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Article by DailyStocks_admin    (01-03-08 04:51 AM)

The Daily Magic Formula Stock for 01/02/2008 is AFC Enterprises Inc. According to the Magic Formula Investing Web Site, the ebit yield is 11% and the EBIT ROIC is > 100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW
AFC Enterprises, Inc. (“AFC” or “the Company”) develops, operates, and franchises quick-service restaurants (“QSRs” or “restaurants”) under the trade name Popeyes ® Chicken & Biscuits (“Popeyes”). Within Popeyes, we manage two business segments: franchise operations and company-operated restaurants. Financial information concerning these business segments can be found at Note 24 to our Consolidated Financial Statements.

In recent years, we have narrowed our business model from a multi-brand operator to focus only on the Popeyes brand. Following the sale of Church’s Chicken ® (“Church’s”) in December of 2004 (which is more fully described in Note 22 to our Consolidated Financial Statements), we renegotiated our material outsourcing contracts, closed our AFC corporate offices, reduced our AFC corporate staffing, and integrated the remaining AFC corporate staff and services into Popeyes’ business operations (which is more fully described in Note 23 to our Consolidated Financial Statements). These transitional activities were completed during 2005 and the first half of 2006.

Popeyes Profile

Popeyes was founded in New Orleans, Louisiana in 1972 and has grown to be the world’s second largest quick-service chicken concept based on the number of units. Within the QSR industry, Popeyes distinguishes itself with a unique “New Orleans” style menu that features spicy chicken, chicken sandwiches, chicken strips, fried shrimp and other seafood, jambalaya, red beans and rice and other regional items. Popeyes is a highly differentiated QSR brand with a passion for its New Orleans heritage and flavorful authentic food.

As of December 31, 2006, we operated and franchised 1,878 Popeyes restaurants in 44 states, the District of Columbia, Puerto Rico, Guam and 24 foreign countries. The map below shows the concentration of our domestic restaurants, by state.
Of our 1,503 domestic franchised restaurants, approximately 70% were concentrated in Texas, California, Louisiana, Florida, Illinois, Maryland, New York, Mississippi, Georgia and Virginia. Of our 319 international franchised restaurants, approximately 67% were located in Korea, Indonesia, Canada and Mexico. Of our 56 company-operated restaurants, more than 90% were concentrated in Georgia, Louisiana and Tennessee.

Overall Business Strategy

United States restaurant industry sales exceeded $500 billion in 2006, of which sales from Popeyes restaurants represent a small fraction. Given the size of the domestic QSR industry, and Popeyes’ broad appeal, we believe Popeyes’ 1,559 restaurant domestic system has the potential to at least double in size without reaching saturation in
our markets. The success of Popeyes outside the United States indicates that the Popeyes international system can expand substantially as well, perhaps outpacing restaurant growth domestically in future years.

Because of Popeyes’ distinctive menu and our opportunities to further penetrate existing and new markets, the Company’s business strategy centers on increasing the number of restaurants in the global Popeyes’ system. Popeyes is heavily franchised (97% of all Popeyes’ restaurants are operated by our franchisees). We favor this business model because it facilitates the simultaneous growth of the system in multiple markets and provides our investors with an attractive return on invested capital from a dependable and diversified royalty stream.

In order to accomplish Popeyes’ growth objectives, the Company is focused on improving the unit economics of the Popeyes system restaurants with business initiatives tailored to enhance the experience of Popeyes’ guests and to promote new restaurant development.

These initiatives are as follows:


• Menu Development. New product introductions and “limited time offers” promotional items play a major role in building sales and encouraging repeat customers. We constantly review our menu to find the optimal mix of products and promotions which address changing consumer preferences and which build on an integrated day-part strategy to increase transactions in our restaurants. Our menu strategies will not only continue to focus on growing our bone-in chicken market share, but will also focus on boneless chicken products and seafood. During 2007, we also expect to combine new product concepts with tested value offerings to provide quality and value to our guests.

During 2007, we plan to strengthen our focus on value offering tests, as we believe that will broaden our appeal in a variety of markets.


• Creative Brand Marketing and Advertising. Our consumer messaging continues to emphasize our distinctive products, flavors and New Orleans heritage. Our media spending typically focuses on television, radio and print options (print advertisement, signage, and point of purchase materials) at the local market and restaurant level. We continually review our advertising strategies and mediums to maximize the effectiveness of the marketing funds generated from our Popeyes system and to offset the increasing cost of media spending. While we have not traditionally used national media, we began a test of national cable advertising in 2006 and continue to consider alternative mediums to supplement our typical spending strategies.

• Customer Service Focus. We will sharpen our focus on the customer to improve both customer satisfaction and the consistency of the experience within our restaurants. Our operational efforts include speed of service initiatives, enhanced field-based training, training certification programs, and continued development and execution of restaurant management testing programs. In addition, we continue our focus on raising service standards throughout our organization and our franchise system.

We believe that the cleanliness, freshness and appearance of our restaurants are critical components of our customers’ overall dining experience and will affect their desire to return. As of December 31, 2006, approximately 76% of our system-wide restaurants have been updated in our Heritage image. We believe our distinctive New Orleans inspired Heritage design adds to our customers’ dining experience and improves the appeal of our restaurants.


• Operations Management. Together with our franchisees we are coordinating the implementation of new restaurant reporting technology which will provide improved information from Popeyes restaurants. We will use this data to help Popeyes’ restaurant managers improve restaurant performance by providing enhanced information regarding labor and food costs in addition to sales data. Additionally, we will continue to reinforce our ongoing effort to improve operations by hosting our second annual franchisee operations conference in the spring of 2007. We use this forum to provide training, re-enforce standards and share best practices among the attendees.

• Store Investment. We stress our continued attention to controlling the costs associated with the construction of new Popeyes restaurants. We evaluate new construction materials, assist franchisees by recommending proven contractors, and test new equipment for use in the restaurants. Additionally, we design restaurants for new construction and conversion of existing buildings, which allows us to tailor a Popeyes restaurant design for virtually any site that provides our franchisees an attractive market.


• New Restaurant Development and Growth. We believe each of the preceding initiatives serve to improve restaurant unit economics as they are designed to minimize initial construction costs, increase the visit frequency of our current customers, and to give new customers reasons to try our restaurants. Improving restaurant profitability and return stimulates new restaurant development by the existing Popeyes franchisee community as well as new franchisees. Our restaurant development strategy promotes restaurant openings in both new and existing markets. Popeyes offers an array of facilities which provide franchisees with flexibility to appropriately tailor new restaurants for the markets they serve.

To further stimulate growth during 2006, we offered financial incentives to franchisees to accelerate new restaurant openings through temporary reductions in franchise fees and royalties. By accelerating the timing of restaurant openings and through stimulating incremental openings, we expect to expedite revenue growth. Our franchisees opened 29 new restaurants during 2006 under this incentive program, and we expect continued acceleration of openings under this program during 2007.

Key to Popeyes continued restaurant growth is the cultivation of a rich pipeline of qualified franchisee candidates, composed of both existing franchisees and new franchisees. During 2007, we will accelerate recruitment of new, qualified franchisees. In addition, we continue to develop existing strategic markets by assisting our current franchise operators in their efforts to identify and secure attractive new restaurant sites.

Internationally, we anticipate substantial growth in new restaurants in Canada, Mexico, Latin America and the Middle East. Our intention in international markets is to enter into area franchise development agreements with franchise operators who already have multi-unit restaurant operating experience, preferably with international QSR brands. We will target franchisees who have the ambition, experience and infrastructure to effectively secure good restaurant sites and execute the Popeyes brand in their countries. Our international leadership and field support team members comprise a cross-functional group responsible for developing prospective franchisees, tailoring the Popeyes menu and operational methods to the consumers in each respective country and coordinating significant ongoing franchisee support.


To further stimulate growth during 2006, we offered financial incentives to franchisees to accelerate new restaurant openings through temporary reductions in franchise fees and royalties. By accelerating the timing of restaurant openings and through stimulating incremental openings, we expect to expedite revenue growth. Our franchisees opened 29 new restaurants during 2006 under this incentive program, and we expect continued acceleration of openings under this program during 2007.

Key to Popeyes continued restaurant growth is the cultivation of a rich pipeline of qualified franchisee candidates, composed of both existing franchisees and new franchisees. During 2007, we will accelerate recruitment of new, qualified franchisees. In addition, we continue to develop existing strategic markets by assisting our current franchise operators in their efforts to identify and secure attractive new restaurant sites.

Internationally, we anticipate substantial growth in new restaurants in Canada, Mexico, Latin America and the Middle East. Our intention in international markets is to enter into area franchise development agreements with franchise operators who already have multi-unit restaurant operating experience, preferably with international QSR brands. We will target franchisees who have the ambition, experience and infrastructure to effectively secure good restaurant sites and execute the Popeyes brand in their countries. Our international leadership and field support team members comprise a cross-functional group responsible for developing prospective franchisees, tailoring the Popeyes menu and operational methods to the consumers in each respective country and coordinating significant ongoing franchisee support.

During 2006, our initiatives allowed us to achieve growth in same-store sales and new restaurant openings. As a result, cash generated from our Popeyes operations has been used for the benefit of our investors (1) to repurchase shares of our outstanding common stock, (2) to reduce the portion of our long-term debt that is subject to a floating interest rate which trended upward during the year, (3) to reinvest in the Popeyes brand through the construction of new restaurants in company-controlled markets, and (4) to acquire existing Popeyes restaurants to provide additional company-operated test markets for our new menu items and promotional concepts to, in turn, help strategically fuel the overall growth of the Popeyes’ system.

As it concerns the expected financial and operating impacts of these strategies during 2007, see the discussion under the heading “Operating and Financial Outlook for 2007” at Item 7 of this Annual Report.

The following features of the Company are material to the execution of our initiatives and business strategies discussed above:

Our Agreements with Popeyes Franchisees

As discussed above, our strategy places a heavy emphasis on increasing the number of restaurants in the Popeyes system through franchising activities. The following discussion describes the standard arrangements we enter into with our Popeyes franchisees.

Domestic Development Agreements. Our domestic franchise development agreements provide for the development of a specified number of Popeyes restaurants within a defined geographic territory. Generally, these agreements call for the development of the restaurants over a specified period of time, usually three to five years, with targeted opening dates for each restaurant. Our Popeyes franchisees currently pay a development fee of $7,500 per restaurant. These development fees typically are paid when the agreement is executed, and are typically non-refundable.

International Development Agreements. Our international franchise development agreements are similar to our domestic franchise development agreements, though the development time frames can be longer and the development fees generally can be as much as $15,000 for each restaurant developed. Depending on the market, limited sub-franchising rights may also be granted.

Domestic Franchise Agreements. Once we execute a development agreement, approve a site to be developed under that agreement, and our franchisee secures the real property for a restaurant, we enter into a franchise agreement with our franchisee that conveys the right to operate the specific Popeyes restaurant at the site. Our current franchise agreements generally provide for payment of a franchise fee of $30,000 per location.

These agreements generally require franchisees to pay a 5% royalty on net restaurant sales. In addition, franchisees must contribute to national and local advertising funds. Payments to the advertising funds are generally 3% of net restaurant sales. Some of our institutional and older franchise agreements provide for lower royalties and advertising fund contributions. These agreements constitute a decreasing percentage of our total outstanding franchise agreements.

International Franchise Agreements. The terms of our international franchise agreements are substantially similar to those included in our domestic franchise agreements, except that these agreements may be modified to reflect the multi-national nature of the transaction and to comply with the requirements of applicable local laws. Our current international franchise agreements generally provide for payment of a franchise fee of up to $30,000 per location. In addition, the effective royalty rates may differ from those included in domestic franchise agreements, and generally are lower due to the greater number of restaurants required to be developed by our international franchisees.

All of our franchise agreements require that our franchisees operate restaurants in accordance with our defined operating procedures, adhere to the menu established by us, and meet applicable quality, service, health and cleanliness standards. We may terminate the franchise rights of any franchisee who does not comply with these standards and requirements.

Site Selection

For new domestic restaurants, we assist our franchisees in identifying and obtaining favorable sites consistent with the overall market plan for each development area. Domestically, we primarily emphasize freestanding sites and “end-cap, in-line” strip-mall sites with ample parking and easy access from high traffic roads.

Each international market has its own factors that lead to venue and site determination. In international markets, we use different venues including freestanding, in-line, food-court and other non-traditional venues. Market development strategies are a collaborative process between Popeyes and our franchisees so we can leverage local market knowledge.

Suppliers and Purchasing Cooperative

Suppliers. Our franchisees are required to purchase all ingredients, products, materials, supplies and other items necessary in the operation of their businesses solely from suppliers who have been approved by us. These suppliers are required to meet or exceed strict quality control standards, and they must possess adequate capacity to supply our franchisees’ reliably.

Purchasing Cooperative. Supplies are generally provided to our domestic franchised and company-operated restaurants pursuant to supply agreements negotiated by Supply Management Services, Inc. (“SMS”), a not-for-profit purchasing cooperative. We, our Popeyes franchisees and the owners of Cinnabon bakeries hold membership interests in SMS in proportion to the number of restaurants owned. As of December 31, 2006, we held one of SMS’s seven seats on the SMS board of directors. Our Popeyes franchise agreements require that each franchisee join SMS.

Supply Agreements. The principal raw material for a Popeyes restaurant operation is fresh chicken. Company-operated and franchised restaurants purchase their chicken from suppliers who service the Popeyes system. In order to ensure favorable pricing and to secure an adequate supply of fresh chicken, SMS has entered into supply agreements with several chicken suppliers. These contracts, which pertain to the vast majority of our system-wide purchases, are “cost-plus” contracts with prices based partially upon the cost of feed grains plus certain agreed upon non-feed and processing costs. These contracts include volume purchase commitments that are adjustable at the election of SMS. Each year, purchase commitments may be adjusted by up to 10%, if notice is given within specified time frames; and the commitment levels for future years may be adjusted based on revised estimates of need. The Company has agreed to indemnify SMS for certain shortfalls in the annual purchase commitments entered into by SMS on behalf of the Popeyes restaurant system. To date, that indemnity has never been called due to the demand for poultry and the chicken suppliers’ ability to mitigate shortfalls, if any. Information about this guarantee can be found in Item 7 of this Annual Report under the caption “Off-Balance Sheet Arrangements.”

We have entered into long-term beverage supply arrangements with certain major beverage vendors. These contracts are customary in the QSR industry. Pursuant to the terms of these arrangements, marketing rebates are provided to the owner/operator of Popeyes restaurants based upon the volume of beverage purchases.

We also have a long-term agreement with Diversified Foods and Seasonings, Inc. (“Diversified”), under which we have designated Diversified as the supplier of certain proprietary products for the Popeyes system. Diversified sells these products to our approved distributors, who in turn sell them to our franchised and company-operated Popeyes restaurants.

Marketing and Advertising

We contribute on behalf of our company-operated restaurants, together with our Popeyes franchisees who contribute on behalf of their franchised restaurants, to an advertising fund that supports (1) branding initiatives and the development of marketing materials that are used throughout our domestic restaurant system and (2) local marketing programs. We act as agent for the fund and coordinate its activities. We work closely with franchisees on local marketing programs, which are the principal uses of collected funds. We and our Popeyes franchisees made contributions to the advertising fund of approximately $57.7 million in 2006, $56.3 million in 2005, and $53.7 million in 2004.

Fiscal Year and Seasonality

Our fiscal year is composed of 13 four-week accounting periods and ends on the last Sunday in December. The first quarter of our fiscal year has four periods, or 16 weeks. All other quarters have three periods, or 12 weeks. Fiscal 2006, which ended on December 31, 2006, included 53 weeks (including one five-week accounting period in our fiscal fourth quarter); fiscal 2005 and fiscal 2004 included 52 weeks.

Seasonality has little effect on our operations.

Employees

As of December 31, 2006, we had 1,532 hourly employees working in our company-operated restaurants. Additionally, we had 82 employees involved in the management of our company-operated restaurants, composed of multi-unit managers and field management employees. We also had 137 employees responsible for corporate administration, franchise administration and business development.

None of our employees are covered by a collective bargaining agreement. We believe that the dedication of our employees is critical to our success and that our relationship with our employees is good.

Intellectual Property and Other Proprietary Rights

We own a number of trademarks and service marks that have been registered with the U.S. Patent and Trademark Office, including the marks “AFC,” “AFC Enterprises,” “Popeyes,” “Popeyes Chicken & Biscuits,” and the brand logo for Popeyes. In addition, we have registered, or made application to register, one or more of these marks and others, or their linguistic equivalents, in foreign countries in which we do business, or are contemplating doing business. There is no assurance that we will be able to obtain the registration for the marks in every country where registration has been sought. We consider our intellectual property rights to be important to our business and we actively defend and enforce them.


Copeland Formula Agreement. We have a formula licensing agreement with Alvin C. Copeland, the founder of Popeyes. Under this agreement, we have the worldwide exclusive rights to the Popeyes fried chicken recipe and certain other ingredients used in Popeyes products. The agreement provides that we pay Mr. Copeland approximately $3.1 million annually through March 2029.

King Features Agreements. We have several agreements with the King Features Syndicate Division (“King Features”) of Hearst Holdings, Inc. under which we have the non-exclusive license to use the image and likeness of the cartoon character “Popeye” in the United States. Popeyes locations outside the United States have the non-exclusive use of the image and likeness of the cartoon character “Popeye” and certain companion characters. We are obligated to pay King Features a royalty of approximately $1.0 million annually, as adjusted for fluctuations in the Consumer Price Index, plus twenty percent of our gross revenues from the sale of products outside of the Popeyes restaurant system, if any. These agreements extend through June 30, 2010.

International Operations

We continue to expand our international operations through franchising. As of December 31, 2006, we franchised 319 international restaurants. During 2006, franchise revenues from these operations represented approximately 8.8% of our total franchise revenues. For each of 2006, 2005 and 2004, international revenues represented 4.7%, 4.5%, and 4.0% of total revenues, respectively.

Insurance

We carry property, general liability, business interruption, crime, directors and officers liability, employment practices liability, environmental and workers’ compensation insurance policies, which we believe are customary for businesses of our size and type. Pursuant to the terms of their franchise agreements, our franchisees are also required to maintain certain types and levels of insurance coverage, including commercial general liability insurance, workers’ compensation insurance, all risk property and automobile insurance.

Competition

The foodservice industry, and particularly the QSR industry, is intensely competitive with respect to price, quality, name recognition, service and location. We compete against other QSRs, including chicken, hamburger, pizza, Mexican and sandwich restaurants, other purveyors of carry out food and convenience dining establishments, including national restaurant chains. Many of our competitors possess substantially greater financial, marketing, personnel and other resources than we do.

Government Regulation

We are subject to various federal, state and local laws affecting our business, including various health, sanitation, fire and safety standards. Newly constructed or remodeled restaurants are subject to state and local building code and zoning requirements. In connection with the re-imaging and alteration of our company-operated restaurants, we may be required to expend funds to meet certain federal, state and local regulations, including regulations requiring that remodeled or altered restaurants be accessible to persons with disabilities. Difficulties or failures in obtaining the required licenses or approvals could delay or prevent the opening of new restaurants in particular areas.

We are also subject to the Fair Labor Standards Act and various other laws governing such matters as minimum wage requirements, overtime and other working conditions and citizenship requirements. A significant number of our foodservice personnel are paid at rates related to the federal minimum wage, and increases in the minimum wage have increased our labor costs.

Many states and the Federal Trade Commission, as well as certain foreign countries, require franchisors to transmit specified disclosure statements to potential franchisees before granting a franchise. Additionally, some states and certain foreign countries require us to register our franchise offering documents before we may offer a franchise. We believe that our uniform franchise offering circulars, together with any applicable state versions or supplements, and our franchising procedures, comply in all material respects with both the Federal Trade Commission guidelines and all applicable state laws regulating franchising in those states which we have offered franchises. We believe that our international disclosure statements, franchise offering documents and franchising procedures comply, in all material respects, with the laws of the foreign countries in which we have offered franchises.

Environmental Matters

We are subject to various federal, state and local laws regulating the discharge of pollutants into the environment. We believe that we conduct our operations in substantial compliance with applicable environmental laws and regulations. Certain of our current and formerly owned and/or leased properties are known or suspected to have been used by prior owners or operators as retail gas stations and a few of these properties may have been used for other environmentally sensitive purposes. Certain of these properties previously contained underground storage tanks (“USTs”) and some of these properties may currently contain abandoned USTs. It is possible that petroleum products and other contaminants may have been released at these properties into the soil or groundwater. Under applicable federal and state environmental laws, we, as the current or former owner or operator of these sites, may be jointly and severally liable for the costs of investigation and remediation of any such contamination, as well as any other environmental conditions at its properties that are unrelated to USTs. We have obtained insurance coverage that we believe is adequate to cover any potential environmental remediation liabilities. We are currently not subject to any administrative or court order requiring remediation at any of our properties.

Where You Can Find Additional Information

We file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports with the Securities and Exchange Commission (the “SEC”). You may obtain copies of these documents by visiting the SEC’s Public Reference Room at 100 F. Street, N.E., Room 1580, Washington, DC 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC’s website at http://www.sec.gov. In addition, as soon as reasonably practicable after such materials are filed with, or furnished to, the SEC, we make copies of these documents (except for exhibits) available to the public free of charge through our web site at www.afce.com or by contacting our Secretary at our principal offices, which are located at 5555 Glenridge Connector, NE, Suite 300, Atlanta, Georgia 30342, telephone number (404) 459-4450.


CEO BACKGROUND

Kenneth L. Keymer, age 58, has served as our Chief Executive Officer since September 2005 and as President of Popeyes ® Chicken & Biscuits since June 2004. From January 2002 to May 2004, Mr. Keymer served as President and Co-chief Executive Officer and Member of the Board of Directors of Noodles & Company, which is based in Boulder, Colorado. From August 1996 to January 2002, Mr. Keymer was President and Chief Operating Officer of Sonic Corporation, the largest publicly-held chain of drive-in restaurants in the U.S. While at Sonic, he led the management team, oversaw franchising operations, company operations, promotional and field marketing, as well as R&D, information technology, and construction, and served as a member of the Board of Directors.

On March 2, 2007, the Company announced the resignation of Mr. Keymer effective March 30, 2007. The Company’s Board of Directors has appointed Fred Beilstein, Former Chief Financial Officer of AFC Enterprises, as interim Chief Executive Officer effective March 30, 2007 and has engaged an executive search firm to work with the Company to find a new Chief Executive Officer.

H. Melville Hope, III, age 45, has served as our Chief Financial Officer since December 2005. From February 2004 until December 2005, Mr. Hope served as our Senior Vice President, Finance and Chief Accounting Officer. From April 2003 to February 2004, Mr. Hope was our Vice President of Finance. Prior to joining AFC, he was an independent consultant in Atlanta, Georgia from January 2003 to April 2003. From April 2002 to January 2003, Mr. Hope was Chief Financial Officer for First Cambridge HCI Acquisitions, LLC, a real estate investment firm, located in Birmingham, Alabama. From November 2001 to April 2002, Mr. Hope was a financial and business advisory consultant in Atlanta, Georgia. From July 1984 to July 2001, Mr. Hope was an accounting, auditing and business advisory professional for PricewaterhouseCoopers, LLP in Atlanta, Georgia, in Savannah, Georgia and in Houston, Texas where he was admitted to the partnership in 1998.


James W. Lyons, age 52, was appointed to the position of our Chief Operating Officer effective March 2, 2007. Prior to that, Mr. Lyons had served as our Chief Development Officer since July 2004. From June 2002 to April 2004, he was Vice President of Development for Domino’s Pizza in Ann Arbor, Michigan. Mr. Lyons was Executive Vice President of Franchising and Development for Denny’s Restaurants in Spartanburg, South Carolina from July 1997 to December 2001.

Robert Calderin, age 49, has served as our Chief Marketing Officer since January 2005. From September 2001 to December 2004, he was an owner of Novus Mentis, Inc. in Miami, Florida. Mr. Calderin was Vice President, U.S. Marketing for Burger King Corporation in Miami, Florida from February 1998 to September 2001.

Harold M. Cohen, age 43, has served as our Senior Vice President of Legal Affairs, Corporate Secretary and General Counsel since September 2005. Mr. Cohen has been General Counsel of Popeyes Chicken & Biscuits, a division of AFC Enterprises, Inc., since January 2005. He also has served as Vice President of AFC since July 2000. From April 2001 to December 2004, he served as Deputy General Counsel of AFC. From August 1995 to June 2000, he was Corporate Counsel for AFC.

SHARE OWNERSHIP

COMPENSATION

MANAGEMENT DISCUSSION FROM LATEST 10K

The following discussion and analysis should be read in conjunction with our Selected Financial Data and our Consolidated Financial Statements that are included elsewhere in this filing.

Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements, as a result of a number of factors including those factors set forth in Item 1A. of this Annual Report and other factors presented throughout this filing.

Nature of Business

AFC develops, operates, and franchises quick-service restaurants under the trade name Popeyes ® Chicken & Biscuits (“Popeyes”) in 44 states, the District of Columbia, Puerto Rico, Guam, and 24 foreign countries. Popeyes has two reportable business segments: franchise operations and company-operated restaurants. Financial information concerning these business segments can be found at Note 24 to our Consolidated Financial Statements.

Historically, AFC also developed, operated and franchised quick-service restaurants and bakeries under the trade names Church’s Chicken ® (“Church’s”) (sold December 28, 2004), Cinnabon ® (“Cinnabon”) (sold November 4, 2004) and Seattle’s Best Coffee ® (“Seattle Coffee”) (sold July 14, 2003). For a discussion of these divestitures, see Note 22 to our Consolidated Financial Statements. In our Consolidated Financial Statements, financial results relating to these divested operations are presented as discontinued operations. Unless otherwise noted, discussions and amounts throughout this Annual Report relate to our continuing operations.

Management Overview of 2006 Operating Results

During 2006, our accomplishments include the following. We:


• reported diluted earnings per share of $0.75,

• increased system-wide sales by 7.0%,

• increased domestic same-store sales by 1.6%,

• increased our global restaurant system by 50 restaurants,

• repurchased approximately 1.5 million shares of our common stock,

• paid down $59.5 million of our 2005 Credit Facility,

• completed the acquisition of 13 previously franchised restaurants, and

• improved annualized average unit sales for new free-standing restaurants in our domestic system to approximately $1.3 million.

2006 Same-Store Sales

During 2006, total domestic same-store sales increased 1.6%. By business segment, domestic same-store sales improved 1.3% for our domestic franchised restaurants and 9.0% for our company-operated restaurants.

Our total domestic same-store sales growth, while positive for fiscal year 2006, declined during the latter part of the third quarter and during the fourth quarter due primarily to the continuing effect of economic concerns related to the discretionary income of our consumers and the impact of rolling over strong comparable sales in markets affected by Hurricanes Katrina and Rita in 2005. During 2005, the hurricanes displaced residents from the costal region into surrounding markets in Louisiana, Texas and Mississippi. As a result, these surrounding markets, which represent approximately 20% of our total domestic system, realized strong same-store sales growth during the latter part of the third quarter and throughout the fourth quarter of 2005. Additionally, restaurants forced to close due to the hurricanes realized extraordinarily high sales performance upon re-opening as workers and residents returned.

The total same-store sales growth of 9% for our company-operated business segment was driven principally by our New Orleans market, which comprised over 35% of our company-operated restaurants as of December 31, 2006. Our company-operated restaurants benefited during the first three quarters of 2006 from the return of residents, influx of consumers engaged in rebuilding New Orleans and reduced QSR competition in that market following Hurricane Katrina in August of 2005. Restaurants that re-opened continued to experience elevated sales levels during the first three quarters of 2006 as compared to the comparable periods of 2005. However, our company-operated restaurants realized negative same-store sales growth in the fourth quarter of 2006 due to the impact of rolling over the extraordinarily high sales performance in the New Orleans market for stores re-opened during 2005, as compared to the somewhat normalized sales levels during the comparable periods of 2006.

Within our international operations, our same-store sales decreased by 3.2% during fiscal 2006. However, international same-store sales performance demonstrated improvement during the latter part of 2006 as strong performance in Latin America and the Middle East helped offset negative performance in Korea and on U.S. military bases abroad. Although remaining negative, Korea has shown steady progress as operational initiatives focused on improving customer experience gain traction.

2006 Unit Growth

During 2006, our global restaurant system grew by 50 restaurants. We opened 139 new franchised restaurants and 3 new company-operated restaurants. These openings during 2006 were offset by 96 permanent closures (including the closing of 45 franchised restaurants within Korea). In addition, our year end restaurant count includes 4 re-opened restaurants (net of temporary closures) which had been temporarily closed at the end of 2005.

As it concerns our expected financial and operating results for 2007, see the discussion under the heading “Operating and Financial Outlook for 2007” later in this Item 7.

Factors Affecting Comparability of Consolidated Results of Operations: 2006, 2005, and 2004

For 2006, 2005 and 2004, the following items and events affect comparability of reported operating results:


• The effects of restaurant openings, closings, unit conversions and same-store sales (see “Summary of System-Wide Data” later in this Item 6).

• During the third quarter of 2005, the company-operated restaurants in the New Orleans market were adversely affected by Hurricane Katrina. There were 36 company-operated restaurants which were at least temporarily closed as a result of Hurricane Katrina. Additional information concerning the impact of these hurricane related restaurant closures on company-operated restaurant sales can be found under the title “Sales by Company-Operated Restaurants” in both the “Comparisons of Fiscal Years 2006 and 2005” and the “Comparison of Fiscal Years 2005 and 2004” sections in this Item 7.

• The Company’s fiscal year ends on the last Sunday in December. The 2006 fiscal year consisted of 53 weeks. The 2005 and 2004, fiscal years consisted of 52 weeks each. The 53rd week in 2006 increased sales by company-operated restaurants by approximately $1.2 million and increased franchise revenues by approximately $1.3 million.

• On May 1, 2006, \the Company completed the acquisition of 13 franchised restaurants from a Popeyes franchisee in the Memphis and Nashville, Tennessee markets. The results of operations of the acquired restaurants are included in the consolidated financial statements since that date. The acquired units increased 2006 revenues by approximately $10.0 million dollars (net of lost franchise revenues). Additional information concerning this acquisition can be found at Note 25 to our Consolidated Financial statements.

• During 2004, we adopted Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 , as revised in December 2003 (“FIN 46R”) and began consolidating three franchisees that qualify for consolidation under FIN 46R as variable interest entities (“VIEs”). These franchisees were not retroactively consolidated for years prior to 2004. Since adoption of FIN 46R, our relationship to each of the franchisees has substantially changed, as described in the section entitled “Principles of Consolidation” in Note 2 to our Consolidated Financial Statements, and they are no longer VIEs. During 2006, 2005 and 2004, the consolidation of these franchisees increased sales by company-operated restaurants by approximately $1.1 million, $2.7 million and $12.6 million, respectively.


• During 2005, general and administrative expenses include approximately $8.3 million relating to corporate restructuring charges as well as stay bonuses and severance costs paid to the Company’s former Chief Executive Officer, former Chief Financial Officer and former General Counsel. During 2004, general and administrative expenses included approximately $10.8 million relating to corporate severances, initial costs for Sarbanes-Oxley controls documentation and compliance, implementation of a new information technology system and legal and other costs associated with the settlement of certain franchisee disputes.

• During 2006, 2005, and 2004, our costs (income) associated with shareholder and other litigation and a special investigation by our Audit Committee were approximately $(0.3) million, $21.8 million, and $3.8 million, respectively. The substantially higher costs in 2005 relate to the settlement of certain shareholder litigation.

• During 2006, 2005, and 2004, asset write-downs were approximately $0.1 million, $5.8 million, and $4.8 million, respectively. Of the 2005 impairments, $4.1 million were due to the adverse effects of Hurricane Katrina, $0.6 million of which were subsequently reversed due to adjustments to damage estimates in 2006.

• During 2006 and 2005, we incurred approximately $1.7 and $3.1 million, respectively, of hurricane-related costs (other than impairments of long-lived assets) associated with Hurricane Katrina. During 2006 and 2005, the Company also accrued insurance proceeds of approximately $1.0 and $5.6 million, respectively, for property damage and business interruption losses.

• During 2004, we incurred $9.0 million of net costs associated with the termination of the lease for our AFC corporate headquarters.

• Effective December 26, 2005, the Company adopted SFAS No. 123(R), Share-Based Payment (“SFAS 123R”), which requires the measurement and recognition of compensation cost at fair value for all share-based payments, including stock options and restricted stock awards. The Company adopted SFAS 123R using the modified prospective transition method and, as a result, did not retroactively adjust results from prior periods. For further discussion regarding SFAS 123R see the section entitled “Stock-Based Employee Compensation” in Note 2 to our Consolidated Financial Statements. The Company recorded $3.4 million, $2.9 million and $0.4 million in total stock compensation expense during 2006, 2005, and 2004, respectively.

• During 2006, 2005, and 2004, loss before discontinued operations and accounting change includes “interest expense, net” of approximately $11.1 million, $6.8 million, and $5.5 million, respectively.

• Discontinued operations, net of income taxes, provided income of $0.2 million in 2006, $158.0 million in 2005, and $39.1 million in 2004. Discontinued operations, in 2005, consist of a $158.0 million gain on sale of Church’s.

Comparisons of Fiscal Years 2006 and 2005

Sales by Company-Operated Restaurants

Sales by company-operated restaurants were $65.2 million in 2006, a $4.9 million increase from 2005. The increase was primarily due to:


• $10.5 million increase due to the acquisition of 13 restaurants in the Memphis and Nashville, Tennessee markets which were previously owned by a franchisee, and

• $5.3 million increase due to same-store sales growth in fiscal 2006 as compared to fiscal 2005, and

• $1.2 million increase attributable to a 53rd week in fiscal 2006 (Fiscal 2005 was composed of 52 weeks),

partially offset by:


• $9.9 million decrease due to the timing of permanent and temporary restaurant closures and related re-openings resulting from Hurricane Katrina, and

• $1.6 million decrease due to the termination of a VIE relationship in the second quarter of 2006 that was previously consolidated during fiscal 2005, and

• $1.0 million decrease due to the temporary closure of a restaurant which suffered fire damage during fiscal 2006.

The remaining fluctuation was due to various factors, including restaurant openings, restaurant transfers, and the timing and duration of temporary restaurant closings, in both 2006 and 2005.

Franchise Revenues

Franchise revenues has three basic components: (1) ongoing royalty payments that are determined based on a percentage of franchisee sales; (2) franchise fees associated with new restaurant openings; and (3) development fees associated with the opening of new franchised restaurants in a given market. Royalty revenues are the largest component of franchise revenues, constituting more than 90% of franchise revenues.

Franchise revenues were $82.6 million in 2006, a $5.1 million increase from 2005. Of this increase, approximately $4.2 million was due to an increase in domestic franchise revenues and approximately $0.9 million was due to an increase in international franchise revenues.

The $4.2 million increase in domestic franchise revenue was primarily due to: (1) a $3.1 million increase in royalties and fees due principally to a net increase of 52 domestic restaurants from December 25, 2005 to December 31, 2006 and a 1.3% increase in same-store sales, and (2) an increase of approximately $1.2 million in royalties associated with the 53rd week in fiscal year 2006. Fiscal year 2005 consisted of 52 weeks.

The $0.9 million increase in international revenue was primarily due to:


• the resumption of the 3% royalty from our Korean master franchisee (the entire 3% royalty due during the last two quarters of 2005 and one-third of the royalties due during the first two quarters of 2006 were abated as temporary royalty relief), and

• increases in royalties and development fees from net openings within our system,

partially offset by:


• negative same-store sales decrease of 3.2%, and

• the closure of poor performing restaurants, primarily in Korea, where 45 restaurants closed during 2006.

Other Revenues

Other revenues were $5.2 million in 2006, a $0.4 million decrease from 2005, primarily as a result of a reduction in the number of leased or subleased properties.


Restaurant Employee, Occupancy and Other Expenses

Restaurant employee, occupancy and other expenses were $33.7 million in 2006, a $3.2 million increase from 2005. The increase was principally attributable to the increase in sales from company-operated restaurants (discussed above). Restaurant employee, occupancy and other expenses were approximately 52% and 51% of sales from company-operated restaurants in 2006 and 2005, respectively.

Restaurant Food, Beverages and Packaging

Restaurant food, beverages and packaging expenses were $21.3 million in 2006, a $0.7 million increase from 2005. The increase was principally attributable to the increase in sales from company-operated restaurants (discussed above). Restaurant food, beverages and packaging expenses were approximately 33% and 34% of sales from company-operated restaurants in 2006 and 2005, respectively.

General and Administrative Expenses

General and administrative expenses were $48.1 million in 2006, a $20.6 million decrease from 2005. The decrease was primarily due to:


• $12.8 million of lower personnel and other costs resulting primarily from the transition of our corporate operations, and severances and stay bonuses paid to certain executives during 2005,

• $5.8 million of lower professional fees (primarily legal, consulting and auditing),

• $3.2 million of lower outsourcing and contractor costs for information technology and accounting support services, and

• $0.4 million of lower bank service fees,

partially offset by:


• $0.7 million of higher marketing and advertising expense, and

• $0.3 million of registration costs associated with a shareholder’s sale of our common stock.

General and administrative expenses were approximately 31% of total revenues in 2006, compared to approximately 48% in 2005.

Depreciation and Amortization

Depreciation and amortization was $6.4 million in 2006, a $0.9 million decrease from 2005. The decrease was primarily due to the accelerated depreciation during 2005 associated with the closing of the corporate center. Depreciation and amortization was approximately 4% of total revenues in 2006, compared to 5% in 2005.

Other Expenses (Income), Net

Other expenses (income), net includes (1) costs associated with certain shareholder litigation discussed in Note 15 to our Consolidated Financial Statements; (2) asset write-downs; (3) hurricane-related costs (other than impairments); (4) estimated insurance proceeds for hurricane-related damages; (5) costs associated with restaurant closures and refurbishments; and (6) gains and losses on the sale of assets.

These aggregated to $1.8 million in income in 2006 compared to $23.2 million of expense in 2005. The decrease in expense was primarily due to:


• $22.1 million of net lower shareholder litigation costs associated with the settlement of outstanding legal actions,

• $5.7 million of lower charges for asset write-downs ($4.7 of which related to hurricane damage), and

• $1.4 million of lower (non-impairment related) hurricane costs, and

• $0.9 million of higher net gains on sale of assets,



partially offset by:


• $4.6 million reduction in income from estimates for insurance proceeds associated with asset impairments and other claims arising from hurricane damage, and

• $0.5 million of higher costs associated with restaurant closures and refurbishments.

See Note 17 to our Consolidated Financial Statements for a description of other expenses (income), net for 2006, 2005 and 2004.

Our franchise operations include an allocation of direct and indirect overhead charges incurred by our corporate operations of $29.6 million in 2006, and $24.9 million in 2005. Our company-operated restaurants include an allocation of direct and indirect overhead charges incurred by our corporate operations of $3.8 million in 2006, and $2.8 million in 2005.

The $2.2 million favorable fluctuation in operating profit associated with our franchise operations was principally due to higher franchise revenues partially offset by higher corporate allocations primarily for field training activities, marketing activities and IT related costs.

The $3.2 million favorable fluctuation in operating profit (loss) associated with our company-operated restaurants was principally due to (1) more company-operated restaurants (both related to re-openings in New Orleans and the acquisition of 13 restaurants in the Memphis and Nashville markets from a franchisee) contributing to our net operating performance, (2) a reduction in damages and costs from Hurricane Katrina in excess of accrued insurance proceeds as compared to fiscal 2005 and (3) gain on sale of assets; partially offset by (4) higher depreciation and amortization, insurance and other costs.

The $46.8 million favorable fluctuation in operating profit (loss) associated with our corporate headquarters was principally due to substantially lower general and administrative expenses and lower shareholder litigation and other costs as compared to fiscal 2005.

Interest Expense, Net

Interest expense, net was $11.1 million in 2006, a $4.3 million increase from 2005. The increase was primarily due to:


• $4.0 million of lower interest income in 2006 as compared to 2005, and

• $1.9 million of higher interest on debt, due primarily to higher average outstanding debt balances for the year and higher average interest rates,

partially offset by:


• $1.4 million of lower amortization and write-offs of debt issuance costs, and

• $0.2 million of lower other debt related charges.



Income Tax Expense

In 2006, we had an income tax expense associated with our continuing operations of $12.0 million compared to a benefit of $5.3 million in 2005. Our effective tax rate for 2006 was 35.1% compared to 38.7% for 2005 (see a reconciliation of these effective rates in Note 19 to our Consolidated Financial Statements). Our effective tax rate decreased in 2006 compared to 2005 primarily due to provision to return adjustments, partially offset by adjustments to prior year tax accruals, increases in state income taxes and the effects of tax free interest income.

Discontinued Operations, Net of Income Taxes

Discontinued operations, net of income taxes provided $0.2 million of income in 2006, compared to income of $158.0 million in 2005.

During 2005, we sold our Church’s division. We recognized an after-tax gain of $158.0 million.

Comparisons of Fiscal Years 2005 and 2004

Sales by Company-Operated Restaurants

Sales by company-operated restaurants were $60.3 million in 2005, a $25.5 million decrease from 2004. The decrease was primarily due to:


• $10.7 million decrease due to the reduction in the number of company-operated restaurants resulting from the sale of company-operated restaurants to franchisees and the permanent closure of underperforming restaurants,

• $9.9 million decrease due to the non-consolidation of a VIE relationship during 2005 that was consolidated during 2004, and

• $8.7 million decrease due to temporary and permanent restaurant closures resulting from Hurricane Katrina,

partially offset by:


• $1.8 million increase due to one newly constructed company-operated restaurant in 2005 and the acquisition of two restaurants that were previously franchised restaurants, and

• $1.5 million increase due to an increase in same-store sales (a 6.5% improvement in 2005 compared to 2004).

The remaining fluctuation was due to various factors, including the timing and duration of temporary restaurant closings, in both 2005 and 2004, related to the re-imaging or rebuilding of older restaurants.

Franchise Revenues

Franchise revenues were $77.5 million in 2005, a $4.7 million increase from 2004. The increase was primarily due to a $4.0 million increase in royalties, due principally to an increase in same-store sales, and a $0.7 million increase in franchise fees (net of franchising incentives).

Within the international portion of our franchise operations, we experienced a $0.4 million decline in royalties, driven principally by declines in revenues from our Korean franchise operations. This is due to the net closure of 32 franchised restaurants in that country and temporary royalty relief provided our Korean master franchisee, partially offset by growth in the number of franchised restaurants elsewhere in our international system. We agreed to abate the entire 3% royalty due to be paid to us by the Korean master franchisee for the last two quarters of 2005 and to abate one-third of the royalties to be paid to us during the first two quarters of 2006.



Other Revenues

Other revenues were $5.6 million in 2005, a $0.3 million increase from 2004. The increase is principally due to an increase in rental revenues associated with an increase in the number of restaurants leased to franchisees as a result of unit conversions in 2004.

Restaurant Employee, Occupancy and Other Expenses

Restaurant employee, occupancy and other expenses were $30.5 million in 2005, a $14.8 million decrease from 2004. The decrease was principally attributable to the decrease in sales from company-operated restaurants (discussed above). Restaurant employee, occupancy and other expenses were approximately 51% and 53% of sales from company-operated restaurants in 2005 and 2004, respectively.

Restaurant Food, Beverages and Packaging

Restaurant food, beverages and packaging expenses were $20.6 million in 2005, an $8.2 million decrease from 2004. The decrease was principally attributable to the decrease in sales from company-operated restaurants (discussed above). Restaurant food, beverages and packaging expenses were approximately 34% of sales from company-operated restaurants in both 2005 and 2004.

General and Administrative Expenses

General and administrative expenses were $68.7 million in 2005, a $13.4 million decrease from 2004. The decrease was primarily due to:


• $8.0 million of lower outsourcing and contractor costs for information technology, accounting, audit and tax support services,

• $4.3 million of lower professional fees,

• $3.8 million of lower personnel costs associated with terminated positions at our AFC corporate office,

• $2.0 million of lower costs for settlement of franchisee and landlord disputes,

• $1.3 million of lower office rents, principally due to the closure of our AFC corporate office,

• $1.2 million of lower net provisions for accounts receivable bad debts, and

• $0.7 million of lower insurance costs,

partially offset by:


• $4.3 million of higher stay bonuses and severance costs,

• $2.6 million of higher deferred compensation associated with stock-based awards, and

• $1.2 million of higher salary costs related to senior positions at Popeyes that were vacant for portions of 2004 and additional field-based personnel who provide support to our franchisees.

General and administrative expenses were approximately 48% of total revenues in 2005, compared to approximately 50% in 2004.

Depreciation and Amortization

Depreciation and amortization was $7.3 million in 2005, a $2.7 million decrease from 2004. The decrease was primarily due to the write-off of assets in 2004 associated with our corporate operations. Depreciation and amortization was approximately 5% of total revenues in 2005, compared to 6% in 2004.

Other Expenses (Income), Net

Other expenses (income), net includes (1) costs associated with certain shareholder litigation discussed in Note 15 to our Consolidated Financial Statements; (2) asset write-downs; (3) hurricane-related costs (other than impairments); (4) estimated insurance proceeds for hurricane-related damages; (5) costs associated with restaurant closures and refurbishments; (6) gains and losses on the sale of assets; and (7) costs associated with the termination of our corporate lease. These aggregated to $23.2 million in 2005, a $6.1 million increase from 2004. The increase was primarily due to:


• $18.0 million of higher shareholder litigation costs associated with the settlement of outstanding legal actions,

• $3.1 million of higher (non-impairment related) hurricane costs, and

• $1.0 million of higher charges for asset write-downs,

partially offset by:


• $9.0 million of lower costs associated with the termination of our corporate lease (zero in 2005 and $9.0 million in 2004),

• $5.6 million of insurance proceeds accrued in 2005 associated with claims arising from the adverse affects of Hurricane Katrina,

• $0.9 million of higher net gains on sale of assets, and

• $0.5 million of lower costs associated with restaurant closures and refurbishments.

See Note 17 to our Consolidated Financial Statements for a description of other expenses (income), net for 2006, 2005 and 2004.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

The following discussion and analysis for AFC Enterprises, Inc. (“AFC” or “the Company”) should be read in conjunction with our condensed consolidated financial statements included in Part 1, Item 1 of this quarterly report and in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
Nature of Business
Within our continuing operations, we develop, operate and franchise quick-service restaurants (“QSRs”) under the trade name Popeyes ® Chicken & Biscuits (“Popeyes”). The Company operates two business segments: franchise operations and company-operated restaurants.

Our Business Strategy
We strive to deliver value to our customers, franchisees and shareholders by improving the unit economics of our restaurants with business initiatives tailored to enhance the experience of the Popeyes guest and to promote new restaurant development. Our business initiatives are focused on:
• improving restaurant operations and customer satisfaction,

• expanding brand awareness and innovative menu development, and

• increasing the return on investment to our shareholders and franchisees.
Management Overview of 2007 Operating Results (Third Quarter)
Our third quarter of 2007 results and highlights include the following:
• We reported net income of $6.5 million, or diluted earnings per common share of $0.23. Net income includes approximately $1.3 million in income from insurance recoveries.

• Total system-wide sales grew by 2.8% as compared to the third quarter of 2006.

• Total domestic same-store sales decreased by 1.9% and international same-store sales increased by 0.5%, resulting in a global same-store sales decrease of 1.7%.

• The Popeyes system opened 32 new restaurants, offset by 30 permanent closings.

• We repurchased approximately 816,000 shares of our common stock.

2007 Same-Store Sales — Third Quarter
Total domestic same-store sales decreased 1.9% in the third quarter of 2007, as compared to the same period in 2006, due to a decrease in transaction counts, partially offset by an increase in check average. As sales have been impacted by weakness in the lunch and dinner day parts within the QSR segment, our promotional menu offerings and price points have not resulted in incremental traffic needed to offset these declines. We are reviewing and assessing our menu and marketing practices to develop traffic-building programs to counter these softer trends.
By business segment, domestic same-store sales decreased 1.5% for our franchised restaurants and decreased 10.5% for our company-operated restaurants. This decrease reflects the continued rollover effect of extraordinarily high sales levels in 2006 following Hurricane Katrina in our New Orleans market, which comprise over 35% of our company-operated restaurant base, as well as softer same-store sales in the Atlanta and Tennessee markets.
Our international operations experienced same-stores sales increases of 0.5% during the third quarter of 2007 due primarily to strong sales comparisons in the Middle East, Korea, and Latin America, partially offset by negative performance in Canada and U.S. military bases abroad which have been affected by the deployment of troops to the Middle East.


Looking Forward to the Remainder of 2007

For full year 2007, we anticipate total domestic same-store sales trends to be negative approximately 2.5%, compared to our previous guidance of approximately negative 2.0%. For full year 2007, new restaurant openings are expected to be at the lower end of previous guidance in the range of 155-165 restaurants. Restaurant closures are expected to fall in the range of 100-110 units, consistent with previous guidance.
As recently announced, effective November 5, 2007, Cheryl Bachelder joined our team as Chief Executive Officer. Additionally, we have engaged a proven marketing consulting resource to work with our management team to help accelerate our return to positive same-store sales. We are fully assessing our marketing and menu initiatives. Our promotional calendar for the remainder of 2007 and into 2008 will be enhanced to ensure that our menu items and price points resonate with our customer base. In addition to these and other initiatives, we will also strengthen our guest satisfaction measures to drive customer loyalty.
Internationally, we continue to see stronger same-store sales performance in certain core markets, resulting in an increase in new restaurant opening momentum in our Latin American and Middle Eastern regions. Additionally, new market development agreements for Turkey and Egypt will accelerate openings in those regions, and we are actively seeking additional new business development partners in Southeast Asia and Latin America.
Comparisons of the Third Quarter for 2007 and 2006
Sales by Company-Operated Restaurants
Sales by company-operated restaurants were $18.4 million in the third quarter of 2007, a $2.3 million increase from the third quarter of 2006. The increase was primarily due to:
• a $2.8 million increase due to the re-opening of additional New Orleans restaurants closed as a result of Hurricane Katrina, and

• a $1.2 million increase due to the timing of new restaurant openings and the acquisition of one restaurant in the Nashville, Tennessee market which was previously owned by a franchisee,
partially offset by:
• a $1.7 million decrease due to a 10.5% decrease in same-store sales in the third quarter of 2007.

The remaining fluctuation was due to various factors, including the timing and duration of temporary restaurant closings, in both the third quarters of 2007 and 2006.
Franchise Revenues
Franchise revenues have three basic components: (1) ongoing royalty fees that are based on a percentage of franchisee sales; (2) franchise fees associated with new unit openings and renewals; and (3) development fees associated with the agreement pursuant to which a franchisee may develop new restaurants in a given market (usually paid at the inception of the agreement and recognized as revenue as restaurants are actually opened or the development right is terminated). Royalty revenues are the largest component of franchise revenues, generally constituting more than 90% of franchise revenues.
Franchise revenues were $19.5 million in the third quarter of 2007, a $0.9 million increase from the third quarter of 2006. The increase was due primarily to a net increase of 35 domestic franchise locations from October 1, 2006 to October 7, 2007, partially offset by a 1.5% decline in domestic franchise same-store sales.
Other Revenues
Other revenues are principally composed of rental income associated with properties leased or subleased to franchisees. Other revenues were $1.0 million in the third quarter of 2007, a $0.3 million decrease from the third quarter of 2006, primarily as a result of a reduction in the number of leased or subleased properties.


Restaurant Employee, Occupancy and Other Expenses

Restaurant employee, occupancy and other expenses were $9.1 million in the third quarter of 2007, a $1.0 million increase from the third quarter of 2006. This increase was principally attributable to the increase in sales from company-operated restaurants as discussed above. Restaurant employee, occupancy and other expenses were 49% and 50% of sales from company-operated restaurants in the third quarters of 2007 and 2006, respectively.
Restaurant Food, Beverages and Packaging
Restaurant food, beverages and packaging costs were $6.3 million in the third quarter of 2007, a $1.0 million increase from the third quarter of 2006. This increase was principally attributable to the increase in sales from company-operated restaurants as discussed above. Restaurant food, beverages and packaging costs were 34% and 33% of sales from company-operated restaurants in the third quarters of 2007 and 2006, respectively, increasing primarily as a result of higher costs for poultry and other commodities.
General and Administrative Expenses
General and administrative expenses were $11.3 million in the third quarter of 2007, a $1.7 million increase from the third quarter of 2006. The increase was primarily due to higher costs incurred for personnel costs including severance and professional fees, partially offset by lower costs for stock based employee compensation.
On a consolidated basis, general and administrative expenses were approximately 29% and 27% of total revenues in the third quarters of 2007 and 2006, respectively.
Depreciation and Amortization
Depreciation and amortization was $1.6 million and $1.5 million in the third quarters of 2007 and 2006, respectively.
Other Expense (Income), Net
Other expense (income), net was $1.3 million of income in the third quarter of 2007 as compared to income of $0.4 million in the third quarter of 2006. The income generated in 2007 resulted primarily from a net gain from insurance recoveries for claims related to Hurricane Katrina. The income generated in 2006 resulted primarily from a net gain on the sale of property and equipment. A schedule of the components of other expense (income), net can be found in Note 7 to our condensed consolidated financial statements in Part 1, Item 1 to this quarterly report.
Interest Expense, Net
Interest expense, net was $2.0 million in the third quarter of 2007, a $0.6 million decrease from the third quarter of 2006, resulting primarily from lower average debt levels in 2007 as compared to 2006. A schedule of the components of interest expense, net can be found in Note 9 to our condensed consolidated financial statements included in Part 1, Item 1 to this quarterly report.

Income Tax Expense

In the third quarter of 2007, we had income tax expense associated with our continuing operations of $3.4 million, as compared to $3.4 million in the third quarter of 2006. Our effective tax rates associated with continuing operations in the third quarters of 2007 and 2006 were 34.3% and 36.6%, respectively. These rates differ from statutory rates due to return to provision adjustments, adjustments to estimated tax reserves, other permanent differences and inter-period allocations.

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