurant closures			4				1				8				6
Number of refranchisings			3				—				4				2
Losses (gains) on asset closures and dispositions		$	2			$	(1	)		$	(4	)		$	(1	)

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

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,
		2006				2005				2006				2005
Numerator:
Numerator for basic and diluted earnings per share:
Net income		$	37,782,214			$	26,790,797			$	78,227,071			$	48,586,669
Denominator:
Denominator for basic earnings per share:
Weighted average shares			133,450,444				106,853,404				133,264,354				106,806,402
Effect of dilutive securities:
Restricted stock units			393,883				705,179				395,004				465,720
Performance-based restricted stock			129,385				—				—				—
Non-qualified stock options			2,481,631				5,337,689				2,445,638				5,585,290
Denominator for diluted earnings per share			136,455,343				112,896,272				136,104,996				112,857,412
Basic earnings per share		$	0.28			$	0.25			$	0.59			$	0.45
Diluted earnings per share		$	0.28			$	0.24			$	0.57			$	0.43

     The Company does not include unexercised NQSO’s to purchase shares of the Company’s common stock with exercise prices equal to or greater than the average market price (anti-dilutive stock options) in its computation of diluted earnings per share as those options would result in anti-dilution. There were 800,000 of anti-dilutive stock options outstanding during the three months ended December 31, 2006 and none during the three months ended December 31, 2005. There were 1.2 million and 1 million of anti-dilutive stock options outstanding during the six months ended December 31, 2006 and 2005, respectively.

Note 5. Comprehensive Income

     Comprehensive income is comprised of the following (in millions):

		Three Months Ended December								Six Months Ended December
		31,								31,
		2006				2005				2006				2005
Net income		$	38			$	27			$	78			$	49
Translation adjustment			(7	)			1				(5	)			3
Cash flow hedges:
Net change in fair value of derivatives			—				3				(8	)			5
Amounts reclassified to earnings during the period			(1	)			—				(2	)			—
Minimum pension liability			—				(6	)			—				(6	)
Total other comprehensive (loss) income			(8	)			(2	)			(15	)			2
Total comprehensive income		$	30			$	25			$	63			$	51

Note 6. Other Accrued Liabilities

     Included in other accrued liabilities as of December 31, 2006 and June 30, 2006, were accrued payroll and employee-related benefit costs totaling $84 million and $101 million, respectively, and income taxes payable of $12 million and $96 million, respectively.

Note 7. Long-Term Debt

     As of December 31, 2006, and June 30, 2006, the Company had $896 million and $997 million, respectively, of long-term debt outstanding. During the six months ended December 31, 2006, the Company prepaid $100 million of term debt. As of December 31, 2006, the next scheduled principal payment on the term debt is March 31, 2009. See subsequent events in footnote 15 for pre-payment in January 2007.

Note 8. Derivative Instruments

     Interest rate swaps

     In September 2005, the Company entered into interest rate swap contracts with a notional value of $750 million that qualify as cash flow hedges under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”). These swaps were used to convert the floating interest rate component of a portion of the Company’s LIBOR-based term debt to fixed rates. In September 2006, the Company terminated these hedges, which had a remaining value of $12 million. In accordance with SFAS No. 133, this remaining value is included in accumulated other comprehensive income and is recognized into earnings as a reduction to interest expense over the remaining life of the term debt underlying the hedge. For the three months ended December 31, 2006, $2 million was recognized into earnings as a reduction to interest expense in the accompanying condensed consolidated statement of income.

     In September 2006, the Company entered into interest rate swap contracts with a notional value of $440 million to hedge forecasted LIBOR-based interest payments on its variable rate debt. These swaps mature through September 2011 and qualify as cash flow hedges under SFAS No. 133. The fair value of these interest rate swaps was $1 million as of December 31, 2006 and is recorded within other assets, net in the accompanying condensed consolidated balance sheets. Unrealized gains and losses related to these hedges are expected to be reclassified into earnings in the future and will offset interest expense on the forecasted interest payments. The actual amounts that will be reclassified could vary from the estimated amount as a result of changes in interest rates in the future. For the three months ended December 31, 2006, approximately $1 million was recognized into earnings as a reduction to interest expense in the accompanying condensed consolidated statement of income. No ineffectiveness was recognized during the three and six months ended December 31, 2006 for interest rate swaps designated as cash flow hedges.

     Foreign currency forward contracts

     In September 2006, the Company entered into three-month foreign currency forward contracts which matured in December 2006, to sell Euros with an aggregate contract amount of $344 million, in order to offset the impact from foreign currency fluctuations on certain foreign-denominated intercompany loans. The Company recognized a $16 million gain during the three months ended December 31, 2006 as a result of the foreign currency translation of these foreign denominated intercompany loans. This gain was offset by a corresponding realized loss on the foreign currency forward contracts of $15 million. The net gain of $1 million is attributable to the difference between the spot rate and the forward exchange rate and is recognized in earnings during the three months ended December 31, 2006. For the six months ended December 31, 2006, the Company has recognized a $12 million gain as a result of the foreign currency translation of these foreign denominated intercompany loans, which has been offset by a corresponding realized loss on foreign currency forward contracts of $9 million. The net gain of $3 million is attributable to the difference between the spot rate and the foreign exchange rate and is recognized in earnings during the six months ended December 31, 2006. In December 2006, the Company entered into three-month foreign currency forward contracts, which mature in March 2007, to sell Euros with an aggregate contract amount of $347 million, in order to economically hedge the impact from foreign currency fluctuations on these foreign denominated intercompany loans for this period.

     As of December 31, 2006, a liability in the amount of $12 million related to the foreign currency forward contracts that matured in December 2006, was recorded in other current liabilities in the accompanying condensed consolidated balance sheets.

Note 9. Income Taxes

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

		Three Months Ended December								Six Months Ended December
		31,								31,
		2006				2005				2006				2005
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				1.0				2.6				2.3
Benefit and taxes related to foreign operations			(1.1	)			9.2				(3.0	)			3.5
Foreign exchange differential on tax benefits			(3.6	)			(0.2	)			(2.2	)			(0.2	)
Change in valuation allowance			2.7				(1.2	)			2.7				4.1
Change in accrual for tax uncertainties			(0.3	)			5.7				1.3				3.8
Other			(0.8	)			(0.4	)			(0.3	)			(0.1	)
Effective income tax rate			34.5	%			49.1	%			36.1	%			48.4	%

Note 10. Related Party Transactions

     In connection with the Company’s acquisition of BKC, the Company entered into a management agreement with the Sponsors for monitoring the Company’s business through board of director participation, executive team recruitment, interim senior management services and other services consistent with arrangements with private equity funds (“the management agreement”). Pursuant to the management agreement, the Company was charged a quarterly fee not to exceed 0.5% of the prior quarter’s total revenues. In May 2006, the Company paid $30 million to the Sponsors to terminate the management agreement upon the completion of its initial public offering eliminating management fees subsequent to that date. Prior to the termination of the management agreement, the Company incurred management fees and reimbursable out-of-pocket expenses under the management agreement totaling $3 million and $6 million for the three and six months ended December 31, 2005, respectively. These fees and reimbursable out-of-pocket expenses are recorded within fees paid to affiliates in the consolidated statement of operations.

     The outstanding balance of the payment-in-kind (“PIK”) notes to the private equity funds controlled by the Sponsors included $103 million of PIK interest as of June 30, 2005, and $2 million of accrued interest for the three months ended fiscal year 2006, and was repaid in July 2005. Interest expense on the PIK notes totaled $2 million for the three and six months ended December 31, 2005.

     A member of the Board of Directors of the Company has a direct financial interest in a company with which the Company has entered into a lease agreement for the Company’s new corporate headquarters (see Note 13).

Note 11. Retirement Plan and Other Postretirement Benefits

     A summary of the components of net periodic benefit cost for the Pension Plans (retirement benefits) and Postretirement Plans (other benefits) is presented below (in millions):

		Retirement Benefits
		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2006				2005				2006				2005
Service cost-benefits earned during the period		$	—			$	1			$	1			$	3
Interest costs on projected benefit obligations			3				2				5				5
Expected return on plan assets			(2	)			(2	)			(4	)			(4	)
Curtailment gain			—				(6	)			—				(6	)
Net periodic benefit cost		$	1			$	(5	)		$	2			$	(2	)

     Other benefits costs were $1 million for both three month periods ended December 31, 2006 and 2005. Other benefit costs were $1 million for both six month periods ended December 31, 2006 and 2005.

Note 12. Other Operating Income, Net

     Other operating income, net, consists of the following (in millions):

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2006				2005				2006				2005
Losses (gains) on asset closures and dispositions		$	2			$	(1	)		$	(4	)		$	(1	)
(Recovery) impairment of investments in franchisee debt			—				—				—				(2	)
Other, net			(3	)			(1	)			(4	)			—
Other operating income, net		$	(1	)		$	(2	)		$	(8	)		$	(3	)

     The $1 million of other operating income, net for the three months ended December 31, 2006, includes a gain of $1 million on forward currency contracts, a $1 million gain on asset sales, offset by $2 million of expenses associated with franchise system distress in the United Kingdom. The $2 million of other operating income, net for the three months ended December 31, 2005, includes a gain on asset sales of $1 million and a foreign currency transaction gain of $1 million.

     The $8 million of other operating income, net for the six months ended December 31, 2006, includes a $5 million gain from the sale of the Company’s investment in a joint venture in New Zealand, a gain on forward currency contracts of $3 million, and $2 million of expenses associated with franchise system distress in the United Kingdom. The $3 million of other operation income, net for the six months ended December 31, 2005, includes a recovery of investments in franchisee debt of $2 million and a $1 million gain on asset sales.

Note 13. Commitments and Contingencies

     Franchisee Restructuring Program

     During fiscal 2003, the Company initiated a program designed to provide 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. As part of this program, the Company agreed to provide financial support to certain franchisees.

     In order to assist certain franchisees in making capital improvements to restaurants in need of remodeling, the Company provided commitments to fund capital expenditure loans (“Capex Loans”) and to make capital expenditures related to restaurant properties that the Company leases to franchisees. Capex Loans are typically unsecured, bear interest, and have 10-year terms. During the three and six months ended December 31, 2006, the Company funded $2 million and $3 million in Capex Loans, respectively, and made $1 million of improvements to restaurant properties that the Company leases to franchisees in connection with these commitments. As of December 31, 2006, the Company has commitments remaining to provide future Capex Loans of $8 million and to make up to $10 million of improvements to properties that the Company leases to franchisees extending over a period of up to five years.

     During the three months ended December 31, 2006, temporary reductions in rent (“rent relief”), for certain franchisees that leased restaurant property from the Company were not significant. For the six months ended December 31, 2006, the Company provided approximately $1 million in rent relief. As of December 31, 2006, the Company had remaining commitments to provide future rent relief of up to $7 million extending over a period of up to 17 years.

     Contingent cash flow subsidies represent commitments by the Company to provide future cash grants to certain franchisees for limited periods in the event of failure to achieve their debt service coverage ratio. For the three and six months ended December 31, 2006, contingent cash flow subsidies provided to franchisees were not significant. The maximum contingent cash flow subsidy commitment for future periods as of December 31, 2006 is $5 million extending over a period of up to five 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 was $106 million as of December 31, 2006, expiring over an average period of six years.

     Other commitments arising out of normal business operations were $12 million as of December 31, 2006, of which $8 million were guaranteed under bank guarantee arrangements.

     Letters of Credit

     As of December 31, 2006, the Company had $34 million in irrevocable standby letters of credit outstanding, which were issued primarily to certain insurance carriers to guarantee payment for various insurance programs such as health and commercial liability insurance. As of December 31, 2006, none of these irrevocable standby letters of credit had been drawn upon.

     As of December 31, 2006, the Company had posted bonds totaling $2 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 Company and franchise restaurants with their products and obligating Burger King restaurants in the United States to purchase a specified number of gallons of soft drink syrup. These volume commitments are not subject to any time limit. As of December 31, 2006, the Company estimates that it will take approximately 16 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, 2006 and June 30, 2006, the deferred amounts totaled $21 million and $23 million, respectively. These deferred amounts are amortized as a reduction to food, paper and product costs in the accompanying condensed consolidated statements of income.

     The Company has $5 million in aggregate contractual obligations for the year ending June 30, 2007 with a vendor providing information technology services under three separate arrangements. These contracts extend up to five years with a termination fee ranging from $1 million to $8 million during those years.

     The Company also enters into commitments to purchase advertising for periods up to twelve months. As of December 31, 2006, commitments to purchase advertising totaled $87 million.

     New Global Headquarters

     In May 2005, the Company entered into an agreement to lease a building in Coral Gables, Florida, to serve as the Company’s new global headquarters beginning in fiscal 2009. The estimated annual rent for the 15 year initial term, which is expected to be approximately $8 million per year, will be finalized upon the completion of the building’s construction. Fixed annual rent under the lease will escalate by 6% every other year commencing after the second year and operating costs will escalate based upon the inflation rate. The Company also expects to spend approximately $18 million in tenant improvements, furniture and fixtures, information technology and moving costs. Of this amount, approximately $17 million will be capitalized and amortized over the shorter of the asset’s useful life or the term of the lease.

     Other

     The Company has insurance programs with deductibles ranging between $500,000 to $1 million to cover claims such as workers’ compensation, general liability, automotive liability, executive risk, and property. The Company is self-insured for healthcare claims for eligible participating employees. The Company determines its liability for claims based on actuarial analysis. As of December 31, 2006, the Company had a balance of $37 million in accrued liabilities to cover such claims.

     The Company had claims for certain years which were insured by a third party carrier, which was insolvent at June 30, 2006. During the first quarter of fiscal 2007, the Company entered into a novation agreement whereby the insolvent carrier was replaced by another third party carrier which will take over the administration of pending and potential claims for these years.

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 retail sales at Company-owned restaurants and franchise 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 operating income by geographic segment (in millions):

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2006				2005				2006				2005
Revenues:
United States and Canada		$	362			$	341			$	724			$	682
EMEA/APAC			171				147				330				293
Latin America			26				24				51				45
Total revenues		$	559			$	512			$	1,105			$	1,020

     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 $323 million and $647 million for the three and six months ended December 31, 2006, respectively. Revenues in Germany totaled $79 million and $152 million for the three and six months ended December 31, 2006, respectively. Revenues in the United States totaled $305 million and $611 million for the three and six months ended December 31, 2005. Revenues in Germany totaled $68 and $135 million for the three and six months ended December 31, 2005.

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

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2006				2005				2006				2005
Operating Income:
United States and Canada		$	84			$	74			$	171			$	152
EMEA/APAC			13				21				33				42
Latin America			10				8				18				15
Unallocated			(32	)			(33	)			(65	)			(67	)
Total operating income		$	75			$	70			$	157			$	142
Interest expense, net			17				17				34				34
Loss on early distinguishment of debt			—				—				1				13
Income before income taxes		$	58			$	53			$	122			$	95
Income tax expense			20				26				44				46
Net income		$	38			$	27			$	78			$	49

Note 15. Subsequent Event

     On January 30, 2007, the Company announced a quarterly dividend of 6.25 cents per share. The dividend will be paid on March 15, 2007 to shareholders of record as of the close of business on February 15, 2007.

     On January 30, 2007, the Company prepaid an additional $25 million of term debt, reducing the total outstanding long-term debt balance to $871 million. As a result of this payment, the next scheduled principal payment on the amended facility is in June 2009.

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, 2006, in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 and under Part II, Item 1A “Risk Factors”, “Special Note Regarding Forward-Looking Statements” and elsewhere in this report. Unless the context otherwise requires all references to “we”, “us”, “our” and ”Company” refer to Burger King Holdings, Inc. and its subsidiaries.

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

Overview

     We operate in the fast food hamburger restaurant, or FFHR, category of the quick service restaurant, or QSR, segment of the restaurant industry. We are the second largest FFHR chain in the world as measured by the number of restaurants and system-wide sales. As of December 31, 2006, we owned or franchised a total of 11,184 restaurants in 65 countries and U.S. territories, of which 7,502 were located in the United States and Canada. At that date, 1,290 restaurants were company-owned and 9,894 were owned by our franchisees. The FFHR category is highly competitive with respect to price, service, location and food quality. Our restaurants feature flame-broiled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks and other reasonably-priced food items.

     Our business operates in three reportable segments: (1) the United States and Canada; (2) Europe, the Middle East, Africa and Asia Pacific, or EMEA/APAC; and (3) Latin America. We generate revenues from three sources: (1) sales at our Company restaurants; (2) royalties and franchise fees paid to us by our franchisees; and (3) property income from restaurants that we lease or sublease to franchisees. We track our results of operations and manage our business by using three key business measures which include sales on a system-wide basis: comparable sales growth, average restaurant sales and system-wide sales growth. Although we do not record franchise restaurant sales as revenues, our royalty revenues are calculated based on a percentage of franchise restaurant sales.

Business Highlights

     Our strategic plan (the ”Go Forward 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 Go Forward plan and strong executive team leadership, our accomplishments since September 30, 2006 include:

	•		twelve consecutive quarters of positive system-wide comparable sales growth, our best comparable sales growth in more than a decade, including comparable sales growth of 3.7% for the second quarter of fiscal 2007;
	•		eleven consecutive quarters of positive comparable sales growth in the United States and Canada, including comparable sales growth of 4.4% for the second quarter of fiscal 2007;
	•		all-time high average restaurant sales of $1.16 million for the trailing 12-month period ended December 31, 2006;
	•		continued acceleration of system-wide restaurant growth with 114 new openings and net growth of 40 during the second quarter of fiscal 2007;
	•		entry into two financially attractive international markets – Japan and Indonesia;
	•		continued success of the BKTM Value Menu and innovative promotions such as the Xbox® game collection;
	•		further reduction in debt of $75 million since September 30, 2006 to $872 million as of January 31, 2007; and
	•		announcement on January 30, 2007 of our first quarterly cash dividend as a public company of 6.25 cents per share.

     Our focus continues to be on:

	•		driving further sales growth and profitability;
	•		expanding our large international platform;
	•		accelerating our new restaurant development; and
	•		employing innovative marketing compaigns, creative advertising and strategic sponsorships.

Key Business Measures

     The following key business measures have been provided for the three and six months ended December 31, 2006 by segment. Comparable sales growth and system-wide sales growth 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.

     Comparable Sales Growth

     Comparable sales growth refers to the change in restaurant sales in one period from a comparable period for restaurants that have been open for thirteen months or longer. We believe comparable sales growth is a key indicator of our performance, as influenced by our initiatives and those of our competitors.

		For the								For the
		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2006				2005				2006				2005
		(In constant currencies)								(In constant currencies)
Comparable Sales Growth:
United States and Canada			4.4	%			2.3	%			3.5	%			1.6	%
EMEA/APAC			1.7	%			1.3	%			1.4	%			0.3	%
Latin America			4.1	%			1.6	%			5.1	%			1.6	%
Total			3.7	%			2.0	%			3.0	%			1.3	%

     Our comparable sales growth for the three and six month periods ended December 31, 2006 was driven by our strategic initiatives related to operational excellence, advertising and our continued focus on our BK™ Value Menu. Strong results for the second quarter of fiscal 2007 were fueled by momentum built up during the first quarter, yielding higher comparable sales for the six months ended December 31, 2006. These results are driven mostly by our franchise restaurants as approximately 90% of our system-wide restaurants are franchised.

     Three Months Ended December 31, 2006

     In the United States and Canada, our comparable sales growth performance improved in the second quarter of 2007 fueled by improvements in our operations, the continued impact of our BK™ Value Menu, and innovative promotions such as our Xbox^® game collection.

     Comparable sales growth in EMEA/APAC is improving and reflects positive sales performance in Germany, Spain, The Netherlands and Australia, primarily driven by a focus on premium products in Germany and Spain, offset by poor sales performance in the United Kingdom where changes in consumer preferences away from the FFHR category have adversely affected our sales. Although comparable sales in the United Kingdom remain weaker than other countries in Europe, they have begun to improve during the second quarter of fiscal 2007 reflecting our efforts to reignite the brand in that market. See Part II, Item 1A “Risk Factors” for a discussion regarding our UK business.

     Latin America demonstrated strong results for the quarter and continues to grow. These strong results were fueled primarily by the Central America region with promotions such as the BK™ Stacker and the Texas DOUBLE WHOPPER^®, South America with the “Whoppermania” promotion, and the Caribbean with a cross promotion with Coca-Cola and the advertisement of XL sandwiches.

     Six Months Ended December 31, 2006

     In the United States and Canada, our comparable sales growth performance improved for the six months ended December 31, 2006 compared to the same period in the prior year driven by improvements in our operations and our menu, such as the introduction of the BK™ Stacker, the continued impact of the BK™ Value Menu and innovative promotions such as the Xbox^® game collection.

     Comparable sales growth in EMEA/APAC reflects positive sales performance in most countries in that segment for the six months ended December 31, 2006 except the United Kingdom, which we believe has begun to improve as a result of our strategic investment in that country, as reflected in the second quarter results of fiscal 2007.

     Latin America demonstrated strong results in comparable sales for the six months ended December 31, 2006 compared to the same period in the prior year as this segment continues to grow. These strong results were fueled by the Central America region with promotions such as the BK™ Stacker, the Texas DOUBLE WHOPPER^®, and the 15^th year WHOPPER^® anniversary, South America with the “Whoppermania” promotion, and the Caribbean with a cross promotion with Coca Cola and the advertisement of XL sandwiches.

     Average Restaurant Sales

     Average restaurant sales, or ARS, is an important measure of the financial performance of our restaurants and changes in the overall direction and trends of sales. ARS is influenced mostly by comparable sales performance and restaurant openings and closures and includes the impact of movement in foreign currency exchange rates. For the three and six months ended December 31, 2006, ARS was $297,000 and $597,000, respectively, compared to $279,000 and $549,000 for the three and six months ended December 31, 2005, respectively. The trailing 12-month ARS reached a record high of $1.16 million for the period ended December 31, 2006, as compared to $1.12 million for the trailing 12 months year-over-year, an increase of 4%. As of December 31, 2006 the last 50 free-standing restaurants that opened in the United States and have operated for at least 12 months generated ARS of $1.51 million, which is approximately 30% higher than the current U.S. system average.

     Our ARS improvement during the first half of fiscal 2007 was primarily due to improved comparable sales, the opening of new restaurants with higher than average sales volumes and the closure of under-performing restaurants. Our comparable sales were 3.7% and 3.0% for the three and six month periods ended December 31, 2006, respectively, driven primarily by our strategic initiatives related to operational excellence, advertising, and our menu, such as our BK^TM Value Menu and BK^TM Stackers, and promotional campaigns, such as our innovative Xbox^® game collection. We and our franchisees opened 375 new restaurants between January 1, 2006 and December 31, 2006. The ARS of these new restaurants was higher than our system-wide ARS. Additionally, we and our franchisees closed 332 restaurants during the same period. Over 90% of these closures were franchise restaurants in the United States and Canada which had ARS in the 12 months prior to closure that was significantly lower than system-wide ARS. We believe that continued improvements to ARS of existing restaurants and strong sales at new restaurants, combined with the closures of under-performing restaurants, will result in financially stronger operators throughout our franchise base.

     System-Wide Sales Growth

     System-wide sales refer to sales at all Company-owned and franchise restaurants. System-wide sales and system-wide sales growth are important indicators of the overall direction and trends of sales and operating income on a system-wide basis and the effectiveness of our advertising and marketing initiatives.

		For the								For the
		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2006				2005				2006				2005
		(In constant currencies)								(In constant currencies)
System-Wide Sales Growth:
United States and Canada			3.7	%			(0.2	)%			2.6	%			(0.6	)%
EMEA/APAC			5.1	%			6.7	%			5.3	%			6.5	%
Latin America			14.2	%			12.5	%			14.8	%			12.9	%
Total			4.7	%			2.3	%			4.0	%			1.8	%

     System-wide sales growth continued a growth trend during the three and six month periods ended December 31, 2006, while comparable sales and the number of restaurants continued to increase on a system-wide 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 system-wide sales growth in the United States and Canada increased during the three and six month periods ended December 31, 2006, primarily as a result of positive comparable sales growth and an increase in the amount of revenues earned by new restaurants, partially offset by a net reduction in restaurants. We had 7,502 restaurants in the United States and Canada as of December 31, 2006, compared to 7,634 restaurants as of December 31, 2005.

     EMEA/APAC demonstrated strong system-wide sales growth during the three and six month periods ended December 31, 2006 reflecting openings of new restaurants and positive comparable sales in several markets, including Germany, Spain, and smaller markets in the Mediterranean and the Middle East. Partially offsetting this growth was the United Kingdom, where changes in consumer preferences away from the FFHR category have adversely affected our sales. See Part II, Item 1A “Risk Factors” for a discussion about our UK business.

     Latin America’s system-wide sales growth was driven by new restaurant openings and strong comparable sales in the three and six month periods ended December 31, 2006.

Other Operating Data

		As of
		December 31,
		2006				2005
Restaurant Count Data:
Number of Company restaurants:
United States and Canada			888				876
EMEA/APAC(1)			331				289
Latin America(2)			71				63
Total Company restaurants			1,290				1,228
Number of franchise restaurants:
United States and Canada			6,614				6,758
EMEA/APAC(1)			2,492				2,449
Latin America(2)			788				706
Total franchise restaurants			9,894				9,913
Total system-wide restaurants			11,184				11,141

		For the Three Months Ended								For the Six Months Ended
		December 31,								December 31,
		2006				2005				2006				2005
Other System-Wide Operating Data:
Comparable sales growth(3)(4)			3.7	%			2.0	%			3.0	%			1.3	%
System-wide sales growth(3)			4.7	%			2.3	%			4.0	%			1.8	%
Average restaurant sales (in millions)(3)		$	297			$	279			$	597			$	549
Segment Data:
Operating income (in millions):
United States and Canada		$	84			$	74			$	171			$	152
EMEA/APAC(1)			13				21				33				42
Latin America(2)			10				8				18				15
Unallocated(5)			(32	)			(33	)			(65	)			(67	)
Total operating income		$	75			$	70			$	157			$	142
Company Restaurant Revenues (in millions):
United States and Canada		$	270			$	254			$	541			$	507
EMEA/APAC(1)			131				110				250				219
Latin America(2)			16				15				31				28
Total Company restaurant revenues		$	417			$	379			$	822			$	754
Company Restaurant Margin:
United States and Canada			15.3	%			14.1	%			15.0	%			14.1	%
EMEA/APAC(1)			15.7	%			15.9	%			15.5	%			15.6	%
Latin America(2)			28.8	%			28.8	%			26.9	%			26.7	%
Total Company restaurant margin			15.9	%			15.2	%			15.6	%			15.0	%
Franchise Revenues (in millions):
United States and Canada		$	70			$	66			$	140			$	133
EMEA/APAC(1)			32				29				65				59
Latin America(2)			10				9				20				17
Total franchise revenues		$	112			$	104			$	225			$	209
Franchise sales (in millions)(6)		$	2,876			$	2,709			$	5,790			$	5,508
EBITDA (in millions)(7)		$	96			$	91			$	200			$	184

     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,
		2006				2005				2006				2005
						(In millions)
Net income		$	38			$	27			$	78			$	49
Interest expense, net			17				17				34				34
Loss on early extinguishment of debt			—				—				1				13
Income tax expense			20				26				44				46
Income from operations		$	75			$	70			$	157			$	142
Depreciation and amortization			21				21				43				42
EBITDA		$	96			$	91			$	200			$	184

     Net Income

     Our net income increased $11 million to $38 million in the second quarter of fiscal 2007, compared to the same quarter in fiscal 2006 primarily as a result of the following:

	•		an $8 million increase in Company restaurant margins;
	•		an $8 million increase in franchise revenues;
	•		a $6 million decrease in income tax expense;
	•		offset by a $13 million increase in selling, general and administrative expenses.

     Our net income increased $29 million to $78 million during the six months ended December 31, 2006, compared to the same period in fiscal 2006 primarily as a result of the following:

	•		a $14 million increase in Company restaurant margins;
	•		a $16 million increase in franchise revenues;
	•		a benefit of $12 million primarily due to a pre-tax loss on early extinguishment of debt of $13 million recorded during the first six months of the prior year;
	•		a $5 million pre-tax gain from the sale of our investment in a New Zealand joint venture;
	•		a $2 million decrease in income tax expense;
	•		offset by a $24 million increase in selling, general and administrative expenses.

Results of Operations for the Three Months Ended December 31, 2006

     The following table presents our results of operations for the three months ended December 31, 2006 and 2005:

		For the Three Months Ended December 31,
		2006				2005				Increase/
		Amount				Amount				(Decrease)
		(In millions, except percentages and per share data)
Revenues:
Company restaurant revenues		$	417			$	379				10	%
Franchise revenues			112				104				8	%
Property revenues			30				29				3	%
Total revenues			559				512				9	%
Company restaurant expenses			351				321				9	%
Selling, general and administrative expenses			119				106				12	%
Property expenses			15				14				7	%
Fees paid to affiliates			—				3				(100	)%
Other operating income, net			(1	)			(2	)			(50	)%
Total operating costs and expenses			484				442				10	%
Income from operations			75				70				7	%
Interest expense, net			17				17				—
Income before income taxes			58				53				10	%
Income tax expense			20				26				(23	)%
Net income		$	38			$	27				41	%
Earnings per share — diluted		$	0.28			$	0.24				17	%
Weighted average shares — diluted			136.5				112.9

     Revenues

     Company restaurant revenues

     Company restaurant revenues increased by 10% to $417 million during the three months ended December 31, 2006, primarily as a result of an increase in net restaurants and an increase in comparable sales of 2.7%. During the period January 1, 2006 through December 31, 2006, we added 62 restaurants (net of closures and refranchisings). Approximately $11 million of the increase in revenues was generated by the favorable impact from the movement of foreign currency exchange rates in EMEA/APAC.

     In the United States and Canada, Company restaurant revenues increased by 6% to $270 million during the three months ended December 31, 2006, primarily as a result of positive comparable sales of 3.6% and the addition of 12 Company restaurants (net of closures and refranchisings) during the period from January 1, 2006 through December 31, 2006.

     In EMEA/APAC, Company restaurant revenues increased by 19% to $131 million during the three months ended December 31, 2006, primarily as a result of the addition of 42 restaurants (net of closures and refranchisings) during the period January 1, 2006 through December 31, 2006. We acquired 32 of these restaurants from a financially distressed franchisee in the United Kingdom during the three months ended December 31, 2006. Overall comparable sales of 1.2% reflect positive comparable sales in Germany, Spain, and The Netherlands, offset by negative comparable sales in the United Kingdom. The increase in revenues also reflects approximately $11 million due to the favorable impact in the movement of foreign currency exchange rates in EMEA.

     In Latin America, Company restaurant revenues increased by 7% to $16 million during the three months ended December 31, 2006, primarily as a result of eight additional restaurants (net of closures and refranchisings) during the period January 1, 2006 through December 31, 2006.

     Franchise revenues

     Franchise revenues increased by 8% to $112 million during the three months ended December 31, 2006, driven by positive comparable sales of 3.8% during the quarter and $2 million favorable impact in the movement of foreign currency exchange rates. These increases were partially offset by a net reduction of 19 in the number of franchise restaurants during the period January 1, 2006 through December 31, 2006, primarily in the United States and Canada.

     In Latin America, where labor costs are generally lower than in the United States and Canada and EMEA/APAC segments, payroll and employee benefits costs increased by 6% during the three months ended December 31, 2006, primarily as a result of the opening of eight new Company restaurants (net of closures) during the period January 1, 2006 through December 31, 2006. These costs decreased by 0.7% to 10.9% as a percentage of Company restaurant revenues due to labor efficiencies.

     Occupancy and other operating costs

     Occupancy and other operating costs increased by 11% to $103 million during the three months ended December 31, 2006, compared to the same period in the prior year. This increase is primarily attributable to the addition of 62 restaurants (net of closures) during the period January 1, 2006 through December 31, 2006 and the unfavorable impact of foreign currency exchange rates. Occupancy and other operating costs were 24.7% of Company restaurant revenues during the three months ended December 31, 2006 compared to 24.6% during the three months ended December 31, 2005.

     In the United States and Canada, occupancy and other operating costs increased by 3% during the three months ended December 31, 2006, compared to the same period in the prior year, driven by 12 additional restaurants (net of closures) during the period January 1, 2006 through December 31, 2006, and an increase in utility costs. These costs decreased as a percentage of Company restaurant revenues by 0.9% to 23.2% as a result of a reduction in casualty and hurricane-related losses.

     In EMEA/APAC, occupancy and other operating costs increased by 27% during the three months ended December 31, 2006, compared to the same period in the prior year primarily due to the addition of 42 Company restaurants (net of closures) during the period January 1, 2006 through December 31, 2006, and the unfavorable impact of foreign currency exchange rates. As a percentage of Company restaurant revenues, occupancy and other operating costs increased to 27.6% compared to 25.8% during the three months ended December 31, 2005. The increase in these costs as a percentage of Company restaurant revenues reflects an acceleration of depreciation and disposal of equipment on certain restaurant closures.

     In Latin America, occupancy and other operating costs increased by 15% during the three months ended December 31, 2006, compared to the same period in the prior year primarily attributable to the addition of eight new Company restaurants during the period January 1, 2006 through December 31, 2006. As a percentage of Company restaurant revenues, occupancy and other operating costs increased to 24.4% compared to 22.6% during the three months ended December 31, 2005, primarily as a result of an increase in utility costs and rent.

     Selling, general and administrative expenses

     Selling, general and administrative expenses increased by $13 million to $119 million for the three months ended December 31, 2006 compared to the same period in the prior year. This increase was primarily driven by an increase in sales promotions and advertising expense of $7 million in the United Kingdom, $2 million of additional corporate salaries and fringe benefits, and negative impact of approximately $3 million from the movement in foreign currency exchange rates. Contributions made to the marketing fund by Company restaurants are recorded as sales promotions and advertising expense and are generally in proportion to Company restaurant revenues. The $7 million increase in the sales promotions and advertising expense during the quarter was driven by an incremental contribution made by the Company to the marketing fund in the United Kingdom. These contributions are being used to improve brand recognition and to introduce new premium products with commercials such as the “Manthem”, and “Have it Your Way Promise”, and promotions for the £1.99 Whopper^® sandwich and Aberdeen Angus burger.

     Other operating income, net

     Other operating income, net for the three months ended December 31, 2006, was $1 million compared to $2 million during the same period in the prior year. The decrease was primarily driven by an additional charge of $2 million associated with franchise system distress in the United Kingdom, offset by an increase in gains on the sale of assets of $1 million.

     Income From Operations

     Income from operations increased by $5 million to $75 million during the three months ended December 31, 2006, primarily as a result of improved restaurant sales and margins, offset by an increase in selling, general and administrative expenses. See Note 14 to our unaudited condensed consolidated financial statements contained in this report for operating income by segment. The favorable impact that the movement in foreign currency exchange rates had on revenues was offset by the unfavorable impact on operating costs and expenses resulting in minimal overall impact on income from operations.

     In the United States and Canada, income from operations increased by $10 million to $84 million during the three months ended December 31, 2006, primarily as a result of an increase in Company restaurant margins of $5 million, driven by positive comparable sales, a reduction in food costs and an increase in the number of Company restaurants, plus an increase in franchise revenues of $4 million reflecting an increase in comparable sales for franchise restaurants.

     Income from operations in EMEA/APAC decreased by $8 million to $13 million during the three months ended December 31, 2006, driven primarily by an increase in Company restaurant margins of $3 million, and an increase in franchise revenues of $3 million, offset by an increase of $13 million in selling, general and administrative expenses.

     There was no significant change in operating income in Latin America during the three months ended December 31, 2006 compared to the same period in the prior year.

     Income Tax Expense

     Income tax expense decreased by $6 million during the three months ended December 31, 2006, compared to the same period in the prior year. Our effective tax rate decreased by 14.6 percentage points to 34.5%, primarily as a result of tax benefits realized from an operational realignment of our European and Asian businesses, which became effective July 1, 2006. In addition, we received additional benefits during the three months ended December 31, 2006 from the closure of a state tax audit and from foreign currency translation on foreign denominated deferred tax assets.

     See Note 9 to our unaudited condensed consolidated financial statements for further information regarding our effective tax rate.

Results of Operations for the Six Months Ended December 31, 2006

     The following table presents our results of operations for the six months ended December 31, 2006 and 2005:

		For the Six Months Ended December 31,
		2006				2005				Increase/
		Amount				Amount				(Decrease)
		(In millions, except percentages and per share data)
Revenues:
Company restaurant revenues		$	822			$	754				9	%
Franchise revenues			225				209				8	%
Property revenues			58				57				2	%
Total revenues		$	1,105			$	1,020				8	%
Company restaurant expenses			694				640				8	%
Selling, general and administrative expenses			231				207				12	%
Property expenses			31				28				11	%
Fees paid to affiliates			—				6				(100	)%
Other operating income, net			(8	)			(3	)			167	%
Total operating costs and expenses		$	948			$	878				8	%
Income from operations			157				142				11	%
Interest expense, net			34				34				—	%
Loss on early extinguishment of debt			1				13				(92	)%
Income before income taxes		$	122			$	95				28	%
Income tax expense			44				46				(4	)%
Net income		$	78			$	49				59	%
Earnings per share — diluted		$	0.57			$	0.43				33	%
Weighted average shares — diluted			136.1				112.9