<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K
(Mark One)
[x]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 27, 1998

                                      OR

[ ]  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 ...........

                            AFC ENTERPRISES, INC. 
            (Exact name of registrant as specified in its charter)
           Minnesota                                          58-2016606
  (State or other jurisdiction                               (IRS Employer
of incorporation or organization)                         Identification No.)

   Six Concourse Parkway, Suite 1700
          Atlanta, Georgia                                     30328-5352
(Address of principal executive offices)                       (Zip Code)
                                (770) 391-9500
             (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Exchange Act:  None
Securities registered pursuant to Section 12 (g) of the Exchange Act:  None

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  [X]    No  ____

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.                          Not applicable.
 
The aggregate market value of the common stock of AFC Enterprises, Inc. held by
non-affiliates of AFC Enterprises, Inc. is not applicable as the common stock of
AFC Enterprises, Inc. is privately held.

As of March 29, 1999, there were 39,233,441 shares of the registrant's Common
Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

The exhibit index is contained in Part IV herein on page 61.
<PAGE>
 
                             AFC ENTERPRISES, INC.

 
                              INDEX TO FORM 10-K

<TABLE>
<CAPTION>
                                     PART I
<S>                                                                    <C>
Item 1.   Business.................................................     1
Item 2.   Properties...............................................    20
Item 3.   Legal Proceedings........................................    23
Item 4.   Submission of Matters to a Vote of Security Holders......    24
 
 
                                    PART II
 
Item 5.   Market for Registrant's Common Equity and Related
             Stockholders Matters..................................    24
Item 6.   Selected Consolidated Financial Data.....................    25
Item 7.   Management's Discussion and Analysis of Financial
             Condition and Results of Operations...................    28
Item 8.   Consolidated Financial Statements and Supplementary Data.    45
Item 9.   Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure...................    45
 
                                   PART III
 
Item 10.  Directors and Executive Officers of the Registrant.......    46
Item 11.  Executive Compensation...................................    50
Item 12.  Security Ownership of Certain Beneficial Owners
             and Management........................................    58
Item 13.  Certain Relationships and Related Transactions...........    59

                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports
             on Form 8-K...........................................    61
</TABLE> 
<PAGE>
 
                                    PART I


ITEM 1.  BUSINESS.

This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. Such forward-looking
statements relate to the plans, objectives and expectations of the Company for
future operations. In light of the risks and uncertainties inherent in any
discussion of the Company's expected future performance or operations, the
inclusion of forward-looking statements in this report should not be regarded as
a representation by the Company or any other person that these will be realized.
Such performance could be materially affected by a number of factors, including
without limitation those factors set forth in this section.


GENERAL

     AFC Enterprises, Inc., a Minnesota corporation and its wholly-owned
subsidiaries (collectively "AFC" or the "Company"), are principally engaged in
the operation, development and franchising of quick-service restaurants,
bakeries and cafes ("QSRs") under the primary trade names of Popeyes Chicken and
Biscuits ("Popeyes"), Churchs Chicken ("Churchs"), Cinnabon Bakeries
("Cinnabon"), Seattle's Best Coffee and Torrefazione Italia ("Seattle Coffee")
and Chesapeake Bakery Cafes ("Chesapeake"). Total restaurants, bakeries and
cafes by brand as of December 27, 1998 were as follows:


<TABLE> 
<CAPTION> 
                              Domestic                  International
                      ------------------------    ------------------------
                      Company-                    Company-
                      Operated      Franchised    Operated      Franchised     Total
                      --------      ----------    --------      ----------     ------ 
<S>                   <C>           <C>           <C>           <C>            <C>
  Popeyes.........        171              899           -             222     1,292
  Churchs.........        491              615           -             293     1,399
  Cinnabon........        212              140           -              17       369
  Seattle Coffee..         57               11           2               1        71
  Chesapeake......          4              103           -               -       107
                      -------       ----------    --------      ----------     -----
       Total......        935            1,768           2             533     3,238
                      =======       ==========    ========      ==========     -----
</TABLE>

     The Company is also engaged in the business of selling premium brand
coffees through wholesale and retail distribution channels. In addition, the
Company has a small manufacturing plant that produces gas fryers and other
custom-fabricated restaurant equipment for sale to Company-operated and
franchised chicken restaurants and to other restaurant operators.

     The Company's principal executive offices are located at Six Concourse
Parkway, Suite 1700, Atlanta, Georgia 30328-5352 and its telephone number is
(770) 391-9500.

                                       1
<PAGE>
 
BRAND PROFILES

     The Company franchises and operates restaurants, bakeries and cafes
catering to different segments of the QSR industry.

     POPEYES CHICKEN AND BISCUITS. Popeyes Chicken and Biscuits was founded in
New Orleans in 1972 and is the market leader in the Cajun segment of the QSR
industry. With 1,292 restaurants worldwide as of December 27, 1998, Popeyes was
the second largest quick-service chicken restaurant chain in 1998, in terms of
sales. System-wide sales for fiscal year 1998 totaled $954.3 million. Popeyes
specialty menu item is fresh, hand-battered, bone-in fried chicken sold in two
flavors--New Orleans Spicy(TM) and Louisiana Mild(TM). Popeyes chicken is
complemented with a wide assortment of signature Cajun cuisine side dishes,
including red beans and rice, Cajun rice, Cajun fries and fresh buttermilk
biscuits. Popeyes is positioned as a premium fried chicken for customers who
seek its full flavor and specialty blend of seasonings and spices. Popeyes is
also known for its unique items that complement its core menu, including its
Louisiana Legends (TM) menu of jambalaya, crawfish etoufee' and chicken and
seafood gumbo. Popeyes spicy fried chicken and other Cajun menu offerings have
also proven to be popular in Far East countries. Popeyes restaurants are
generally found in urban areas in traditional stand-alone locations, as well as
in non-traditional formats such as airports and other travel centers and
supermarkets.

     CHURCHS CHICKEN. Churchs Chicken, founded in San Antonio, Texas in 1952, is
one of the United States' oldest QSR chains and as of December 27, 1998 had
1,399 restaurants worldwide, making Churchs the second largest quick-service
chicken restaurant chain, in terms of number of outlets. Total system-wide sales
for fiscal year 1998 totaled $755.1 million. Churchs restaurants focus on
serving traditional Southern fried chicken in a simple, no frills restaurant
setting. Churchs menu items also include other Southern specialties including
fried okra, coleslaw, mashed potatoes and gravy, corn on the cob and honey
butter biscuits. Churchs is positioned as a value-oriented brand, providing
simple, traditional meals to price conscious consumers. Churchs restaurants are
traditionally found in urban areas where their reputation as a "neighborhood"
restaurant has been established. With its small footprint and a simple operating
system, Churchs is rapidly expanding into non-traditional formats such as
convenience stores, grocery stores and co-branding locations. Internationally,
Churchs has been very popular in the Far East, operating under the brand name
Texas Chicken(TM).

     CINNABON. On October 15, 1998, the Company acquired Cinnabon International,
Inc. ("CII"), the operator and franchisor of 363 retail cinnamon roll bakeries
operating in 39 states, Canada and Mexico. The Company acquired CII for $64.0
million in cash. Founded in Seattle, Washington in 1985, Cinnabon International,
Inc. is the leading cinnamon roll bakery retailer in North America. Located in
high traffic shopping malls, airports, train stations, travel plazas and
supermarkets, Cinnabon bakeries serve fresh cinnamon rolls made with Indonesian
cinnamon and topped with a sweet, rich cream cheese-based frosting. Cinnabon has
built a reputation for offering fresh, aromatic, oven-hot cinnamon rolls at
affordable prices. Continually evolving and improving since 

                                       2
<PAGE>
 
the original Cinnabon opened in Seattle in 1985, today's product offerings are
built upon the foundation recipe begun by "CinnaMom" Jerilyn Brusseau. After
nine arduous months of testing and re-testing more than 200 recipes, Jerilyn
invented the original Classic Roll. The Classic Roll laid the foundation for
Cinnabon's high standards and commitment to quality and freshness. Some of the
Company's successful new product offerings include the Pecanbon and the
Berrybon. In addition to the cinnamon roll related products, the Company offers
a variety of proprietary beverages including the Mochalatta Chill and Vareva
Orange Juice.

     SEATTLE COFFEE. On March 18, 1998, the Company acquired all of Seattle
Coffee Company's ("SCC") common stock for an adjusted purchase price of
approximately $68.8 million plus the assumption of approximately $4.8 million of
debt. Seattle Coffee Company was created as a result of combining Seattle's Best
Coffee, Inc. and Torrefazione Italia, Inc. in May 1994. Seattle's Best Coffee is
one of the oldest companies in the specialty coffee business in the United
States. Currently, SCC has more than 5,000 wholesale accounts, 59 Company-
operated cafes and twelve franchised cafes.

     Founded by Jim Stewart in 1969 in Coupeville on Whidbey Island, Washington,
the coffee roasting operation was moved to a store in Seattle in 1971. In 1983,
the first Stewart Brothers Coffee retail store was opened in Bellevue Square, a
regional mall and management adopted a strategy of using retail stores to
promote the brand name and drive wholesale sales. This strategy has remained
basically unchanged to the present. SCC's brand name was changed from Stewart
Brothers Coffee to Seattle's Best Coffee ("SBC") in the 1980s, after being
honored by Seattle's leading chefs as "Seattle's best coffee." SBC markets
several "coffee house blends" under names such as Seattle's Best Blend, Post
Alley, Saturday's, Grand Central and Henry's. Each blend has a unique flavor
profile, allowing SBC to meet a full range of taste preferences.

     Torrefazione Italia ("TI") was founded in 1986 by Umberto Bizzarri and Dawn
Zervas. Like SBC, TI has opened retail locations to support and build brand
awareness for its primary business of wholesaling premium brand coffees. TI
presents a classic Italian coffee experience. TI coffees are positioned at the
highest end of the quality and price range and are marketed with an Italian
image. With names such as Venezia, Milano, Perugia and Napoli, these coffees are
the creations of the Bizzarri family. The Italian heritage is enhanced by
serving TI coffees in hand-painted ceramics imported from Deruta, Italy. The TI
cafes project the brand's European flavor and are designed to accommodate those
who are on-the-go as well as those who wish to relax and sip their coffee while
listening to classic music.

     CHESAPEAKE. On May 5, 1997, the Company acquired all of the intangible
assets of the franchise business of Chesapeake from The American Bagel Company.
Located primarily in Washington, D.C., Maryland and Virginia, Chesapeake
operates four Company-operated bagel bakeries and franchises 103 bagel bakeries.
System-wide sales for the year totaled $61.5 million in 1998. Chesapeake bagel
bakeries offer a variety of freshly made items, including a wide assortment of
bagels and other baked goods, 

                                       3
<PAGE>
 
sandwiches, salads, fountain drinks and specialty coffees. Several of the
restaurants have viewing areas that allow customers to experience the bagel
making process. The acquisition of Chesapeake gives the Company a presence in
the bagel and sandwich segment of the QSR industry.

WHOLESALE OPERATIONS

     SEATTLE COFFEE. Seattle Coffee roasts and blends specialty coffees in its
28,000 square foot automated roasting facility on Vashon Island, near Seattle.
Management believes that the roasting and packaging facility may be one of the
most technically advanced in the U.S., for its capacity. Seattle Coffee selects
its coffee beans from the best quality Arabica beans from the finest growing
regions of the world, which have been prepared by growers and producers who take
great care with their coffees. Seattle Coffee is one of a few specialty coffee
roasters in the U.S. that travels to the producing countries to purchase green
coffee beans. Management believes this buying strategy will be increasingly
important to ensure supply of the highest quality green beans, as the demand for
specialty coffee expands in the U.S. and around the world.

     Seattle Coffee's wholesale sales are made primarily to other food service
retailers, supermarkets and to its own coffee cafes. Food service wholesale
sales are targeted to such food service providers as hotel chains, fine
restaurants, specialty coffee retailers, espresso carts, delis, and theaters,
among others. Seattle Coffee has opened 14 regional offices to support the
expansion of its wholesale food service sales. Seattle Coffee has been
successful in initiating strategic alliances with multi-market retailers such as
Books-A-Million, Eddie Bauer, Mrs. Fields Cookies and Albertson's Supermarkets.
In addition, Alaska Airlines recently announced that it will serve Seattle's
Best Coffee on all of its flights beginning in April, 1999.

     Seattle's Best Coffee whole bean bulk and pre-packaged coffee is
distributed to supermarkets throughout the Pacific Northwest and other parts of
the country. The brand has achieved a high degree of penetration in the Pacific
Northwest with settings in most major supermarkets, including QFC, Safeway,
Albertson's and others. SCC initiated the entry of Torrefazione Italia into
supermarkets in late 1995 and the brand is now carried in selected high-end
chains and independents in Western Washington and Oregon. The prospects for
growth in the supermarket channel appear to be significant. Management believes
that the increasing presence of its brands in retail cafes and key food service
accounts around the country will, in turn, stimulate opportunities for long-term
growth of bean sales through supermarkets. Seattle Coffee operates 14 regional
wholesale offices throughout the U.S. and one in Canada.

MANUFACTURING OPERATIONS

     ULTRAFRYER SYSTEMS.  The Company's Ultrafryer Systems ("Ultrafryer")
division (f.k.a. Far West Products) is a manufacturer of restaurant equipment
and is located in San Antonio, Texas.  Ultrafryer's focus is to provide
equipment for Company-operated 

                                       4
<PAGE>
 
and franchised Popeyes and Churchs restaurants domestically and internationally,
as well as other QSR customers. Ultrafryer's main product is the Ultrafryer(TM)
gasfryer.

RESTAURANT LOCATIONS

     As of December 27, 1998, the Company's 3,238 systemwide restaurants were
located in 47 states, the District of Columbia and 24 foreign countries.

     POPEYES. Popeyes restaurants are located in 39 states, the District of
Columbia and 18 foreign countries. The 171 Company-operated Popeyes restaurants
are located in the states of Texas, Louisiana, Georgia, North Carolina and South
Carolina. Over 70% of the 899 domestic franchised Popeyes restaurants are
located in the states of Texas, Louisiana, Florida, California, Illinois,
Maryland, Mississippi and Georgia. Over 65% of the 222 international franchised
Popeyes restaurants are located in Korea.

     CHURCHS. Churchs restaurants are located in 29 states and nine foreign
countries. The 491 Company-operated Churchs restaurants are concentrated
primarily in the states of Texas, Louisiana, Georgia, Oklahoma, Alabama,
Florida, Mississippi and Arizona. Almost 65% of the 615 domestic franchised
Churchs restaurants are located in Texas, California, Louisiana, Georgia,
Florida, Michigan, New York and Illinois. Over 95% of the 293 international
franchised Churchs restaurants are in Canada, Puerto Rico, Indonesia, Taiwan and
the Philippines.

     CINNABON. Cinnabon bakery cafes are located in 40 states and three foreign
countries. The 212 Company-operated Cinnabon bakeries are heavily concentrated
in the states of California, Washington, Florida, Illinois, Ohio, Texas,
Massachusetts, Michigan and Pennsylvania. The 140 domestic franchised Cinnabon
bakeries are heavily concentrated in the states of Minnesota, Massachusetts,
Illinois, Arizona, California, Nevada, New Jersey and New York. The 17
international franchised Cinnabon restaurants are open in Canada, Mexico and
Saudi Arabia.

     SEATTLE COFFEE. Seattle Coffee cafes are located in eight states and two
foreign countries. The 57 Seattle Coffee domestic Company-operated cafes are
located primarily in the states of Washington, Oregon, California and Illinois.
There are two Seattle Coffee Company-operated cafes in Canada. The 11 franchised
Seattle Coffee cafes are located primarily in Washington and Oregon. There is
one international franchised Seattle Coffee cafe in Saudi Arabia.

     CHESAPEAKE. Chesapeake bagel bakeries are located in 23 states and the
District of Columbia. The four Company-operated Chesapeake bagel bakeries are in
the states of Georgia and Maryland. The 103 franchised Chesapeake bagel bakeries
are concentrated primarily in Virginia, Maryland, Pennsylvania, Florida and the
District of Columbia.

                                       5
<PAGE>
 
STRATEGY

     GLOBAL STRATEGY. The Company has adopted a global strategy to increase
revenues and profits by (i) the franchise development of its existing Popeyes,
Churchs, Cinnabon, Seattle Coffee and Chesapeake brands and (ii) the multiple-
channel distribution of specialty coffee products, penetrating both at-home and
away-from-home consumption. The Company's strategy is to (i) deliver world class
service and support to its franchisees by capitalizing on the Company's size,
state-of-the-art technology and leadership position, (ii) promote franchisee
development of traditional and non-traditional formats in new and existing
markets, (iii) provide new and existing franchisees with investment
opportunities in high value/high growth branded concepts and (iv) expand
wholesale and retail channels of distribution for its specialty coffees. The
Company believes that by following this strategy it will become Franchisor of
Choice(TM)  which, when combined with the Company's market leadership position,
superior brand awareness, strong franchisee relationships and expanding channels
of distribution will result in continued growth.

     INCREASE DOMESTIC FRANCHISED RESTAURANTS, BAKERIES AND CAFES. The Company
believes that significant opportunities exist to increase the number of domestic
franchised restaurants, bakeries and cafes operated by both new and existing
franchisees and that growth through franchising can provide significant
additional revenue growth at relatively low levels of capital expenditures by
the Company. The Company intends to target restaurant growth in markets where it
has or can achieve sufficient penetration to justify television advertising
because sales at restaurants, bakeries and cafes in the Company's media
efficient markets are generally 5% to 10% higher than sales in non-media
efficient markets. The number of domestic franchised restaurants, bakeries and
cafes has increased from approximately 990 at the beginning of 1993, to 1,768 at
December 27, 1998. Domestic franchised restaurant openings during fiscal year
1998 are as follows:


 
                                             Fiscal Year
                                                 1998
                                             -----------

                  Popeyes.............           83
                  Churchs.............           51
                  Cinnabon............            3
                  Seattle Coffee......            1
                  Chesapeake..........           10
                                             -----------
                      Total...........          148
                                             ===========


     INCREASE INTERNATIONAL FRANCHISED RESTAURANTS, BAKERIES AND CAFES.
Management believes that international expansion is an attractive growth
opportunity due to (i) advantageous per unit economics, resulting largely from
lower food and/or labor costs and less QSR competition abroad, (ii) foreign
economies with an expanding group of QSR consumers and (iii) well established
markets for quick-service restaurants, bakeries and cafes in a substantial
number of countries around the world. The Company's international operations
have increased from 172 franchised restaurants in 14 foreign 

                                       6
<PAGE>
 
countries at the beginning of 1993, to 533 franchised restaurants, bakeries and
cafes in 24 foreign countries at December 27, 1998. Additionally, commitments to
develop international franchised restaurants have risen from 161 at the
beginning of 1993, to 815 at December 27, 1998. International franchised
restaurant openings during fiscal year 1998 are as follows:

 
                                             Fiscal Year
                                                1998
                                             -----------
 
                     Popeyes..............       46
                     Churchs..............       25
                     Cinnabon.............        2
                     Seattle Coffee.......        1
                                             -----------
                        Total.............       74
                                             ===========


     INCREASE SPECIALTY COFFEE WHOLESALE BUSINESS. The Company's goal is to
develop Seattle's Best Coffee and Torrefazione Italia into nationally recognized
brand names in the premium segment of the specialty coffee industry. Quality
restaurants, hotels, offices, specialty retailers, clubs, universities and other
places where people consume food and beverages are now potential outlets for
specialty coffee. Supermarkets will remain the dominant source of coffee for
home consumption and specialty coffee's share of this market is expanding
rapidly. Management anticipates significant growth in specialty coffee
distribution through retail, wholesale food service and grocery over the next
few years.

     CAPITALIZE ON ADDITIONAL GROWTH OPPORTUNITIES. The Company intends to
aggressively pursue selected growth opportunities by (i) expanding its existing
brands to new domestic and international markets, (ii) promoting the development
of new points of distribution, (iii) expanding the channels of distribution for
its specialty coffees and (iv) acquiring additional branded concepts to provide
franchisees with a broad range of investment opportunities, thereby generating a
larger and more diversified stream of franchise revenues to the Company. These
initiatives include the following:

     .    NON-TRADITIONAL FORMATS. In response to new marketing opportunities
          and consumer demand, the Company intends to continue to promote the
          expansion of the number and type of non-traditional formats from which
          it sells Popeyes, Churchs, Chesapeake, Cinnabon and Seattle Coffee
          food products. In addition to the traditional stand-alone models, the
          Company has franchised and opened Popeyes, Churchs, Cinnabon, Seattle
          Coffee and Chesapeake restaurants, bakeries and cafes within community
          shopping plazas, convenience stores, mall food courts, airports and
          other transportation centers and grocery stores.

     .    CO-BRANDING INITIATIVES. The Company intends to selectively enter into
          co-branding arrangements in which Popeyes and Churchs restaurants
          share facilities with other QSRs. Management believes that co-branding
          represents an attractive revenue growth opportunity that provides
          brand 

                                       7
<PAGE>
 
          awareness in new markets and faster opening times (as restaurants are
          constructed within existing QSR facilities), together with reduced
          costs of entry and lower ongoing capital expenditures. The Company has
          entered into several such arrangements including franchising Churchs
          restaurants in 91 Cara Operations Limited Harvey's hamburger
          restaurants in Canada and in 76 White Castle hamburger restaurants
          throughout the Midwest, Southeast and Northeast.

     .    NEW DISTRIBUTION CHANNELS. Management intends to aggressively pursue
          new and expanded distribution channels for its premium coffee
          products. Marketing efforts will be aimed at developing key accounts
          with such food service providers as espresso carts, quality
          restaurants, hotels, independent coffee cafes, delis, theaters,
          colleges, corporate offices and general merchandise retailers.
          Marketing efforts will also be aimed at developing strategic alliances
          with larger hotel chains, quality restaurant chains and specialty
          retailers doing business in multiple regions or on a national basis.
          Management believes that significant opportunities exist to expand its
          distribution channels into regional and national supermarkets.

     .    NEW BRANDED CONCEPTS. Management has identified and acquired
          additional high value/high growth brands which it believes will
          benefit from the Company's operating efficiency, management
          experience, state-of-the-art technology, service commitment to
          franchisees and shared administrative infrastructure. In line with
          this strategy, in May 1997 the Company acquired all of the intangible
          assets relating to the franchise business of Chesapeake Bagel. In
          March 1998, the Company acquired Seattle Coffee Company and its two
          specialty coffee brands Seattle's Best Coffee and Torrefazione Italia.
          Further, in October 1998, the Company acquired Cinnabon International.
          Management currently plans to focus on integrating and growing these
          concepts but intends to continue to seek out additional high
          value/high growth brands to acquire, operate and franchise in the
          future.

     INCREASE OPERATIONAL EFFICIENCIES AND LEVERAGE INFORMATION TECHNOLOGY. The
Company's customized management information systems, typically not affordable by
smaller QSR chains, provide both the Company and its franchisees with the
ability to quickly capitalize on restaurant sales enhancement and profit
opportunities. The Company utilizes its management information systems to (i)
minimize waste and control labor costs, (ii) effectively manage inventory and
(iii) analyze product mix and various promotional programs using point-of-sale
information. In 1998, management launched AFC Online, an intranet for
franchisees that provides operational support, a restaurant development roadmap,
a business planning template, marketing information and certain other relevant
information on a 24 hours a day, seven days a week basis.

     MAINTAIN HIGH QUALITY PRODUCTS, SUPERIOR CUSTOMER SERVICE AND STRONG
COMMUNITY RELATIONS.  The Company seeks to ensure overall customer satisfaction

                                       8
<PAGE>
 
through consistency in food quality, service and restaurant appearance. The
Company maintains rigorous and ongoing quality control procedures over suppliers
and distributors to ensure that its product specifications are maintained. In
addition, the Company has taken an important leadership role in the
neighborhoods and communities it serves. Through its involvement in Habitat for
Humanity, the United Negro College Fund and the Hispanic Association of Colleges
and Universities, among others, the Company has established a meaningful
presence in the local communities it serves, while building customer loyalty and
brand awareness.

     FRANCHISOR OF CHOICE(TM). The Company has adopted the Franchisor of
Choice(TM) global strategy, which will be implemented by (i) promoting
distinctly positioned brands, currently Popeyes, Churchs, Cinnabon, Seattle's
Best Coffee, Torrefazione Italia and Chesapeake with other branded concepts to
be acquired in the future, (ii) developing multi-unit development territories,
(iii) providing high quality service and support to franchisees, (iv) providing
franchisees with alternative formats in innovative market settings, (v)
redesigning business processes to provide additional support to franchisees,
including a multi-million dollar investment in new technology, (vi) eliminating
barriers to growth for existing and new franchisees through new financial and
real estate support mechanisms and (vii) providing on-site or field support
including site selection, construction expertise, multi-national supply and
distribution, marketing, operations and training.

SITE SELECTION

     The Company has an extensive domestic site selection process for the
establishment of new Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake
restaurant, bakery and cafe locations, commencing with an overall market plan
for each intended area of development compiled by the Company and the relevant
area developer, if any. The Company emphasizes free-standing pad sites and end-
cap locations with ample parking and easy dinner-time access from high traffic
roads for its Popeyes and Churchs brands. Cinnabon, Seattle Coffee and
Chesapeake brands emphasize mall food courts, in-line shopping centers,
transportation facilities and office buildings.

     The Company's involvement in the international site selection process is
less significant due to the relative size and sophistication of the Company's
international franchisees, who independently conduct extensive site
investigations. International sites are often located in highly concentrated
urban areas and are built with a multi-floor layout to accommodate the higher
percentage of dine-in customers.

FRANCHISE DEVELOPMENT

     The Company's global strategy includes the opening of substantially all new
restaurants, bakeries and cafes through franchising additional restaurants,
bakeries and cafes to new and existing franchisees.  The Company enjoys strong
relationships with its franchisees as a result of its ongoing efforts to (i)
develop Popeyes, Churchs, Cinnabon 

                                       9
<PAGE>
 
and Seattle Coffee globally and Chesapeake in the U.S. by investing capital to
re-image and renovate Company-operated restaurants in each of the systems, (ii)
provide strong operational, marketing and technological support to franchisees,
(iii) deliver operating efficiencies and economies of scale to its franchisees
and (iv) promote the expansion of points of distribution to non-traditional
formats and new markets for existing brands, and by acquiring and franchising
high value/high growth branded concepts.

     DOMESTIC DEVELOPMENT AGREEMENTS. Domestic development agreements provide
for the development of a specified number of restaurants, bakeries and cafes
within a defined domestic geographic territory in accordance with a schedule of
restaurant opening dates. Development schedules generally cover three to five
years and typically have benchmarks for the number of restaurants, bakeries and
cafes to be opened and in operation at six-month to twelve-month intervals. Area
developers currently pay a development fee of $10,000 for the first restaurant
to be developed and $5,000 for each additional restaurant to be developed under
the same development agreement. Such development fees are non-refundable and
paid when the area development agreement is executed.

     INTERNATIONAL DEVELOPMENT AGREEMENTS. The Company enters into development
agreements with qualifying parties to develop Popeyes, Churchs, Cinnabon or
Seattle Coffee franchised restaurants, bakeries and cafes in jurisdictions
outside of the United States ("International Development Rights"). International
Development Rights may include one or more countries or limited geographic areas
within a particular country. The terms of the development agreements for
International Development Rights are, in most respects, similar to domestic
development agreements. International development agreements also require a pre-
payment of a portion of the franchise fee for each franchised restaurant to be
developed under the agreement. International development agreements also include
additional provisions necessary to address the multi-national nature of the
transaction (including foreign currency exchange, taxation matters and
international dispute resolution provisions) and are also subject to
modifications necessary to comply with the requirements of applicable local
laws, such as laws relating to technology transfers, export/import matters and
franchising.

     FRANCHISE AGREEMENTS. Once a site has been approved by the Company and the
property has been acquired by the developer either by purchase or lease, the
Company and the area developer enter into a franchise agreement under which the
area developer becomes the franchisee for the specific restaurant to be
developed at such site. Current franchise agreements typically provide for
payment of a franchise fee of $15,000 per restaurant. Franchise fees for mass
merchandise locations (including department stores and supermarkets) are
generally $10,000 for the first location and $5,000 for each additional mass
merchandise location under the same development agreement. In addition, the
Popeyes and Churchs franchise agreements require franchisees to pay a 5% royalty
on net restaurant sales and a 3% (with respect to Popeyes) and 4% (with respect
to Churchs) national advertising fund contribution (reduced to a maximum of 1%
if a local advertising co-operative is formed). The Cinnabon franchise
agreements require franchisees to pay a 5% royalty on net restaurant sales and a
1.5% national advertising 

                                       10
<PAGE>
 
fund contribution. Franchise agreements for Seattle Coffee franchisees require a
3% royalty on net restaurant sales and a 2% national advertising fund
contribution. The Chesapeake franchise agreements require franchisees to pay a
4% royalty on net restaurant sales and a 1% to 2% national advertising fund
contribution. Certain of the Company's older franchise and area development
agreements provide for lower royalties and reduced franchise and area
development fees. Such older forms of agreements constitute a decreasing
percentage of all franchise agreements.

     All of the Company's franchise agreements require that each restaurant
operates in accordance with the operating procedures, adheres to the menu
established by the Company and meets applicable quality, service and cleanliness
standards. The Company may terminate the franchise rights of any franchisee who
does not comply with such standards. The Company is specifically authorized to
take accelerated action if any franchised restaurant presents a health risk. The
Company believes that maintaining superior food quality, a clean and pleasant
environment and excellent customer service are critical to the reputation and
success of the Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake systems
and it intends to aggressively enforce applicable contractual requirements.
Franchisees may contest such terminations.

     The terms of international franchise agreements are substantially similar
to domestic franchise agreements, except that such agreements may be modified to
reflect the multi-national nature of the transaction and to comply with the
requirements of applicable local laws. In addition, royalty rates may differ
from domestic franchise agreements due to the relative size and sophistication
of international franchisees. The international developer is required to
partially pre-pay a franchise fee up to $30,000 at the time the development
agreement is entered into, along with a development fee up to $10,000 for each
development commitment.

     TURNKEY DEVELOPMENT. In order to expedite development of domestic
franchised restaurants, the Company may build restaurants in certain markets,
which will be subsequently sold to qualifying franchisees as franchised
restaurants ("Turnkey Units"). In 1997, the Company entered into an agreement
with Banco Popular De Puerto Rico to provide up to $15 million in revolving
construction financing to AFC and permanent financing to qualifying franchisees
for these Turnkey units. As of December 27, 1998, the Company has eleven turnkey
sites in various stages of development.

MARKETING AND COMMUNITY ACTIVITY

     Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake products are
marketed to their respective customer bases using a predominantly three-tiered
marketing strategy. First, electronic media (local TV and radio) create
awareness for the products and spark consumer interest in particular product
offerings. Second, print media (newspaper ads, free-standing inserts and direct
mail) generate trial by offering a purchase incentive--often a coupon--to buy a
new product or promotional item. Finally, signage and point-of-purchase
materials at Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake
restaurants, bakeries and cafes support the promotional activity. 

                                       11
<PAGE>
 
Each of the brands offers consumers a new program each month to maintain
consumer product interest. New product introductions and "limited time only"
promotional items also play major sales building roles and create regular repeat
customers.

     Both franchised and Company-operated Popeyes, Churchs, Cinnabon, Seattle
Coffee and Chesapeake restaurants, bakeries and cafes contribute to a national
advertising fund to pay for the development of marketing materials. Franchised
and Company-operated Popeyes, Churchs and Chesapeake restaurants and bakeries
also contribute to local advertising funds to support programs in their local
markets. For the fiscal year ended December 27, 1998, the Company contributed
approximately $21.7 million to these various advertising funds.

     AFC is also heavily involved in community activities and support programs
that often have an educational theme. Through The AFC Foundation, Inc., a non-
profit foundation, the Company has sponsored and helped construct 200 homes
worldwide through Habitat For Humanity, a non-profit sponsor of housing
construction for the poor. In addition, the Company supports the United Negro
College Fund and the Hispanic Association of Colleges and Universities with
promotional fund raisers. The Company also sponsors Adopt-A-School programs.

COMPETITION

     The restaurant industry, and particularly the quick service restaurant
("QSR") segment, is intensely competitive with respect to price, quality, name
recognition, service and location. Other QSR competitors include chicken,
hamburger, pizza, Mexican, sandwich and Chinese food QSRs, other purveyors of
carry-out food and convenience dining establishments, including national
restaurant chains. Numerous well-established QSR competitors possess
substantially greater financial, marketing, personnel and other resources than
AFC. In addition, the QSR industry is characterized by the frequent introduction
of new products, accompanied by substantial promotional campaigns. AFC must
respond to various factors affecting the restaurant industry, including changes
in consumer preferences, tastes and eating habits, demographic trends and
traffic patterns, increases in food and labor costs, competitive pricing and
national, regional and local economic conditions. In recent years, a number of
companies in the QSR industry have introduced products, including non-fried
chicken products, which were developed to capitalize on a growing consumer
preference for food products which are, or are perceived to be, healthful,
nutritious, low in calories and low in fat content. It can be expected that AFC
will be subject to increasing competition from companies whose products or
marketing strategies address these consumer preferences. There can be no
assurance that consumers will continue to regard AFC's products favorably, as
compared to such competitive products, or that AFC will be able to continue to
compete successfully in the QSR marketplace. In addition, AFC's chief
competitors in the chicken segment of the QSR industry, KFC Corporation ("KFC"),
and in the specialty coffee business, Starbucks, are larger, better capitalized
and have greater access to financing at favorable rates, all of which may affect
AFC's competitive abilities.

                                       12
<PAGE>
 
     Chesapeake bagel bakeries and Cinnabon bakeries compete with other QSR's,
bagel bakeries and traditional bakeries in the bagel and cinnamon roll business.
While national chains such as Einstein/Noah Bagels, Big City Bagels and others
compete directly with the Company for the sale of bagels and other bakery
products, there are few direct competitors in cinnamon rolls. Cinnabon is one of
the leaders in the cinnamon roll segment of the QSR business and is the only
national cinnamon roll retailer in North America.

     SCC's whole bean coffees compete directly with specialty coffees sold at
retail through supermarkets, specialty retailers, and a growing number of
specialty coffee stores. SCC's coffee beverages compete directly with all
restaurant and beverage outlets that serve coffee and a growing number of
espresso kiosks, carts, and coffee cafes. Both SCC's whole bean coffees and its
coffee beverages compete indirectly with all other coffees on the market,
including specialty retail companies such as Starbucks, and conventional coffee
from several large companies such as Kraft General Foods, Procter & Gamble, and
Nestle.

SUPPLIERS

     Franchisees are generally required to purchase all ingredients, products,
materials, supplies, and other items necessary in the operation of their
businesses solely from suppliers who (i) demonstrate, to the continuing
satisfaction of the Company, the ability to meet the Company's standards and
specifications for such items, (ii) possess adequate quality controls and
capacity to supply franchisees' needs promptly and reliably and (iii) have been
approved in writing by the Company.

     SUPPLY CONTRACTS.  Notwithstanding the above, Popeyes and Churchs Company-
operated restaurants are obligated by various agreements to serve certain Coca-
Cola(R) or Dr Pepper(R) beverages exclusively. The Company also has an agreement
with Diversified Foods and Seasonings, Inc. ("Diversified"), which terminates in
March 2029, under which the Company is required to purchase certain proprietary
products made exclusively by Diversified. Moreover, Diversified is the sole
supplier of certain proprietary products for the Popeyes system. Diversified
sells only to Company approved distributors who in turn sell to franchised and
Company-operated restaurants. In the fiscal year ended December 27, 1998, the
Popeyes system purchased approximately $40.7 million of proprietary products
made by Diversified. The Popeyes and Churchs systems purchase fresh chicken from
14 suppliers from 33 plant locations.

     With respect to SCC's wholesale operations, SCC's principal raw material is
green coffee beans. The Company typically enters into supply contracts to
purchase a pre-determined quantity of green coffee beans at a fixed price per
pound. These contracts usually cover periods up to a year as negotiated with the
individual supplier. At December 27, 1998, the Company had commitments to
purchase approximately 5.3 million pounds of green coffee beans at a total cost
of approximately $7.7 million. The contract terms cover a period from January
1999 to September 1999. SCC purchases 50% of its green coffee beans from two
suppliers and purchases the remaining 50% from 

                                       13
<PAGE>
 
15 other suppliers. To the extent the two major suppliers cannot meet SCC's
coffee orders, SCC has the option of ordering its coffee from the other fifteen
suppliers.

     PURCHASING COOPERATIVES.  Supplies are generally provided to franchised and
Company-operated restaurants in the Popeyes and Churchs systems pursuant to
supply agreements negotiated by Popeyes Operators Purchasing Cooperative
Association, Inc. ("POPCA") and Churchs Operators Purchasing Association, Inc.
("COPA"), respectively, each a not-for-profit corporation that was created for
the purpose of consolidating the collective purchasing power of the franchised
and Company-operated restaurants and negotiating favorable terms. COPA also
purchases certain ingredients and supplies for Cinnabon and Chesapeake
franchised and Company-operated restaurants, bakeries and cafes in order to
further leverage the collective buying power of AFC. Currently, the Company
purchases cinnamon for Cinnabon products from one supplier. The purchasing
cooperatives are not obligated to purchase, and do not bind their members to
commitments to purchase any supplies. Membership in each cooperative is open to
all franchisees. Since 1995, the Company's chicken restaurant franchise
agreements have required that each franchisee joins its respective purchasing
cooperative as a member. All Company-operated Popeyes and Churchs restaurants
are members of POPCA or COPA, as the case may be. Substantially all of the
Company's domestic chicken restaurant franchisees participate in POPCA or COPA.

     SCC CAFES. SCC's Company-operated and franchised cafes purchase all their
coffee from SCC's wholesale distribution centers. The cafes purchase non-coffee
food and supply items from Unisource Worldwide, Inc., a large food service
supply distributor.

TRADEMARKS AND LICENSES

     The Company owns a number of trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including the
marks "Popeyes", "Popeyes Chicken and Biscuits", "Churchs", "Cinnabon World
Famous Cinnamon Roll", "Seattle's Best Coffee", "Torrefazione Italia",
"Chesapeake Bagel Bakery", "Ultrafryer" and each brand's logo utilized by the
Company and its franchisees in virtually all Popeyes, Churchs, Cinnabon, Seattle
Coffee and Chesapeake restaurants, bakeries and cafes domestically. The Company
also has trademark registrations pending for a number of additional marks,
including "Gotta Love It", "Day of Dreams", "Love That Chicken From Popeyes",
"New Age of Opportunity" and "Franchisor of Choice". In addition, the Company
has registered or made application to register the marks (or, in certain cases,
the marks in connection with additional words or graphics) in approximately 150
foreign countries, although there can be no assurance that any mark is
registrable in every country registration is sought. The Company considers its
intellectual property rights to be important to its business and actively
defends and enforces them.

     FORMULA AGREEMENT. The Company has a perpetual formula licensing agreement,
as amended (the "Formula Agreement"), with Alvin C. Copeland, the former 

                                       14
<PAGE>
 
owner of the Popeyes and Churchs restaurant systems, and Diversified, which
calls for the worldwide exclusive licensing to the Popeyes system of the spicy
fried chicken formula and certain other ingredients used in Popeyes products.
The Formula Agreement provides for monthly royalty payments of $237,500 until
April 1999 and, thereafter, monthly royalty payments of $254,166 until March
2029.

     KING FEATURES AGREEMENTS. The Company currently has a number of domestic
and international agreements with The Hearst Corporation, King Features
Syndicate Division ("King Features") under which the Company has the exclusive
license to use the image and likeness of the cartoon character "Popeye" (and
certain companion characters such as "Olive Oyl") in connection with the
operation of franchised and Company-operated Popeyes restaurants worldwide.
Under such agreements, the Company is obligated to pay to King Features a
royalty of 0.1% of the first $1 billion of Popeyes systemwide sales and 0.05%
for the next $2 billion of such sales. The King Features agreements
automatically renew annually.

YEAR 2000 ISSUES

     In the process of customizing the Company's management information systems,
the Company established procedures to ensure that its new systems were year 2000
compliant. In addition, during 1997 the Company formalized a plan to analyze all
of its financial and operating computer systems to ensure any corrective action
necessary to eliminate problems before the beginning of the year 2000. This plan
includes analyses of existing systems, new systems to be implemented in 1998 and
1999, systems used by its vendors and customers that are needed for the proper
functioning of the Company's systems and all other known Company processes that
use computer systems to function. While the analysis phase of the plan has not
been completed as of December 27, 1998, the Company believes that, with the
completion of its system upgrades, a significant portion of the potential year
2000 issues will be resolved. Although the analysis is not yet complete, the
Company believes that the cost, if any, to make other systems year 2000
compliant will not be material to its results of operations. See "Item 7.
Management's Discussion and Analysis - Year 2000".


EXPANSION; DEPENDENCE ON FRANCHISEES AND DEVELOPERS

     The Company's global strategy will depend heavily on growing its franchise
operations. At December 27, 1998, the Company franchised 1,768 Popeyes, Churchs,
Cinnabon, Seattle Coffee and Chesapeake restaurants, bakeries and cafes
domestically and 533 Popeyes, Churchs, Cinnabon and Seattle Coffee restaurants,
bakeries and cafes internationally. The Company's success is dependent upon its
franchisees and the manner in which they develop and operate Popeyes, Churchs,
Cinnabon, Seattle Coffee and Chesapeake restaurants, bakeries and cafes. As the
Company expands it will also need to find new franchisees who are capable of
promoting the Company's strategy. The opening and success of franchised
restaurants, bakeries and cafes will depend on various other factors, including
the availability of suitable sites, the negotiation of acceptable 

                                       15
<PAGE>
 
lease or purchase terms for new locations, permitting and regulatory compliance,
the ability to meet construction schedules, the financial and other capabilities
of the Company's franchisees and developers, the ability of the Company to
manage this anticipated expansion and hire and train personnel, and general
economic and business conditions. Not all of the foregoing factors are within
the control of the Company or its franchisees or developers.

INTERNATIONAL OPERATIONS

     As of December 27, 1998, the Company franchised 533 restaurants, bakeries
and cafes to franchisees in 24 foreign countries and plans to expand its foreign
franchising program significantly in the future. There are no Chesapeake
operations outside the U.S. The Company currently operates two Seattle Coffee
cafes and a wholesale distribution center that are located in Canada. The
Company operates no other restaurants outside of the U.S. Included in the
Company's revenues are foreign franchise royalties and other fees that are
based, in part, on sales generated by its foreign franchised restaurants,
bakeries and cafes, including a significant number of franchised restaurants in
Asia. Therefore, the Company is exposed, to a limited degree, to changes in
international economic conditions and currency fluctuations. The Company has not
historically and did not at the end of 1998 maintain any hedges against foreign
currency fluctuations, although management entered into a foreign currency
hedging agreement in February 1999 with respect to the Korean Won. Losses
recorded by the Company during the past three years related to foreign currency
fluctuations have not been material to the Company's results of operations. For
fiscal years 1998, 1997 and 1996, royalties and other revenues from foreign
franchisees represented 1.9%, 2.4% and 2.4%, respectively, of total revenues of
the Company.

FOOD SERVICE INDUSTRY

     Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns and the type, number and location of competing restaurants, bakeries
and cafes. Multi-unit food service chains such as Popeyes, Churchs, Cinnabon,
Seattle Coffee and Chesapeake can also be adversely affected by publicity
resulting from food quality, illness, injury or other health concerns or
operating issues stemming from just one restaurant or a limited number of
restaurants. Dependence on frequent deliveries of fresh food products also
subjects food service businesses such as the Company to the risk that shortages
or interruptions in supply caused by adverse weather or other conditions could
adversely affect the availability, quality and cost of ingredients. In addition,
material changes in, or the Company's or its franchisees' failure to comply
with, applicable Federal, state and local government regulations, and such
factors as inflation, increased food, labor and employee benefits costs, such as
Federally-mandated increases in the minimum wage, regional weather conditions
and the unavailability of experienced management and hourly employees may also
adversely affect the food service industry in general and the Company's results
of operations and financial condition in particular.

                                       16
<PAGE>
 
FLUCTUATIONS IN COST OF CHICKEN

     The Company's and its franchisees' principal raw material is fresh chicken.
For fiscal years ended December 27, 1998 and December 28, 1997, approximately
50% and 60%, respectively of the Company's restaurant cost of sales were
attributable to the purchase of fresh chicken. As a result, the Company is
significantly affected by increases in the cost of chicken, which can be
affected by, among other factors, the cost of grain, the price for other
alternative domestic meats and overseas demand for chicken products. Due to
extremely competitive conditions in the QSR industry, following increases in raw
material costs such as chicken, the Company has generally not raised retail
prices sufficiently to pass all such costs on to the consumer.

     The market price for chicken changes on a weekly basis. While the Company's
purchase agreements with its fresh chicken suppliers in 1998 and prior generally
provided for a "ceiling", or highest price, and a "floor", or lowest price, that
the Company would pay for chicken over the contract term, the ceilings were
generally set at prices well above the current market price, exposing the
Company to a risk of price increases. Additionally, such supply contracts were
generally for one to two years, thereby exposing the Company to regular cost
increases if the price of fresh chicken continued to rise. In order (i) to
ensure favorable pricing for the Company's chicken purchases in the future, (ii)
to reduce volatility in chicken prices and (iii) to maintain an adequate supply
of fresh chicken, the Company has or will enter into two types of chicken
purchasing arrangements with its suppliers. The first of these contracts is a
grain-based "cost-plus" pricing arrangement that provides chicken prices based
upon the cost of feed grains, such as corn and soybean meal, plus certain agreed
upon non-feed and processing costs. The other contract is similar to the grain
based "cost-plus" arrangement but contains price provisions which limit how far
up or down prices may move in any year. Both contracts have terms ranging from
three to five years with provisions for certain annual price adjustments as
defined in the contracts.

AVAILABILITY AND COST OF GREEN COFFEE BEANS

     The supply and prices of green coffee beans are volatile. Although most
coffee beans trade in the commodity market (the "C market"), coffee beans of the
quality sought by Seattle Coffee tends to trade on a negotiated basis at a
premium above the C market coffee pricing, depending upon the supply and demand
at the time of purchase. Availability and price can be affected by many factors
in producing countries, including weather and political and economic conditions.

                                       17
<PAGE>

INSURANCE
 
     The Company carries property, liability, business interruption, crime, and
workers' compensation insurance policies, which it believes are customary for
businesses of its size and type. Franchisees are also required to maintain
certain minimum standards of insurance with insurance companies satisfactory to
the Company pursuant to their franchise agreements, including commercial general
liability insurance, workers' compensation insurance, all risk property and
casualty insurance and automobile insurance. Under the current form of franchise
agreement, such insurance must be issued by insurers approved by the Company.

SEASONALITY

     The Company has historically experienced the strongest operating results at
Popeyes, Churchs and Chesapeake restaurants and bakeries during the summer
months while operating results have been somewhat lower during the winter
season. Cinnabon and Seattle Coffee have traditionally experienced the strongest
operating results during the Christmas holiday shopping season between
Thanksgiving and Christmas. Certain holidays and inclement winter weather reduce
the volume of consumer traffic at quick-service restaurants and may impair the
ability of certain restaurants to conduct regular operations for short periods
of time.

REGULATION

     The Company is subject to various Federal, state and local laws affecting
its business, including various health, sanitation, fire and safety standards.
Newly constructed or remodeled restaurants, bakeries and cafes are subject to
state and local building code and zoning requirements. In connection with the
remodeling and alteration of the Company's restaurants, bakeries and cafes, the
Company may be required to expend funds to meet certain Federal, state and local
regulations, including regulations requiring that remodeled or altered
restaurants, bakeries and cafes 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, bakeries and cafes in
particular areas.

     The Company is also subject to the Fair Labor Standards Act and various
state laws governing such matters as minimum wage requirements, overtime and
other working conditions and citizenship requirements. A significant number of
the Company's food service personnel are paid at rates related to the Federal
minimum wage and increases in the minimum wage, including those recently enacted
by the Federal government, have increased the Company's labor costs.

     Certain states and the Federal Trade Commission require franchisors such as
the Company to transmit specified disclosure statements to potential franchisees
before granting a franchise. Additionally, some states require franchisors to
register their franchise with the state before it may offer a franchise. The
Company believes that its Uniform Franchise Offering Circulars (together with
any applicable state versions or supplements) comply with both the Federal Trade
Commission guidelines and all 

                                       18
<PAGE>
 
applicable state laws regulating franchising in those states in which it has
offered franchises. The Company is also subject to various Federal, state and
local laws regulating the discharge of pollutants into the environment. The
Company believes that it conducts its operations in substantial compliance with
applicable environmental laws and regulations as well as other applicable laws
and regulations governing its operations.

ENVIRONMENTAL MATTERS

     Approximately 200 of the Company's owned and 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. Many of these properties previously contained underground
storage tanks ("USTs") and some of these properties may currently contain
abandoned USTs. As a result of the use of oils and solvents typically associated
with automobile repair facilities and gas stations, 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, the Company, as the current owner or operator of these
sites, may be jointly and severally liable for the costs of investigation and
remediation of any such contamination. As a result, after an analysis of its
property portfolio, including testing of soil and groundwater at a
representative sample of its facilities, the Company believes it has accrued
adequate reserves for environmental remediation liabilities. The Company is
currently not subject to any administrative or court order requiring remediation
at any of its properties.

EMPLOYEES AND PERSONNEL

     As of December 27, 1998, the Company employed approximately 2,805 full-time
salaried employees and approximately 15,274 full-time and part-time hourly
employees. Of the Company's full-time salaried employees, 130 are involved in
overseeing restaurant operations, 2,086 are involved in the management of
individual restaurants, bakeries and cafes and all remaining salaried employees
are responsible for corporate administration, franchise administration and
business development. None of the Company's employees are covered by a
collective bargaining agreement. The Company believes that the dedication of its
employees is critical to its success, and that its relationship with its
employees is good.

                                       19
<PAGE>
 
ITEM 2.  PROPERTIES

     The Company either owns or leases the land and buildings for its Company-
operated restaurants. In addition, in certain circumstances, the Company owns or
leases land and buildings which it then leases or subleases to its franchisees
and third parties. While the Company expects to continue to lease many of its
sites in the future, the Company also may purchase the land and/or buildings for
restaurants to the extent acceptable terms are available. The majority of the
Company's restaurants are located in retail community shopping centers and
freestanding, well-trafficked locations.

     Restaurants leased to the Company are typically leased under "triple net"
leases that require the Company to pay real estate taxes, maintenance costs and
insurance premiums and, in some cases, to pay percentage rent based on sales in
excess of specified amounts. Generally, the Company's leases have initial terms
of 20 years with options to renew for two additional five-year periods. Typical
leases or subleases by the Company to franchisees are triple net to the
franchisee, provide for a minimum rent, based upon prevailing market rental
rates, and have a term that usually coincides with the term of the franchise
agreement for the location, often being 20 years with renewal options. Such
leases are typically cross-defaulted against the corresponding franchise
agreement for that site.

     The following table sets forth the locations by state of the Popeyes
Company-operated restaurants as of December 27, 1998:

<TABLE>
<CAPTION>
                                                    Land         
                                      Land and     and/or        
                                      Building    Building       
                                       Owned       Leased      Total 
                                      --------    --------    ------- 
<S>                                   <C>         <C>         <C>   
     Texas.........................      21          40          61   
     Louisiana.....................       3          36          39   
     Georgia.......................       2          44          46   
     North Carolina................       -          17          17   
     South Carolina................       -           8           8   
                                      --------    --------    ------- 
       Total Popeyes...............      26         145         171   
                                      ========    ========    =======  
</TABLE>

                                       20
<PAGE>
 
     The following table sets forth the locations by state of the Churchs
Company-operated restaurants as of December 27, 1998:

<TABLE>
<CAPTION>
                                                      Land         
                                       Land and      and/or        
                                       Building     Building       
                                        Owned        Leased      Total 
                                       --------     --------     ----- 
<S>                                    <C>          <C>          <C>   
     Texas..........................        151           96       247 
     Georgia........................         34           17        51 
     Louisiana......................         20           18        38 
     Alabama........................         25           10        35 
     Arizona........................         15            9        24 
     Florida........................         22            2        24 
     Oklahoma.......................         17            2        19 
     Mississippi....................         11            4        15 
     Tennessee......................         13            1        14 
     New Mexico.....................          5            2         7 
     Missouri.......................          6            -         6 
     Arkansas.......................          4            1         5 
     Nevada.........................          2            2         4 
     Kansas.........................          2            -         2 
                                       --------     --------     ----- 
       Total Churchs................        327          164       491 
                                       ========     ========     =====  
</TABLE>

     The following table sets forth the locations by state of the SCC Company-
operated restaurants as of December 27, 1998:

<TABLE>
<CAPTION>
                                                      Land
                                       Land and      and/or
                                       Building     Building
                                         Owned       Leased      Total
                                       --------     --------     -----
<S>                                    <C>          <C>          <C>
     Washington....................        -           27          27
     California....................        -           10          10
     Illinois......................        -            9           9
     Oregon........................        -            5           5
     Massachusetts.................        -            3           3
     Georgia.......................        -            1           1
     Texas.........................        -            1           1
     Virginia......................        -            1           1
                                       --------     --------     -----
        Total SCC..................        -           57          57
                                       ========     ========     =====
</TABLE>

                                       21
<PAGE>
 
     The following table sets forth the locations by state of the Cinnabon
Company-operated restaurants as of December 28, 1997:

<TABLE>
<CAPTION>
                                                      Land
                                       Land and      and/or
                                       Building     Building
                                         Owned       Leased      Total
                                       --------     --------    -------
<S>                                    <C>          <C>         <C>
     California.....................       -           46         46  
     Washington.....................       -           24         24 
     Florida........................       -           15         15 
     Illinois.......................       -           15         15 
     Ohio...........................       -           12         12 
     Texas..........................       -           10         10 
     Massachusetts..................       -            9          9 
     Michigan.......................       -            8          8 
     Pennsylvania...................       -            8          8 
     Indiana........................       -            7          7 
     Wisconsin......................       -            7          7  
     New Jersey.....................       -            6          6
     Hawaii.........................       -            4          4
     Maryland.......................       -            4          4
     Nevada.........................       -            4          4
     Kentucky.......................       -            3          3
     North Carolina.................       -            3          3
     Oregon.........................       -            3          3
     Virginia.......................       -            3          3
     Georgia........................       -            2          2
     Iowa...........................       -            2          2
     Missouri.......................       -            2          2
     New York.......................       -            2          2
     Tennessee......................       -            2          2
     Alabama........................       -            1          1
     Colorado.......................       -            1          1
     Connecticut....................       -            1          1
     Delaware.......................       -            1          1
     Kansas.........................       -            1          1
     Montana........................       -            1          1
     Nebraska.......................       -            1          1
     New Hampshire..................       -            1          1
     New Mexico.....................       -            1          1
     South Carolina.................       -            1          1
     South Dakota...................       -            1          1
                                       -------      -------     -------
          Total Cinnabon............       -          212        212
                                       =======      =======     =======
</TABLE>

                                       22
<PAGE>
 
     The following table sets forth the locations by state of the Chesapeake
Company-operated restaurants as of December 27, 1998:

<TABLE>
<CAPTION>
                                                      Land
                                        Land and     and/or
                                        Building    Building
                                         Owned       Leased     Total
                                        --------    --------    -----
<S>                                     <C>         <C>         <C>
     Georgia......................          -          3          3
     Maryland.....................          -          1          1
                                        --------    --------    -----
          Total Chesapeake........          -          4          4
                                        ========    ========    =====
</TABLE>

     The Company's headquarters are located in approximately 102,000 square feet
of leased and subleased office space in Atlanta, Georgia. The leased space,
covering approximately 87,000 square feet, is subject to extensions through
2013, and the subleased space is subject to extensions through 2003. The
Company's Popeyes division relocated to another facility in Atlanta, Georgia on
July 1, 1998. The Company's Churchs division will be relocating to another
facility in Atlanta, Georgia in April 1999. The Company believes that its
existing headquarters provides sufficient space to support its current needs.
The Company's wholly-owned subsidiaries, SCC and Cinnabon both lease office
space in Seattle, Washington. SCC has four distribution facilities that service
SCC's coffee wholesale operations. Two of the distribution centers are located
in the Seattle, Washington area. The other two facilities are located in
Portland, Oregon and Chicago, Illinois. The Company's accounting and computer
facilities and its Ultrafryer Systems manufacturing facilities are located in
San Antonio, Texas and are housed in three buildings that are located on
approximately 16 acres of land owned by the Company.

      Substantially all of the properties and assets of the Company are pledged
as collateral against the Company's bank credit facility (See Note 8 to the
Company's Consolidated Financial Statements).


ITEM 3.  LEGAL PROCEEDINGS

     In July 1997, CP Partnership ("CP") filed a complaint against the Company
alleging patent infringement regarding the design of the proprietary gas fryer
manufactured by the Company's manufacturing division. This case was segregated
into a patent infringement claim and a contract claim. In August 1998, the Court
dismissed CP's patent infringement claim. CP has appealed this judgment. In
November 1998, the Company settled the contract claim for an immaterial amount.
It is management's belief that the final outcome of the patent infringement
claim will not have an adverse effect on the Company's consolidated financial
position or results of operations.

     While the Company is party to a number of other pending legal proceedings
that have arisen in the ordinary course of its business, management does not
believe that the Company is a party to any pending legal proceeding, the
resolution of which would have a material adverse effect on the Company's
financial condition or results of operations.

                                       23
<PAGE>
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.


                                   PART II.


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     There is no established public trading market for the common stock of the
Company. As of March 29, 1999, the number of record holders of the Company's
common stock was 100.

     The Company has not declared or paid cash dividends to its shareholders.
The Company anticipates that all of its earnings in the near future will be
retained for the development and expansion of its business and, therefore, does
not anticipate paying dividends on its common stock in the foreseeable future.
Declaration of dividends on the common stock will depend upon, among other
things, levels of indebtedness, future earnings, the operating and financial
condition of the Company, its capital requirements and general business
conditions. The agreements governing the Company's indebtedness contain
provisions, which restrict the ability of the Company to pay dividends on its
common stock. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."

     On October 15, 1998, the Company sold 2,795,703 shares of its common stock
to "qualified investors" who are existing shareholders and option holders at a
price of $7.75 per share. The Company received approximately $20.3 million in
cash and $1.3 million in notes receivable from certain shareholders and option
holders. All of these unregistered securities were issued by AFC pursuant to the
limited offering exception under Rule 506 of Regulation D. Cash proceeds from
the sale of stock was used to fund a portion of the purchase price to acquire
Cinnabon International, Inc. and to pay $1.0 million in stock issuance costs in
connection with the stock offering. The $1.0 million in stock issuance costs was
paid to Freeman Spogli and Co., Inc. ("FS"), an affiliate of the Company's
majority shareholder. A second affiliate of FS purchased the majority of shares
under this offering.

                                       24
<PAGE>
 
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 
     The following table sets forth selected historical consolidated financial
information for the Company for the periods and the dates indicated.  The
balance sheet data and statement of operations data for the years ended December
25, 1994, December 31, 1995, December 29, 1996, December 28, 1997 and December
27, 1998 set forth below have been derived from the financial statements of the
Company, which have been audited by Arthur Andersen LLP, independent public
accountants.  This selected historical consolidated financial information should
be read in conjunction with, and is qualified in its entirety by (i)
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and (ii) the audited Consolidated Financial Statements for the
Company and the notes thereto, each of which is included elsewhere in this
report.

<TABLE>
<CAPTION>
                                                                       Year Ended (1)
                                             ------------------------------------------------------------------------
                                             December 27,  December 28,   December 29,   December 31,    December 25,
                                                1998          1997           1996           1995              1994
                                             ------------  ------------   ------------   ------------    ------------
<S>                                          <C>           <C>            <C>            <C>             <C>
REVENUES:
   Restaurant sales.......................    $  488,574      $  403,285     $  430,280       $426,707        $401,855
   Franchise revenues.....................        66,606          64,055         51,336         47,916          41,581
   Wholesale revenues.....................        36,411               -              -              -               -
   Manufacturing revenues.................         7,561           7,647          8,222          9,969          12,026
   Other revenues.........................         9,939           8,766          8,005          8,320           8,252
                                             -----------    ------------   ------------   ------------    ------------
    Total revenues........................       609,091         483,753        497,843        492,912         463,714

COSTS AND EXPENSES:
   Restaurant cost of sales...............       155,627         131,374        142,199        139,286         133,893
   Restaurant operating expenses..........       246,448         197,324        211,275        214,703         206,212
   Wholesale cost of sales................        18,466               -              -              -               -
   Wholesale operating expenses...........         8,313               -              -              -               -
   Manufacturing cost of sales............         5,802           6,381          7,201          9,180          11,414
   General and administrative.............        89,457          79,541         76,071         78,095          72,540
   Executive compensation award (2).......             -               -              -         10,647               -
   Depreciation and amortization..........        46,078          33,803         30,904         28,665          25,438
   Impairment of Chesapeake intangible....         6,800               -              -              -               -
   Charges for restaurant closings........         9,183             479          1,304            688             650
   Provision for software write-offs......         5,000               -              -              -               -
   Gain on sale of fixed assets from
    AFDC transaction......................             -          (5,319)             -              -               -
                                             -----------    ------------   ------------   ------------    ------------
    Total costs and expenses..............       591,174         443,583        468,954        481,264         450,147
                                             ------------   ------------   ------------   ------------    ------------

INCOME FROM OPERATIONS....................         17,917         40,170         28,889         11,648          13,567

OTHER EXPENSES:...........................
   Interest, net..........................         30,786         20,645         15,875         23,444          19,172
                                             ------------   ------------   ------------   ------------    ------------

NET INCOME (LOSS) BEFORE INCOME
   TAXES AND EXTRAORDINARY LOSS...........        (12,869)        19,525         13,014        (11,796)         (5,605)
   Income tax expense (benefit)...........         (4,223)         8,525          5,163         (2,969)           (553)
                                             ------------   ------------   ------------   ------------    ------------
NET INCOME (LOSS) BEFORE
  EXTRAORDINARY LOSS......................         (8,646)        11,000          7,851         (8,827)         (5,052)
   Extraordinary loss, net of taxes (3)...              -              -         (4,456)             -               -
                                             ------------   ------------   ------------   ------------    ------------

NET INCOME (LOSS).........................         (8,646)        11,000          3,395         (8,827)         (5,052)

8% Preferred Stock dividends..............              -              -          1,316          4,555           4,467
10% Preferred Stock dividends
 payable in kind..........................              -          2,240          3,956              -               -
Accelerated accretion of 8% Preferred
 Stock discount upon retirement...........              -              -          8,719              -               -
Accretion of 8% Preferred Stock discount..              -              -            813          2,571           2,250
                                             ------------   ------------   ------------   ------------    ------------
NET INCOME (LOSS) ATTRIBUTABLE
 TO COMMON STOCK..........................     $   (8,646)     $   8,760       $(11,409)   $   (15,953)       $(11,769)
                                             ============   ============   ============   ============    ============
</TABLE>
 

                                       25
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                            Year Ended (1) 
                                              --------------------------------------------------------------------------
                                               December 27,    December 28,   December 25,   December 31,   December 29, 
                                                  1998             1997          1996           1995            1994
                                              -------------    ------------   ------------   ------------   ------------
<S>                                           <C>              <C>            <C>            <C>            <C>    
OTHER FINANCIAL DATA:
 
EBITDA, as defined (4).....                    $     87,037      $   74,017     $   64,866     $   55,342     $   43,435            

                                                                                                                                    

EBITDA margin (5)..........                            14.3%           15.3%          13.0%          11.2%           9.4%           

                                                                                                                                    

CASH FLOWS PROVIDED BY                                                                                                              

 (USED IN):                                                                                                                         

   Operating activities....                          45,537          52,515         47,801         28,031         22,673            

   Investing activities....                        (188,287)        (35,782)       (29,388)       (20,114)       (11,493)           

   Financing activities....                         126,852          (2,985)       (12,806)       (10,721)       (17,530)           

   Cash capital expenditures (6)                                                                                                    

     Maintenance capital expenditures          $      6,059      $    7,756     $    6,010     $    5,483     $    5,050            

     Re-images and renovation                         4,079          13,356         15,342         15,502         10,267            

     New restaurant development                      13,749           4,588          3,215          2,272          1,999            

     Other                                           13,965          16,436          9,384          1,739          3,496            

                                              -------------    ------------   ------------   ------------   ------------
     Total cash capital expenditures           $     37,852      $   42,136     $   33,951     $   24,996     $   20,812            

                                                                                                                                    

RATIO OF EARNINGS TO FIXED                                                                                                          

 CHARGES (7)...............                               -            1.64%         1.29%             -              -            

                                                                                                                                    

BALANCE SHEET DATA:                                                                                                                 

   Total assets............                    $    556,465      $  380,002     $  339,668     $  328,645     $  327,494            

   Total debt and capital lease                                                                                                     

   obligations.............                         360,711         243,882        151,793        204,025        193,646            

   Mandatorily redeemable preferred                                                                                                 

   stock...................                               -               -         59,956         46,468         43,897            

   Total shareholders                                                                                                               

    equity (deficit).......                          87,917          48,459         37,902        (21,665)        (6,707)           

                                                                                                                                    

RESTAURANT DATA (UNAUDITED) (8):                                                                                                    

Systemwide restaurant sales (in                                                                                                     

(thousands):                                                                                                                        

   Popeyes.................                    $    954,305      $  853,078     $  762,108     $  710,840     $  649,880            

   Churchs.................                         755,074         723,988        675,996        647,746        590,261            

   Cinnabon................                          41,738               -              -              -              -            

   Seattle Coffee..........                          24,887               -              -              -              -            

   Chesapeake Bagel........                          61,474          50,878              -              -              -            

                                              -------------    ------------   ------------   ------------   ------------
   Total...................                    $  1,837,478      $1,627,944     $1,438,104     $  358,586     $1,240,141            

                                              =============    ============   ============   ============   ============            

                                                                                                                                    

Systemwide restaurant units:                                                                                                        

   Popeyes.................                           1,292           1,131          1,021            964            907            

   Churchs.................                           1,399           1,356          1,257          1,219          1,165            

   Cinnabon................                             369               -              -              -              -            

Seattle Coffee.............                              71               -              -              -              -            

   Chesapeake Bagel........                             107             155              -              -              -            

                                              -------------    ------------   ------------   ------------   ------------
   Total...................                           3,238           2,642          2,278          2,183          2,072            

                                              =============    ============   ============   ============   ============            

                                                                                                                                    

Systemwide percentage                                                                                                               

 change                                                                                                                             

   in comparable                                                                                                                    

    restaurant sales (9):                                                                                                           

   Popeyes domestic........                             5.2%            3.6%           0.5%           1.2%           2.0%           

   Churchs domestic........                             4.6%            4.0%           4.6%           4.6%           5.1%           

   Popeyes international...                           (13.3)%           1.3%           4.3%          11.6%          (2.2)%          

   Churchs international...                            (1.5)%           2.6%          (2.1)%          0.9%           3.4%           

                                                                                                                                    

Total commitments outstanding,                                                                                                      

end of period (10)                                    1,757           1,715          1,319          1,083          1,047  
</TABLE> 

(1) The company has a 52/53-week fiscal year ending on the last Sunday in
    December, which normally consists of 13 four-week periods. The fiscal year
    ended December 31, 1995 included 53 weeks of operations.

(2) During 1995, the Board of Directors granted a special award of $10.0 million
    to the CEO of the Company and his designees contingent upon the happening of
    certain events related to a recapitalization of the Company. See "Item 11.
    Executive Compensation - Note (2)." The award became payable at the time of
    the Recapitalization. This award was paid in 1996 in approximately 3.0
    million shares of the Company's common stock valued at $3.317 per share, the
    market value of the Company's common stock at the date of issuance. As a
    result of the Recapitalization, certain

                                       26
<PAGE>
 
     senior executive officers became fully vested in certain stock options
     pursuant to the terms of the 1992 Stock Option Plan resulting in
     recognition of $647,000 of compensation expense in 1995.

(3)  The extraordinary loss recorded in fiscal 1996 represents the loss
     associated with the prepayment of certain debt obligations of the Company,
     net of related income tax effects.

(4)  EBITDA is defined as income from operations plus depreciation and
     amortization; adjusted for non-cash items related to gains/losses on asset
     dispositions and write-downs, compensation expense related to stock option
     activity (deferred compensation), the executive compensation award (see
     Note 2 above) and non-cash officer notes receivable items related to the
     executive compensation award. EBITDA, as defined, should not be construed
     as a substitute for income from operations or as a better indicator of
     liquidity than cash flow from operating activities, which is determined in
     accordance with generally accepted accounting principles. EBITDA, as
     defined, is included herein to provide additional information with respect
     to the ability of the Company to meet its future debt service, capital
     expenditure and working capital requirements. In addition, management
     believes that certain investors find EBITDA, as defined, to be a useful
     tool for measuring the ability of the Company to service its debt. EBITDA,
     as defined, is not necessarily a measure of the Company's ability to fund
     its cash needs. See the Consolidated Statements of Cash Flows of the
     Company and the related Notes to the Consolidated Financial Statements
     thereto attached.

(5)  EBITDA margin represents EBITDA, as defined, divided by total revenues.

(6)  Capital expenditures (excluding expenditures funded through capital leases)
     have been segregated into the following categories to provide additional
     information:

     .    Maintenance capital expenditures-represents day to day expenditures
          related to restaurant equipment replacements and general restaurant
          capital improvements.

     .    Re-images and renovation-represents significant restaurant renovations
          and upgrades pursuant to the Company's re-imaging and renovation
          activities.

     .    New restaurant development-represents new Company-operated restaurant
          construction and development.

     .    Other-represents capital expenditures at various corporate offices and
          new restaurant equipment such as fryers and security systems.

(7)  The Company had a deficiency of earnings to fixed charges for the fiscal
     years December 25, 1994, December 31, 1995 and December 27, 1998 of
     approximately $5,869,000, $12,284,000 and $13,139,000, respectively.
     Earnings consist of income (loss) before taxes, plus fixed charges
     (excluding capitalized interest). Fixed charges consist of interest
     expense, amortization of debt issuance cost and debt discount, preferred
     stock dividend requirements and accretion (including related tax effects),
     and one-third of rent expense on operating leases considered representative
     of the interest factor attributable to rent expense.

(8)  Represents restaurant sales for all franchised and Company-operated
     restaurants. Sales information for franchised restaurants is as reported by
     franchisees or, in some instances, estimated by the Company based on other
     data, and is unaudited.

(9)  Prior year sales figures for Cinnabon, Seattle Coffee, and Chesapeake are
     not comparable since these acquisitions occurred during 1997 and 1998.

(10) Commitments represent commitments to open franchised restaurants, as set
     forth in development agreements. On a historical basis, a number of such
     commitments have not resulted in restaurant openings. There can be no
     assurance that parties to development agreements will open their respective
     number of restaurants.

                                       27
<PAGE>
 
ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

     This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended.  Such
forward-looking statements relate to the plans, objectives and expectations of
the Company for future operations.  In light of the risks and uncertainties
inherent in any discussion of the Company's expected future performance or
operations, the inclusion of forward-looking statements in this report should
not be regarded as a representation by the Company or any other person that
these will be realized.  Such performance could be materially affected by a
number of factors, including without limitation those factors set forth in the
"Item 1.  Business" section in this filing.


ACQUISITIONS

     CINNABON ACQUISITION

     On October 15, 1998, the Company acquired Cinnabon International, Inc.
("CII"), the operator and franchisor of 363 retail cinnamon roll bakeries
operating in 39 states, Canada and Mexico. Two hundred and eleven of the retail
cinnamon roll bakeries are Company-operated and are located within the United
States.  In connection with the acquisition, CII became a wholly-owned
subsidiary of AFC through the merger of AFC Franchise Acquisition Corp. into CII
(the "Acquisition").

     The Company acquired CII for $64.0 million in cash.  The Company obtained
$44.7 million of the cash consideration from its 1997 Credit Facility, which was
amended to add a $50.0 million Tranche B term loan (see below).  The remaining
$19.3 million cash consideration was funded with the proceeds from the sale of
approximately 2.8 million shares of AFC common stock to certain "qualified"
investors who are existing AFC shareholders and option holders.  The shares were
sold at a price of $7.75 per share and net proceeds from the sale totaled
approximately $19.3 million.

 
RESULTS OF OPERATIONS

     The following table presents selected revenues and expenses as a percentage
of total revenues for the Company's Consolidated Statements of Operations for
the fiscal years ended December 27, 1998, December 28, 1997 and December 29,
1996.

                                       28
<PAGE>
 
PERCENTAGE RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
 
                                                          Year Ended (1)
                                          ----------------------------------------------
                                           December 27,    December 28,    December 29,
                                              1998            1997            1996
                                           ------------    ------------    ------------
<S>                                        <C>             <C>             <C>       
REVENUES:
 Restaurant sales.......................        80.3 %         83.4 %          86.4 %
 Franchise revenues.....................        10.9           13.2            10.3 
 Wholesale revenues.....................         6.0              -               - 
 Manufacturing revenues.................         1.2            1.6             1.7 
 Other revenues.........................         1.6            1.8             1.6 
                                              --------       --------        -------    
  Total revenues........................       100.0 %        100.0 %         100.0 %
                                              --------       --------        -------
                                                                                    
COSTS AND EXPENSES:                                                                 
 Restaurant cost of sales (1)...........        31.9 %         32.6 %          33.0 %
 Restaurant operating expenses (1)......        50.4           48.9            49.1 
 Wholesale cost of sales (2)............        50.7              -               - 
 Wholesale operating expenses (2).......        22.8              -               - 
 Manufacturing cost of sales (3)........        76.7           83.4            87.6 
 General and administrative.............        14.7           16.4            15.3 
 Depreciation and amortization..........         7.6            7.0             6.2 
 Impairment of Chesapeake intangible....         1.1              -               - 
 Charges for restaurant closings........         1.5            0.1             0.3 
 Provision for software write-offs......         0.8              -               - 
 Gain on sale of fixed assets from                                                  
  AFDC transaction......................           -           (1.1)              - 
  Total costs and expenses..............        97.1           91.7            94.2 
                                                                                    
Income from operations..................         2.9            8.3             5.8 
                                                                                    
Interest expense, net...................         5.1            4.3             3.2 
                                                                                    
Net income (loss) before extraordinary                                              
 loss and taxes.........................        (2.1)           4.0             2.6 
                                                                                    
Income tax expense (benefit)............        (0.7)           1.8             1.0 
                                                                                    
Net income (loss) before                                                            
 extraordinary items....................        (1.4)%          2.2 %           1.6 %
</TABLE>
(1)  Expressed as a percentage of restaurant sales by Company-operated
     restaurants.
(2)  Expressed as a percentage of wholesale revenues.
(3)  Expressed as a percentage of manufacturing revenues.

                                       29
<PAGE>
 
SELECTED CONSOLIDATED FINANCIAL DATA


The following table sets forth certain financial information and other
restaurant data relating to Company-operated and franchised restaurants (as
reported to the Company by franchisees) for the fiscal years ended December 27,
1998, December 28, 1997 and December 29, 1996:
<TABLE>
<CAPTION>
 
                                                                Year Ended
                                       ------------------------------------------------------------------------------------------
                                          December 27,        December 28,     % Change        December 29,         % Change
                                             1998                1997        1997 - 1998          1996             1996 - 1997
                                        --------------       -------------    ------------     -----------         --------------
                                                                    (dollars in millions)
<S>                                        <C>                <C>             <C>              <C>                 <C>      
 
EBITDA, as defined (1)................      $   87.0          $     74.0      17.6   %         $    64.9           14.1   %
 
EBITDA margin.........................          14.3  %             15.3  %   (6.7)                 13.0  %        17.5
 
Capital Expenditures (2)..............          41.5                62.9     (34.0)                 46.3           36.0
 
Restaurant data (unaudited):
 
Systemwide restaurant sales (3):
            Popeyes...................      $  954.3          $    853.0      11.9%            $   762.1           11.9   %
            Churchs...................         755.1               724.0       4.3                 676.0            7.1
            Cinnabon..................          41.7                 -         N/A                   -              N/A
            Seattle Coffee............          24.9                 -         N/A                   -              N/A
            Chesapeake................          61.5                50.9      20.8                   -              N/A
                                            --------          ----------                       ---------   
               Total                        $1,837.5          $  1,627.9      12.9%            $ 1,438.1           13.2   %
                                            ========          ==========                       =========   
 
Systemwide restaurant openings:
            Popeyes...................           198                 137        44.5%                110             24.6   %
            Churchs...................            87                 132       (34.1)                117             12.8
            Cinnabon..................             6                   -         N/A                   -              N/A
            Seattle Coffee............            17                   -         N/A                   -              N/A
            Chesapeake................            11                  27       (59.3)                  -              N/A
                                            --------          ----------                       ---------           
               Total                             319                 296         8.1%                227             30.4   %
                                            ========          ==========                       =========      
                                         
Systemwide restaurants open,             
            end of period:               
            Popeyes...................         1,292               1,131        14.2               1,021             10.8   %
            Churchs...................         1,399               1,356         3.2               1,257              7.9
            Cinnabon..................           369                   -         N/A                   -              N/A
            Seattle Coffee............            71                   -         N/A                   -              N/A
            Chesapeake................           107                 155       (31.0)                  -              N/A
                                            --------          ----------                       ---------
               Total                           3,238               2,642        22.6%              2,278             16.0   %
                                            ========          ==========                       ========= 
Systemwide percentage change in          
     comparable restaurant sales (3):    
            Popeyes domestic..........           5.2 %               3.6%                            0.5% 
            Churchs domestic..........           4.6                 4.0                             4.6  
            Popeyes international.....         (13.3)                1.3                             4.3  
            Churchs international.....          (1.5)                2.6                            (2.1) 
</TABLE>
(1)  EBITDA is defined as income from operations plus depreciation and
     amortization; adjusted for items related to gains/losses on asset
     dispositions and write-downs and compensation expense related to stock
     option activity (deferred compensation).
(2)  Excludes fixed assets added in connection with the Seattle Coffee, Cinnabon
     and Pinetree acquisitions and capital expenditures made to convert the
     Pinetree restaurants to Popeyes Company-operated restaurants.
(3)  Prior year sales figures for Cinnabon, Seattle Coffee and Chesapeake and
     are not comparable since these acquisitions occurred during 1997 and 1998.

                                       30
<PAGE>
 
YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997

Certain items relating to prior periods have been reclassified to conform with
current presentation.

   REVENUES

   Total revenues increased 25.9%, or $125.3 million, during the fiscal year
ended December 27, 1998, as compared to the fiscal year ended December 28, 1997.

   RESTAURANT SALES.    Restaurant sales were up 21.1% or $85.3 million over the
prior year, primarily due to sales generated by Company-operated restaurants
acquired during 1998.

Chicken

   Sales at Company-operated chicken restaurants increased 10.2% or $41.1
million from the prior year. The increase was primarily attributable to sales
generated by Company-operated restaurants acquired during the first quarter of
1998.  On February 10, 1998, the Company acquired all of the restaurant
properties operated by Pinetree Foods, Inc. ("Pinetree") and during the first
and second quarters of 1998 converted these properties into 66 Popeyes Company-
operated restaurants.  Sales generated by these restaurants during 1998 were
$32.9 million. The remaining sales increase was due to an increase in comparable
sales for Company-operated chicken restaurants of 4.5% for the year.

Bakery Cafes

   Sales at Company-operated bakery cafes were up $23.8 million from the prior
year.  Sales increased primarily due to the acquisition of the Cinnabon bakery
cafes in October 1998.  Sales for the Cinnabon bakeries during 1998 were $22.8
million.

Seattle Coffee

   On March 18, 1998, the Company acquired all of Seattle Coffee Company's
(SCC's) common stock, resulting in the acquisition of 59 Company-operated cafes.
Sales generated by the SCC cafes during 1998 were $20.4 million.

   FRANCHISE REVENUES.  Franchise revenues increased $2.6 million or 4.0% from
the prior year.

Chicken

   Domestic franchise royalty revenue for chicken restaurants increased $6.1
million or 14.4% from the prior year.  The increase in franchise royalty revenue
was primarily

                                       31
<PAGE>
 
attributable to a 130 or 9.8% increase in the average number of chicken
franchised restaurants open during 1998 as compared to 1997. The remaining
increase was attributable to an increase in comparable sales for domestic
franchised restaurants of 5.0% for the year.

   Domestic franchise fee income decreased $4.2 million or 58.3% for the year
ended December 27, 1998, compared to the year ended December 28, 1997. Franchise
fee income in the amount of $2.5 million was recorded in connection with the
sale of 100 Company-operated Churchs restaurants to the Atlanta Franchise
Development Corporation ("AFDC") during the second quarter of 1997 and $1.2
million was recorded in connection with the sale of 47 Company-operated Churchs
restaurants to the Royal Capital group during the first quarter of 1997. AFDC
and the Royal Capital group both entered into franchise agreements with the
Company to each develop 100 additional franchised restaurants. Franchise fee
income was also lower, as domestic franchise restaurant openings during 1998
were 134, versus 170 in 1997.

Bakery Cafes

   Franchise royalty revenue for bakery cafes during 1998 increased $1.4 million
or 82.2% from the prior year, primarily due to the acquisition of the Cinnabon
bakeries in October 1998. Royalty revenues for Cinnabon bakeries were $1.0
million in 1998. Royalty revenues for Chesapeake bakeries were up $0.4 million
over 1997 as a result of the bakeries being owned for the entire fiscal year of
1998.

Seattle Coffee

   Franchise royalty revenue for Seattle Coffee franchised cafes totaled $0.2
million during 1998.  There were a total of 11 Seattle Coffee domestic
franchised cafes as of December 27, 1998.

International

   International franchise revenues were down $0.6 million or 4.6% from the
prior year. International franchise royalty revenue decreased $1.4 million or
13.6%, while franchise fees increased $0.8 million or 34.2%. Royalty revenues
were down, despite an increase in the number of international franchised
restaurants, primarily due to the depressed economies in Southeast Asia.
Overall, international comparable sales were down 7.0% from the prior year.
Unfavorable currency fluctuations caused further decreases in royalty revenues
for 1998 as compared to 1997. International franchise fee income was up over the
prior year, primarily due to amounts recorded in connection with the development
of international Cinnabon bakeries and Seattle Coffee cafes in the Middle East.

   WHOLESALE REVENUES. The Company's wholesale revenues consist of sales of
premium brand coffee from its roasting and distribution company to food service

                                       32
<PAGE>
 
retailers, supermarkets and its own coffee cafes.  Wholesale revenues for the
year ended December 27, 1998 were $36.4 million.

   MANUFACTURING REVENUES.  Manufacturing revenues consist of sales of
proprietary fryers and other custom-fabricated restaurant equipment to
distributors and franchisees.  Manufacturing revenues decreased $0.1 million
from fiscal year 1997 to fiscal year 1998.

   OPERATING COSTS AND EXPENSES

   RESTAURANT COST OF SALES.  Restaurant cost of sales for 1998 increased 18.5%
or $24.3 million from the prior year. The increase was primarily attributable to
the increase in restaurant sales.  Expressed as a percentage of restaurant
sales, cost of sales were 31.9% for the year ended December 27, 1998 and 32.6%
for the year ended December 28, 1997.  The decrease in this percentage is
primarily due to selective menu price increases taken during 1998.

   RESTAURANT OPERATING EXPENSES.  Restaurant operating expenses for the fiscal
year ended December 27, 1998 increased $49.1 million or 24.9% from the
corresponding period in 1997.  The increase in restaurant operating expenses was
primarily due to the increase in the number of Company-operated restaurants.
Restaurant operating expenses as a percentage of restaurant sales were 50.4% for
fiscal year 1998, compared to 48.9% for fiscal year 1997.  The increase in this
percentage was primarily attributable to high restaurant operating costs
incurred by the converted Pinetree restaurants.   High labor and training costs
at the Pinetree restaurants caused personnel costs to increase by 0.8% as a
percentage of sales.  High rent costs at the Pinetree restaurants caused other
restaurant operating costs to increase by 0.7% as a percentage of sales.
Management believes that the closure of the underperforming Pinetree restaurants
will help to lower these costs during 1999 and has implemented plans to reduce
restaurant operating costs at the remaining Pinetree restaurants still in
operation.

   WHOLESALE COST OF SALES.  Wholesale cost of sales represent the cost of
coffee beans and the direct overhead used to roast and blend specialty coffee
blends. Wholesale cost of sales were $18.5 million, which as a percentage of
wholesale revenues was 50.7%.

   WHOLESALE OPERATING EXPENSE. Wholesale operating expenses represent the
overhead incurred in connection with the distribution of specialty coffee
blends. Wholesale operating expenses were $8.3 million, which as a percentage of
wholesale revenues was 22.8%.

   MANUFACTURING COST OF SALES.  Manufacturing cost of sales represent the cost
of raw materials and direct labor used to manufacture the restaurant equipment
sold to franchisees and third parties and direct and indirect manufacturing
overhead applied during the manufacturing process.  Manufacturing cost of sales
as a percentage of manufacturing revenues decreased from 83.4% during fiscal
year 1997 to 76.7% during fiscal year 1998.  The decrease in this percentage was
primarily due to a sales mix

                                       33
<PAGE>
 
consisting of more standard-configurated versus custom-configurated fryers and
certain price increases taken during fiscal year 1998 .

   GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses
increased $9.9 million or 12.5% during 1998 compared to the prior year.  The
increase was primarily attributable to general and administrative expenses
incurred by the Seattle Coffee and Cinnabon operations, which totaled $8.8
million combined.  As a percentage of total revenues, general and administrative
expenses decreased from 16.4% for fiscal year 1997 to 14.7% for fiscal year
1998.  The decrease in this percentage was primarily attributable to a decrease
in corporate bonuses in the amount of $4.6 million from 1997 to 1998.  Due to
the Company not meeting bonus plan incentive benchmarks, incentive bonuses for
corporate employees were not earned during the year for payment in 1999.  Also
contributing to the decrease in this percentage was the acquisition of SCC's
operations.  SCC's general and administrative expenses as a percentage of SCC
revenues was 11.4% for the fiscal year ended December 27, 1998, causing the
overall percentage for the Company to decrease from the prior year.

   DEPRECIATION AND AMORTIZATION.  Depreciation and amortization increased $12.3
million or 36.4% from the prior year.  Depreciation and amortization as a
percentage of total revenues increased from 7.0% to 7.6%.   Depreciation and
amortization attributable to Seattle Coffee and Cinnabon tangible and intangible
assets totaled $6.2 million for 1998.  Depreciation and amortization
attributable to Pinetree restaurants during 1998 totaled $4.9 million.  Overall,
net property and equipment of $268.1 million as of December 27, 1998 was up
29.0% over net property and equipment of $207.8 million at December 28, 1997.
Net intangible assets as of December 27, 1998 were $208.1 million, versus net
intangible assets of $100.3 million as of December 28, 1997.

   IMPAIRMENT OF CHESAPEAKE INTANGIBLE.   During 1998 management wrote down the
Chesapeake franchise value and trademarks by $6.8 million.  The write-down was
made subsequent to a FAS 121 review of Chesapeake operations, which indicated a
partial impairment loss related to the intangible asset.  The decrease in the
value of the intangible asset resulted primarily from the closing of 58
franchised Chesapeake bagel bakeries during 1998 and the weakness of the bagel
bakery industry in general.

   CHARGES FOR RESTAURANT CLOSINGS.  Charges for restaurant closings include
write-downs of restaurant assets to net realizable value, provisions related to
future rent obligations for the closed properties and write-offs of any
intangible assets identified with the restaurant properties.  Charges for
restaurant closings were $9.2 million during 1998, compared to $0.5 million
during 1997.  The increase was primarily attributable to charges taken for the
closing of 14 Pinetree restaurants during fiscal year 1998.  Charges taken for
these closings during 1998 totaled $8.5 million.

    PROVISION FOR SOFTWARE WRITE-OFFS.  Management recorded a provision for
software write-offs in the amount of $5.0 million during fiscal year 1998.  The
provision was made after a third party technology expert evaluation of the
Company's "back office" automation

                                       34
<PAGE>
 
systems currently under development. The technology expert evaluating these 
systems concluded that certain elements of the software being developed were not
stable in the AFC information technology environment. Management is in the
process of performing its own review of these systems, but believes that it is
probable that certain of the "back office" software development costs will be
deemed to have little or no value. Therefore, management made a provision of
$5.0 million to establish a reserve as of December 27, 1998 for the potential
write offs of these assets. (See Note 1 - "Summary of Significant Accounting
Policies" of the Company's Consolidated Financial Statements.)

   GAIN ON SALE OF ASSETS FROM AFDC TRANSACTION.   During the second quarter of
1997, the Company recorded a $5.3 million pre-tax gain associated with the sale
of 100 Company-operated restaurants to AFDC.

   INCOME FROM OPERATIONS.   Income from operations decreased $22.3 million or
55.4% from the prior year, primarily due to unusual charges taken during 1998
and a one-time gain recorded during 1997.  During 1998, the Company recorded
write-downs and charges with respect to the closure of 14 Pinetree restaurants
totaling $8.5 million, an impairment charge with respect to the Chesapeake
franchise value and trademarks intangible in the amount of $6.8 million and a
$5.0 million provision for software write-offs.  Also, income from operations
for 1997 included a $5.3 million pre-tax gain associated with the sale of 100
Company-operated restaurants to AFDC.

   Income from operations for chicken restaurants decreased $20.8 million or
27.3%, primarily due to the Pinetree write-downs in 1998 and the pre-tax gain
recorded for the AFDC sale in 1997.  In addition, the Company realigned its
management structure during 1998 to more directly support its various restaurant
concepts, resulting in a shift in overhead costs from corporate to the chicken
brands.  The remaining decrease in income from operations for the chicken
restaurants was due to start up costs related to establishing the Popeyes brand
in new markets through its conversion of Pinetree restaurants in 1998.   Income
from operations for bakery cafes decreased $6.5 million from the prior year,
primarily due to the impairment charge taken against the Chesapeake franchise
value and trademarks.

   NET INTEREST EXPENSE.  Interest expense, net of capitalized interest, for the
year ended December 27, 1998 was $30.8 million, compared to $20.6 million for
the year ended December 28, 1997. The $10.2 million increase in interest expense
was due to higher levels of average debt outstanding and higher effective
interest rates during 1998 as compared with the prior year.  The increase in
average debt outstanding was primarily attributable to the refinancing
transaction completed during the second quarter of 1997, borrowings made under
the Company's acquisition and revolving loan facilities during 1998 and
borrowings made under the new Tranche B term loan (see "--Liquidity and Capital
Resources"). The refinancing transaction also led to higher effective interest
rates during fiscal 1998 compared to fiscal 1997.

                                       35
<PAGE>
 
   INCOME TAXES.  The Company's effective tax rate for fiscal year ended
December 27, 1998 was (32.8)%, compared to 43.6% for fiscal year ended December
28, 1997.  A reconciliation of the Federal statutory rate to the Company's
effective tax rate began with a federal tax benefit rate of (35.0)% for fiscal
year 1998 and a federal tax expense rate of 35.0% for fiscal year 1997.  The tax
benefit rate for 1998 was reduced for non-deductible amortization expense
related to acquired goodwill.

YEARS ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996

Certain items relating to prior periods have been reclassified to conform with
current presentation.

     REVENUES

     Total revenues decreased 2.8%, or $14.1 million, during the fiscal year
ended December 28, 1997, as compared to the fiscal year ended December 29, 1996.

     RESTAURANT SALES.   Restaurant sales decreased $27.0 million or 6.3% from
fiscal year 1996 to fiscal year 1997.

Chicken

     Chicken restaurant sales decreased 6.3% or $27.1 million from the prior
year.  The decrease in chicken restaurant sales was primarily attributable to
the sale of 100 Churchs restaurants to AFDC in March 1997.  Sales generated by
these restaurants during the last three quarters of 1996 totaled $43.4 million.
The overall sales decrease was partially offset by an increase in comparable
sales for the remaining Company-operated chicken restaurants of 5.1% for the
year.

Bakery cafes

     Only one Company-operated bakery cafe was in operation as of the end of
1997.  Sales generated by this Chesapeake bagel bakery during 1997 were $100
thousand.

     FRANCHISE REVENUES.  Franchise revenues increased $12.7 million or 24.8%
from the prior year.  Franchise royalty revenue increased $9.8 million or 22.2%
and franchise fees increased $2.9 million or 40.4%.

Chicken

     Franchise royalty revenues from chicken restaurants increased $6.6 million
or 18.4% from the prior year. The increase in franchise royalty revenue was
primarily attributable to royalty revenues recorded for 100 restaurants
franchised in connection with the AFDC transaction and a comparable sales
increase for domestic franchised chicken restaurants of 3.2%.  Franchise fee
income for chicken restaurants increased $3.9 million

                                       36
<PAGE>
 
or 121.1% from 1996 to 1997, primarily due to franchise fees of $2.5 million
recorded in connection with the sale of 100 restaurants to AFDC and $1.2 million
recorded in connection with the sale of 47 restaurants to the Royal Capital
group.

Bakery Cafes

     Franchise revenues produced by the Chesapeake brand during 1997 totaled
$2.3 million, including $1.7 million in franchise royalty income and $0.6
million in franchise fee income.

International

     Revenues from franchising for international franchised restaurants were
down $0.1 million from 1996 to 1997.  Royalty income was up $1.5 million or
18.3% from the prior year, although franchise fee income was down $1.6 million
or 41.6%.  Royalty income was up as the average number of international
franchised restaurants open during 1997 was up 20.1% from 362 in 1996 to 435 in
1997.  Exchange rate losses on royalties earned in Southeast Asia partially
offset the increase in international royalty income.  Franchise fee income was
down $1.6 million from the prior year, primarily due to a decrease in the amount
of default revenues recorded for terminated international development agreements
and a decrease in international commitments sold from 464 in 1996 to 225 in
1997.

     MANUFACTURING REVENUES.  Revenues from manufacturing decreased 7.0%, or
$0.6 million for the fiscal year ended December 28, 1997, as compared to the
fiscal year ended December 29, 1996.  The decrease was primarily attributable to
a decrease in the sale of smallwares.  The Company sold its Ultrafryer
distribution business during the first half of 1996.

     OPERATING COSTS AND EXPENSES

     RESTAURANT COST OF SALES.  Cost of sales for the year decreased 7.6% or
$10.8 million from the prior year.  The decrease was primarily attributable to a
decrease in restaurant sales. Expressed as a percentage of restaurant sales,
cost of sales were 32.6% for the fiscal year ended December 28, 1997, compared
to 33.0% for the fiscal year ended December 29, 1996. The decrease in the
percentage was attributable to (i) small menu price increases taken in late 1996
and early 1997, (ii) usage reductions in paper items and shortening and (iii)
favorable pricing on certain non-poultry food items.

     RESTAURANT OPERATING EXPENSES.  Restaurant operating expenses for the
fiscal year ended December 28, 1997 decreased $14.0 million or 6.6% from the
corresponding period in 1996.  The decrease in restaurant operating expenses was
primarily attributable to the sale of the 100 AFDC restaurants.  Restaurant
operating expenses as a percentage of restaurant sales were 48.9% for 1997,
compared to 49.1% for 1996.  A decrease in utility costs resulting from the
installation of more energy efficient gas fryers in

                                       37
<PAGE>
 
Company-operated restaurants offset an increase in personnel expenses
resulting from the increase in the minimum wage levels effective October 1,
1996 and September 1, 1997.

     MANUFACTURING COST OF SALES.  Manufacturing cost of sales decreased 11.4%
or $0.8 million for the fiscal year ended December 28, 1997, compared to the
fiscal year ended December 29, 1996.  The decrease was primarily attributable to
the decrease in manufacturing revenues during fiscal year 1997 compared to
fiscal year 1996.

     GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses
increased $3.5 million or 4.6% during 1997 compared to the prior year.  As a
percentage of total revenues, general and administrative expenses increased from
15.3% for fiscal year 1996 to 16.4% for fiscal year 1997.  The increase in
general and administrative expenses was due to a number of factors including,
but not limited to, asset write-downs of software costs, overhead costs
associated with the Chesapeake Bagel brand, an increase in franchise development
marketing costs, costs associated with acquisition activity, costs associated
with information technology initiatives, and deferred compensation expenses
related to employee stock options.

     DEPRECIATION AND AMORTIZATION.  Depreciation and amortization increased
$2.9 million or 9.4% from the prior year.  Depreciation and amortization as a
percentage of total revenues increased from 6.2% to 7.0% from the previous to
the current year.  The increase was primarily due to fixed asset additions made
during this period totaling $62.9 million.  Partially offsetting the increase
was a decrease in depreciation expense associated with the sale of 100
restaurants to AFDC.  Overall, net fixed assets of $207.8 million at fiscal year
ended December 28, 1997 were up 9.8% over net fixed assets of $189.2 million at
fiscal year ended December 29, 1996.

     GAIN ON SALE OF ASSETS FROM AFDC TRANSACTION.   During the second quarter
of 1997, the Company recorded a $5.3 million pre-tax gain associated with the
sale of 100 Company-operated restaurants to AFDC.

     INCOME FROM OPERATIONS.  Income from operations increased $11.3 million or
39.0% from fiscal year 1997 to fiscal year 1998.  The increase was primarily due
to an increase in franchising revenues for chicken restaurants in the amount of
$10.5 million.  The gain on the sale of the 100 AFDC restaurants in the amount
of $5.3 million recognized during fiscal year 1997 was nearly offset by the
decrease in income from operations generated by these restaurants during fiscal
year 1996.

     NET INTEREST EXPENSE.  Interest expense, net of capitalized interest, for
the year ended December 28, 1997 was $20.6 million, compared to $15.9 million
for the year ended December 29, 1996.  The $4.7 million increase in interest
expense was due to higher levels of average debt outstanding and higher
effective interest rates during 1997 as compared with the prior year.  The
increase in average debt outstanding was primarily attributable to the
refinancing transaction completed during the second quarter of 1997

                                       38
<PAGE>
 
(see " -Liquidity and Capital Resources"). The refinancing transaction also led
to higher effective interest rates during 1997 versus the prior year.

     INCOME TAXES.  The Company's effective tax rate for the year ended December
29, 1997 was 43.6%, compared to an effective tax rate of 42.3% (including tax
benefits recorded with respect to the extraordinary loss) for the year ended
December 28, 1996.  Based on the level of pre-tax income, the tax rate for
fiscal year 1997 assumed a federal statutory rate of 35%, versus 34% assumed for
fiscal year 1996.

     EXTRAORDINARY LOSS.  During the second quarter of 1996 the Company
completed a refinancing whereby it sold 21.1 million shares of its common stock
for $70.0 million.  Proceeds from the sale of stock were used, in part, to
retire $65.0 million of the Company's existing debt.  As a result, the Company
recognized an extraordinary loss on the early retirement of debt (net of income
taxes) in the amount of $4.4 million during the fiscal year ended December 29,
1996.  Unamortized debt discounts written off in connection with the early
retirement of debt totaled $7.1 million.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has financed its business activities primarily with funds
generated from operating activities, proceeds from the sale of shares of common
stock, proceeds from long-term debt and a revolving line of credit and proceeds
from the sale of certain Company-operated restaurants.

     Net cash provided by operating activities for the years ended December 27,
1998, December 28, 1997 and December 29, 1996 was $45.5 million, $52.5 million
and $47.8 million, respectively.  Available cash and cash equivalents, net of
bank overdrafts, as of December 27, 1998 was $10.8 million, compared to $23.3
million at December 28, 1997 and $8.4 million at December 29, 1996.  The
Company's working capital deficit as of December 27, 1998, December 28, 1997 and
December 29, 1996 was approximately $34.1 million, $13.6 million and $29.5
million, respectively.  The decrease in available cash and cash equivalents, net
of bank overdrafts from December 28, 1997 to December 27, 1998 was primarily due
to the acquisitions of the Pinetree restaurants and Seattle Coffee Company.

     On February 10, 1998 the Company acquired the assets of Pinetree Foods,
Inc. ("Pinetree") based in Asheville, North Carolina.  The assets of Pinetree
included 81 restaurant units located primarily in North Carolina, South Carolina
and Georgia.  The assets were acquired in cash for a total purchase price of
approximately $24.3 million.  The Company borrowed $16.0 million under its
$100.0 million acquisition facility in order to complete the transaction.  The
Company converted 66 of these restaurants into Company-operated Popeyes
restaurants.  The Company spent approximately $16.0 million to convert these
restaurants.  Funds to convert these restaurants were provided primarily by the
Company's acquisition facility and short-term borrowings under its revolving
line of credit.  As of December 27, 1998, the Company had borrowed $9.0

                                       39
<PAGE>
 
million under its acquisition facility and $7.0 million under its revolving
line of credit to convert these restaurants.

     On March 18, 1998, the Company acquired all of Seattle Coffee Company's
("SCC") common stock for an adjusted purchase price of approximately $68.8
million plus the assumption of approximately $4.8 million of debt.  In order to
complete the transaction, the Company obtained $37.6 million in cash from its
acquisition facility and issued $25.5 million in AFC common stock, options and
warrants. In addition, the Company established a payable of approximately $3.8
million pursuant to a holdback payment provision in the acquisition agreement.
Included in the adjusted purchase price was a contingent payment of $1.9
million, based upon SCC operations achieving a level of earnings, as defined in
the agreement, over a 52-week period from September 29, 1997 to September 27,
1998.

     On October 15, 1998, the Company acquired Cinnabon International, Inc.
("CII"), the operator and franchisor of 363 retail cinnamon roll bakeries
operating in 39 states, Canada and Mexico. Two hundred and eleven of the retail
cinnamon roll bakeries are Company-operated and are located within the United
States.  In connection with the acquisition, which was accounted for as a
purchase, CII became a wholly-owned subsidiary of AFC through the merger of AFC
Franchise Acquisition Corp. into CII (the "Acquisition").

     The Company acquired CII for $64.0 million in cash.  The Company obtained
$44.7 million of the cash consideration from its 1997 Credit Facility, which was
amended to add a $50.0 million Tranche B term loan (see below).  The remaining
$19.3 million cash consideration was funded with the proceeds from the sale of
approximately 2.8 million shares of AFC common stock to certain "qualified"
investors who are existing AFC shareholders and option holders.  The shares were
sold at a price of $7.75 per share and cash proceeds from the sale totaled
approximately $19.3 million.  The Company also received notes receivable from
the investors totaling approximately $1.3 million.

     In connection with the acquisition of CII, the Company amended its existing
1997 Credit Facility (See Note 8-"Long-term Debt" of the Company's Consolidated
Financial Statements) to add a $50.0 million Tranche B term loan. The terms of
the amended 1997 Credit Facility remained substantially unchanged with respect
to security interests, covenants and events of default. At the election of the
Company, the Tranche B term loan will bear interest at (i) a defined base rate
plus 1.75% per annum or (ii) LIBOR plus 2.75% per annum, subject to reduction
based on the achievement of certain leverage ratio levels. Principal repayments
under the term loan are due in quarterly instalments of $0.1 million commencing
December 31, 1998 and increasing to $3.8 million beginning September 30, 2002.
The Tranche B term loan matures on June 30, 2004. As of December 27, 1998, total
amounts outstanding under the Company's 1997 Credit Facility included: Tranche A
term loan - $44.3 million; Tranche B term loan - $50.0 million; Acquisition
Facility- $68.0 million; and Revolving Facility - $7.0 million.

                                       40
<PAGE>
 
     During the fiscal year ended December 27, 1998 the Company invested in
various capital projects totaling $41.5 million.  During this period the Company
invested $13.7 million in new restaurant locations, $4.1 million in its re-
imaging and renovation program and $5.1 million in new management information
systems.  In addition, during 1998 the Company invested $18.6 million in other
capital assets to update, replace and extend the lives of restaurant equipment
and facilities and complete other projects.  Approximately $3.7 million of the
above capital projects were financed through capital lease obligations or note
payable obligations.  The remaining capital projects were financed primarily
through cash flows provided from normal operating activities and internal funds.

     Based upon the current level of operations and anticipated growth,
management of the Company believes that available cash flow, together with the
available borrowings under the Senior Secured Credit Facility and other sources
of liquidity, will be adequate to meet the Company's anticipated future
requirements for working capital, capital expenditures and scheduled payments
under the Senior Subordinated Notes and the Senior Secured Credit Facility.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to market risk from changes in interest rates on
debt and changes in commodity prices.  In addition, a portion of the Company's
receivables are denominated in foreign currency, which exposes it to exchange
rate movements.  Historically, the Company has not utilized hedging contracts to
manage its exposure to foreign currency rate fluctuations since the market risk
associated with international receivables was not determined to be significant.
Management anticipates that such hedging contracts may be used to some extent in
1999 and beyond to reduce the Company's exposure to future foreign currency rate
fluctuations.

     The Company's net exposure to interest rate risk consists of its Senior
Subordinated Notes and borrowings under its 1997 Credit Facility.  The Senior
Subordinated Notes bear interest at a fixed rate of 10.25%.  The aggregate
balance outstanding under the Senior Subordinated Notes as of December 27, 1998
was $175.0 million.  Should interest rates increase or decrease, the estimated
fair value of these notes would decrease or increase, respectively.   As of
December 27, 1998, the fair value of the Senior Subordinated Notes exceeded the
carrying amount by approximately $7.0 million.  The Company's 1997 Credit
Facility has borrowings made pursuant to it that bear interest rates that are
benchmarked to US and European short-term interest rates.  The balances
outstanding under the 1997 Credit Facility as of December 27, 1998 totaled
$169.3 million.  The impact on the Company's annual results of operations of a
hypothetical one-point interest rate change on the outstanding balances under
the 1997 Credit Facility would be approximately $1.7 million.  This assumes no
change in the volume or composition of the debt at December 27, 1998.

                                       41
<PAGE>
 
     The Company and its franchisees purchase certain commodities such as
chicken, potatoes, flour, cooking oil and coffee beans.  These commodities are
generally purchased based upon market prices established with vendors.  These
purchase arrangements may contain contractual features that limit the price paid
by establishing certain price floors or caps.  Historically, the Company has not
used financial instruments to hedge commodity prices.  In the future, the
Company intends to enter into commodity hedging initiatives to control the
ultimate cost paid for these products and limit the impact of changes in
commodity prices.

IMPAIRMENTS OF LONG-LIVED ASSETS

     Effective December 13, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121").  Under FAS 121,
the Company reviews its long-lived assets (such as property and equipment) and
certain identifiable intangible assets for impairment whenever events or
circumstances indicate that the carrying value of an asset may not be
recoverable.  If the sum of the undiscounted estimated future cash flows of an
asset is less than the carrying value of the asset, an impairment loss equal to
the difference between the carrying value and the fair value of the asset is
recognized.  Fair value is estimated to be the present value of expected future
cash flows, as determined by management, after considering such factors as
inflation, interest rates and other economic data.

     During 1998 management reviewed the estimated future cash flows expected
from its Chesapeake bakery cafe group and determined an impairment loss equal to
$6.8 million.  The bagel bakery industry segment has been weak the last two
years and, as a result, 58 franchised Chesapeake bagel bakeries closed during
1998.   Management believes that expected future cash flows from the remaining
bagel bakery restaurants support the carrying values for long-lived tangible and
intangible assets of the Chesapeake brand as of December 27, 1998.

YEAR 2000

     The Company relies to a large extent on computer technology to carry out
its day-to-day operations.  The Company is currently working to resolve the
potential impact of the Year 2000 on the processing of date-sensitive
information by the Company's information technology ("IT") systems and non-IT
systems that are reliant on computer technology.  The Year 2000 problem is the
result of computer programs being written using two digits (rather than four) to
define the applicable year.  Any of the Company's programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000.  This problem could result in a system failure or miscalculations
causing disruptions of operations, including, but not limited to, a temporary
inability to process transactions or engage in normal business activities.

                                       42
<PAGE>
 
     The Company has adopted a Year 2000 plan that includes five phases.  These
phases are: 1) inventory 2) assess 3) remediate 4) test and 5) maintain.
Although the pace of the work varies among IT and non-IT systems and the phases
are often conducted in parallel, the inventory and assess phases have been
substantially completed as of December 27, 1998 and the remediation phase is in
progress. Under the Company's current plan, remediation and testing of IT
systems is scheduled to be completed by the end of its third quarter of 1999.
The Company anticipates the timely completion of this compliance assessment,
which should mitigate the Year 2000 issue.

     To date, the Company has incurred approximately $0.1 million in Year 2000
costs.  These costs are primarily related to fees paid to outside consultants
who helped develop a strategy to assess the Company's Year 2000 issues.  The
Company estimates that the total costs of addressing the Year 2000 issue will
approximate $0.9 million, including the amount that has already been expended.
These costs will be funded through operating cash flows.

     Based upon its compliance assessment, the Company does not expect the Year
2000 problem, including the cost of making the Company's IT and non-IT systems
Year 2000 compliant, to have a material adverse impact on the Company's
financial position or results of operations in future periods.  The cost and
time estimates for the Company's Year 2000 project are based on its best
estimates.  There can be no assurance that these estimates will be achieved or
that planned results will be achieved.  The inability of the Company to resolve
all potential Year 2000 problems in a timely manner could have a material
adverse impact on the Company.

     During August 1994, an outsourcing agreement between the Company and IBM
Global Services ("IGS") was executed to, among other things, enhance and upgrade
the Company's corporate and restaurant hardware and software computer systems.
During the process of upgrading its systems, which is scheduled for completion
by the end of third quarter of 1999, the Company established procedures to
ensure that its new IT systems were Year 2000 compliant. The Company believes
that a significant portion of the potential Year 2000 issues will be resolved
with the completion of its IT system upgrades made in connection with the IGS
contract.

     Under the Company's Franchise Awareness Program and Vendor/Supplier Letter
Program, the Company has and will initiate communications with its significant
suppliers and vendors and its franchisee community in an effort to determine the
extent to which the Company's business is vulnerable to the failure by these
third parties to remediate their Year 2000 problems.   While the Company has not
been informed of any material risks associated with the Year 2000 problem with
respect to these entities, there can be no assurance that the IT and non-IT
systems of these third parties will be Year 2000 compliant on a timely basis.
The inability of these third parties to remediate their Year 2000 problems could
have a material adverse impact on the Company's financial position and results
of operations.

                                       43
<PAGE>
 
     The Company has not yet ascertained what the impact would be on the
Company's financial position and results of operations in the event of failure
of the Company's or third parties' IT and non-IT systems due to the Year 2000
issue.  The Company began developing a contingency plan in the fourth quarter of
1998 and will continue to develop such plan during the first quarter of 1999
designed to allow continued operations in the event that such failures should
occur.

IMPACT OF INFLATION

     The Company believes that, over time, it has generally been able to pass
along inflationary increases in its costs through increased prices of its menu
items.  Accordingly, the effects of inflation on the Company's net income
historically have not been, nor are such effects expected to be, materially
adverse.  Due to competitive pressures, however, increases in prices of menu
items often lag inflationary increases in costs.

SEASONALITY

     The Company has historically experienced the strongest operating results at
Popeyes, Churchs and Chesapeake restaurants during the summer months while
operating results have been somewhat lower during the winter season.  Cinnabon
and Seattle Coffee have traditionally experienced the strongest operating
results during the Christmas holiday shopping season between Thanksgiving and
Christmas.  Certain holidays and inclement winter weather reduce the volume of
consumer traffic at quick-service restaurants and may impair the ability of
certain restaurants to conduct regular operations for short periods of time.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130") was issued.  FAS 130 establishes
standards for reporting and displaying comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements.  This standard requires that all items required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement with the same prominence as other financial
statements.  FAS 130 is effective for fiscal years beginning after December 15,
1997.  Presently, the Company does not have any items which are considered to be
components of comprehensive income and therefore, FAS 130 does not impact the
Company's financial statements at this time.

     In February 1998, Statement of Financial Accounting Standards No. 132,
"Employer's Disclosure about Pensions and Other Post-Retirement Benefits" ("FAS
132") was issued.  FAS 132 revises employer's disclosures about pension and
other post-retirement benefit plans.  It does not change the measurement or
recognition of those plans.  This statement is effective for fiscal years
beginning after December 15, 1997 and

                                       44
<PAGE>
 
impacts the presentation of financial statement disclosures.  The Company 
adopted FAS 132 in fiscal year 1998.

     In June 1998, Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued.  The
statement is effective for all quarters of fiscal years beginning after June 15,
1999.  This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities.  It requires recognition of all
derivatives as either assets or liabilities in the financial statements at fair
value. Management does not believe the implementation of this recent accounting
pronouncement, if applicable, will have a material effect on its consolidated
financial statements.

     In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 provides guidance on the
financial reporting of start-up costs and organization costs. It requires that
costs of start-up activities and organization costs be expensed as incurred.
SOP 98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998.  The Company will adopt SOP 98-5 in fiscal year 1999.  It is
management's belief that SOP 98-5 will not have a materially adverse effect on
the Company's financial position or results of operations.


ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The Company has included the consolidated financial statements and
supplementary financial information required by this item immediately following
Part IV of this report and hereby incorporates by reference the relevant
portions of those statements and information into this Item 8.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

     No disagreements between the Company and its accountants have occurred
within the 24-month period prior to the date of the Company's most recent
consolidated financial statements.

                                       45
<PAGE>
 
                                   PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The directors, executive officers and senior management of AFC are listed
below.


<TABLE>
<CAPTION>
           Name                      Age                      Position
           ----                      ---                      --------
<S>                                  <C>    <C>
     Frank J. Belatti                  51   Chairman, Chief Executive Officer and
                                            Director

     Dick R. Holbrook                  46   President, Chief Operating Officer and
                                            Director

     Samuel N. Frankel                 61   Executive Vice President, Secretary,
                                            General Counsel and Director

     Gerald J. Wilkins                 41   Chief Financial Officer

     Jon Luther                        55   President of Popeyes Chicken & Biscuits

     Hala Moddelmog                    43   President of Churchs Chicken

     William M. Van Epps               51   President of International

     Gregg A. Kaplan                   42   President of Bakery Cafe Group

     James W. Clarke                   52   President of Seattle Coffee Company

     Mark J. Doran                     35   Director

     Paul Farrar                       64   Director

     Matt L. Figel                     39   Director

     Peter Starrett                    51   Director

     Kelvin J. Pennington              40   Director

     John M. Roth                      40   Director

     Ronald P. Spogli                  50   Director

     William M. Wardlaw                51   Director
</TABLE>

     FRANK J. BELATTI, CHAIRMAN, Chief Executive Officer and Director: Mr.
Belatti has served as the Chairman, Chief Executive Officer and a director of
AFC since it commenced operations in November 1992 following the reorganization
of its predecessor. Prior to joining AFC, from 1990 to 1992, Mr. Belatti was
employed by Hospitality Franchise Systems, Inc., the franchisor for Ramada and
Howard Johnson hotels ("HFS"), as its President and Chief Operating Officer.
From 1989 to 1990, Mr. Belatti was President and Chief Operating Officer of
Arby's, Inc. ("Arby's") and from 1985 to 1989 he served as the Executive Vice
President of Marketing at Arby's.  

                                       46
<PAGE>
 
From 1986 to 1990, Mr. Belatti also served as President of Arby's Franchise
Association Service Corporation ("AFA"), which created and developed the
marketing programs and new product development for the Arby's system. Mr.
Belatti received the 1996 International Foodservice Management Association
Silver Plate award for excellence and achievement in the food-service industry
and is also the 1997 Golden Chain Award winner. He also received the NAACP's
Walter White award and the President's Award for private sector initiatives. In
1999, Mr. Belatti received the Entrepreneur of the Year Award by the
International Franchise Association. Mr. Belatti also serves as Chairman of the
AFC Foundation, Inc., as well as a member of the Boards of Directors for The
Hank Aaron Chasing the Dream Foundation, Inc., The Schenck School, APEX Museum,
The Tandy Corporation and The Urban League. Mr. Belatti is also a member of the
Executive Steering Committee for Habitat for Humanity.

     DICK R. HOLBROOK, President, Chief Operating Officer and Director: Mr.
Holbrook joined AFC in November 1992 as Executive Vice President and Chief
Operating Officer and assumed the role of President and Chief Operating Officer
in August 1995. He has been a director of AFC since 1995. From 1991 to 1992, Mr.
Holbrook served as Executive Vice President of Franchise Operations of HFS. From
1972 to 1991, Mr. Holbrook served in various management positions with Arby's,
starting as a crew member and working his way up to Assistant Restaurant
Manager, Restaurant Manager, District Manager, Regional Director of Operations,
Vice President of Operations Development and Training and Senior Vice President
of Franchise Operations. Mr. Holbrook is a member of the Board of Directors of
the AFC Foundation, Inc.

     SAMUEL N. FRANKEL, Executive Vice President, Secretary, General Counsel and
Director: Mr. Frankel has served as Executive Vice President since 1996, and as
Secretary and General Counsel of AFC as well as a director of AFC since 1992.
Prior to 1996, Mr. Frankel spent 25 years with Frankel, Hardwick, Tanenbaum &
Fink, P.C., an Atlanta, Georgia law firm specializing in commercial transactions
and business law, including franchising, licensing and distributorship
relationships. Mr. Frankel is a member of the Board of Directors of Colonial
Bank, Hank Aaron Enterprises, Inc., and The Hank Aaron Chasing the Dream
Foundation, Inc.

     GERALD J. WILKINS, Chief Financial Officer: Mr. Wilkins has served as the
Chief Financial Officer of AFC since 1995. From 1993 to 1995, Mr. Wilkins was
Vice President of International Business Planning at KFC International in
Louisville, Kentucky. Mr. Wilkins also served in senior management positions
with General Electric Corporation from 1985 to 1993, including Assistant
Treasurer of GE Capital Corporation from 1989 to 1992. He has also worked with
AT&T Corporation and Peat Marwick, Mitchell & Co.

     JON LUTHER, President of Popeyes Chicken & Biscuits: Mr. Luther has served
as President of Popeyes Chicken & Biscuits since 1997. Prior to joining AFC, Mr.
Luther was President of CA One Services, Inc., a subsidiary of Delaware North
Enterprises, Inc. in Buffalo, New York from 1992 to 1997. Mr. Luther is a member
of the Board of Directors of the AFC Foundation, Inc.

                                       47
<PAGE>
 
     HALA MODDELMOG, President of Churchs Chicken. Ms. Moddelmog has served as
President of Churchs Chicken since 1996. From 1993 to 1996, Ms. Moddelmog was
Vice President of Marketing and then Senior Vice President/General Manager for
the Churchs brand. From 1990 to 1993, Ms. Moddelmog was Vice President of
Product Marketing and Strategic Planning at AFA in Atlanta. Prior to joining
AFA, Ms. Moddelmog was a marketing manager for BellSouth Services in Atlanta
from 1989 to 1990. Ms. Moddelmog is a member of the Board of Directors of the
AFC Foundation, Inc.

     WILLIAM M. VAN EPPS, President of International: Mr. Van Epps is President
of International, a position he assumed in March 1998. He served as President of
Chesapeake from April 1997 to February 1998. He served as President--Worldwide
Business Development from 1996 to March 1997. From 1995 to 1996 Mr. Van Epps
served as President--International and he was Senior Vice President--
International from 1993 to 1995. From 1988 to 1993, Mr. Van Epps was Vice
President of Marketing and International at Western Sizzlin, Inc. From 1984 to
1988, Mr. Van Epps was President of Mid-American Restaurant Systems and the
President of Intercontinental Foodservice from 1982 to 1984. Mr. Van Epps was
with PepsiCo Foodservice International from 1977 to 1982, in a variety of
positions.

     GREGG A. KAPLAN, President of Bakery Cafe Group: Mr. Kaplan assumed the
position as President of the Bakery Cafe Group in March 1998. He served as Vice
President of Strategic Development with the Company from June 1996 to March
1998. Mr. Kaplan formerly served as Senior Vice President of Marketing with
Shoney's, Inc. Mr. Kaplan joined Shoney's, Inc. in December 1990. From January
1989 to December 1990, Mr. Kaplan served as Vice President of Marketing with
Rally's Inc. From 1983 to 1988, Mr. Kaplan was the Director of Marketing at
Wendy's International. Mr. Kaplan is a member of the Board of Directors of the
International Franchise Association.

     JAMES W. CLARKE, President of Seattle Coffee Company: Mr. Clarke assumed
the position of President of Seattle Coffee Company in October 1998. He served
as Seattle Coffee Company's Chief Operating Officer from April 1997 to September
1998. Between August 1995 and May 1997, Mr. Clarke was the Senior Vice President
of Marketing at Seattle Coffee Company. Mr. Clarke is also a member of the
Boards of Directors of the Salvation Army of King County and the Pacific
Northwest Aquarium.

     MARK J. DORAN, Director: Mr. Doran joined FS&Co. in 1988 and became a
general partner in March 1998. Previously, Mr. Doran was employed in the high
yield department of Kidder, Peabody & Co. Incorporated. Mr. Doran became a
director of AFC in April 1996.

     PAUL FARRAR, Director: Mr. Farrar served as a Senior Vice President of
Canadian Imperial Bank of Commerce in Toronto, Canada from 1986 to 1993 and has
been retired since then. Mr. Farrar became a director of AFC in 1992. Mr. Farrar
also serves as a member of the Boards of Directors for Consumers Packaging,
Inc., Anchor Glass Container Corporation, Adelaide Capital Corp., and Pendaries
Petroleum, Ltd.

                                       48
<PAGE>
 
     MATT L. FIGEL, Director: Mr. Figel founded Doramar Capital, a private
investment firm, in January 1997. From October 1986 to December 1996, Mr. Figel
was employed by FS&Co. Mr. Figel became a director of AFC in April 1996.

     PETER STARRETT, Director: Mr. Starrett founded Peter Starrett Associates, a
retail advisory firm, in August 1998. From 1990 to 1998, Mr. Starrett was the
President of Warner Bros. Studio Stores Worldwide. Previously, he held senior
executive positions at both Federated Department Stores and May Department
Stores. Mr. Starrett also serves on the boards of directors of Brylane, Inc.,
Guitar Center, Inc. and Petco Animal Supplies, Inc.

     KELVIN J. PENNINGTON, Director: Mr. Pennington has served as Managing
General Partner of PENMAN Asset Management, L.P., the general partner of PENMAN
Private Equity and Mezzanine Fund, L.P., in Chicago, Illinois since 1992. Mr.
Pennington became a director of AFC in May 1996. Mr. Pennington also serves as a
member of the Boards of Directors for Liberty Service Corporation, MainStreet
Healthcare Corporation and HTD Corporation.

     JOHN M. ROTH, Director: Mr. Roth joined FS&Co. in March 1988 and became a
general partner in March 1993. From 1984 to 1988, Mr. Roth was employed by
Kidder, Peabody & Co. Incorporated, his most recent position being a Vice
President in the Merger and Acquisition Group. Mr. Roth became a director of AFC
in April 1996 and is also a member of the Boards of Directors of EnviroSource,
Inc. and Advance Holding Corporation.

     RONALD P. SPOGLI, Director: Mr. Spogli is a founding partner of FS&Co. He
became a director of AFC in April 1996. Mr. Spogli is the Chairman of the
Executive Committee and a director of EnviroSource, Inc. and also serves on the
Boards of Directors of Advance Holding Corporation, Century Maintenance Supply
and Hudson Respiratory Care, Inc.

     WILLIAM M. WARDLAW, Director: Mr. Wardlaw joined FS&Co. in March 1988 and
became a general partner in January 1991. From 1984 to 1988, Mr. Wardlaw was a
principal of the law firm of Riordan & McKinzie. Mr. Wardlaw became a director
of AFC in April 1996.

                                       49
<PAGE>
 
     ITEM 11.  EXECUTIVE COMPENSATION

     The following table sets forth all compensation awarded to, earned by or
paid to the Chief Executive Officer and the other four of AFC's most highly
compensated executive officers whose total annual salary and bonus exceeded
$100,000 (the "Named Executive Officers") during the fiscal years ended December
27, 1998, December 28, 1997 and December 29, 1996.


<TABLE>
<CAPTION>
                                                           Annual Compensation                              All Other
----------------------------------     ---------------------------------------------------------
   Name and Principal Position             Year              Salary                 Bonus/(1)/             Compensation/(2)/
----------------------------------     -----------     -----------------     -------------------     ------------------------
<S>                                    <C>             <C>                   <C>                     <C>
FRANK J. BELATTI                          1998              $495,385                        -               $  19,560/(3)/     
  Chief Executive Officer                 1997               468,462                  660,000                  55,860          
                                          1996               430,000                  515,045                  32,943          
                                                                                                                               
DICK R. HOLBROOK                          1998              $345,385                        -               $  17,935/(3)/     
  President and                           1997               323,077                  270,000                  21,635          
  Chief Operating Officer                 1996               300,000                  220,000                  13,643          
                                                                                                                               
SAMUEL N. FRANKEL                         1998              $311,538                        -               $  50,995          
  Executive Vice President,               1997               294,231                  250,000                  50,995          
  Secretary and                           1996               275,000                  200,000                  32,745          
  General Counsel                                                                                                              
                                                                                                                               
WILLIAM M. VAN EPPS                       1998              $266,154                        -               $   5,833/(3)/     
  President of                            1997               236,615                   90,000                   5,617/(3)/     
  International                           1996               196,720                  100,000                   5,758/(3)/     
                                                                                                                               
HALA MODDELMOG                            1998              $266,154                        -               $   2,935/(3)/     
  President of Churchs Chicken            1997               230,001                  120,000                   2,935/(3)/     
                                          1996               178,079                   80,000                   2,860/(3)/     
</TABLE>                                                            

______________
  (1) The bonus amounts shown for 1997 and 1996 for all Named Executive Officers
other than Mr. Van Epps and Ms. Moddelmog reflect annual payments that were
based solely on Company performance during 1997 and 1996 as determined using
performance objectives established for fiscal years 1997 and 1996. The amounts
shown for Mr. Van Epps and Ms. Moddelmog were largely (but not exclusively)
based on performance objectives established for their individual business
segments for fiscal years 1997 and 1996.

  (2) The amounts shown under All Other Compensation reflect life insurance
premiums paid by AFC with respect to split dollar life insurance policies for
the benefit of the Messrs. Belatti, Holbrook and Frankel. AFC also paid $4,633,
$4,417 and $4,633 in life insurance premiums in 1998, 1997 and 1996,
respectively, for the split dollar life insurance policy for the benefit of Mr.
Van Epps. AFC also paid $1,735 in life insurance premiums in 1998, 1997 and 1996
for the split dollar life insurance policy for the benefit of Ms. Moddelmog.

  (3) Includes matching contributions by AFC into the AFC Deferred Compensation
Plan on behalf of Messrs. Belatti and Holbrook of $1,200. Includes matching
contributions by AFC into the qualified employee benefit plan under Section
401(k) of the Code on behalf of (i) Mr. Van Epps of $1,200, $1,200 and $1,125
for 1998, 1997 and 1996, respectively, and (ii) Ms. Moddelmog of $1,200, $1,200
and $1,125 for 1998, 1997 and 1996, respectively.

EMPLOYMENT AGREEMENTS

     FRANK J. BELATTI. Mr. Belatti and AFC entered into an employment agreement
on November 5, 1992, as amended, on November 5, 1995 (the "Belatti Agreement").
The Belatti Agreement contains customary employment terms and provides for a
current annual base salary of $500,000, subject to annual adjustment by the
Board of Directors, 

                                       50
<PAGE>
 
an annual incentive bonus, stock options, fringe benefits, participation in all
Company-sponsored benefit plans and such other compensation as may be approved
by the Board of Directors. The term of the Belatti Agreement terminates on
November 5, 2001, unless earlier terminated or otherwise renewed, pursuant to
the terms thereof. Pursuant to the terms of the Belatti Agreement, if Mr.
Belatti's employment is terminated without cause or if written notice not to
renew his employment is given by AFC, Mr. Belatti would be entitled to, among
other things, one to two-and-one-half times his base annual salary, depending on
his length of service at such termination date, and the bonus payable to him for
the fiscal year in which such termination occurs. Under the Belatti Agreement,
upon (i) a change of control of AFC, (ii) a significant reduction in Mr.
Belatti's responsibilities, title or duties or (iii) the relocation of AFC's
principal office more than 45 miles from its current location (except to
Atlanta, Georgia), Mr. Belatti may terminate his employment and would be
entitled to receive, among other things, the same severance pay he would have
received had his employment been terminated by AFC without cause.

     DICK R. HOLBROOK. Mr. Holbrook and AFC entered into an employment agreement
on November 5, 1992, as amended, on November 5, 1995 (the "Holbrook Agreement").
The Holbrook Agreement contains customary employment terms and provides for a
current annual base salary of $350,000, subject to annual adjustment by the
Board of Directors, an annual incentive bonus, stock options, fringe benefits,
participation in all Company-sponsored benefit plans and such other compensation
as may be approved by the Board of Directors. The term of the Holbrook Agreement
terminates on November 5, 2001, unless earlier terminated or otherwise renewed,
pursuant to the terms thereof. Pursuant to the Holbrook Agreement, if Mr.
Holbrook's employment is terminated without cause or if written notice not to
renew his employment is given by AFC, he would be entitled to, among other
things, one to two-and-one-half times his base annual salary, depending on his
length of service at such termination date, and the bonus payable to him for the
fiscal year in which such termination occurs. Under the Holbrook Agreement, upon
(i) a change of control of AFC, (ii) a significant reduction in Mr. Holbrook's
responsibilities, title or duties not approved by Mr. Belatti or (iii) AFC
relocates its principal office more than 45 miles from its current location
(except to Atlanta, Georgia), Mr. Holbrook may terminate his employment and
would be entitled to receive, among other things, the same severance pay he
would have received had his employment been terminated by AFC without cause.

     SAMUEL N. FRANKEL. Mr. Frankel and AFC entered into an employment agreement
on December 5, 1995 (the "Frankel Agreement"). The Frankel Agreement contains
customary employment terms and provides for a base annual salary of $315,000,
subject to annual adjustment by the Board of Directors, and for an annual
incentive bonus. The term of the Frankel Agreement terminates on December 5,
2001, unless earlier terminated or otherwise renewed pursuant to the terms
thereof. Pursuant to the Frankel Agreement, if Mr. Frankel's employment is
terminated without cause or if written notice not to renew is given by AFC, he
would be entitled to, among other things, two-and-one-half times his base annual
salary, and the bonus payable to him for the fiscal year in which such
termination occurs. Under the Frankel Agreement, upon (i) a change of control of
AFC, (ii) a significant reduction in Mr. Frankel's responsibilities, title or
duties not approved by Mr. Belatti or (iii) the relocation of AFC's principal
office more 

                                       51
<PAGE>
 
than 45 miles from its current location (except to Atlanta, Georgia), Mr.
Frankel may terminate his employment and would be entitled to receive, among
other things, the same severance pay he would receive if he was terminated by
AFC without cause.

OPTION PLANS

1992 NONQUALIFIED STOCK OPTION PLAN

     The 1992 Nonqualified Stock Option Plan (the "1992 Option Plan"), provides
for the grant of options to purchase shares of Common Stock to selected officers
of AFC. Options under the 1992 Option Plan are not intended to qualify for
treatment as incentive stock options under Section 422A of the Internal Revenue
Code of 1986, as amended ("Section 422A"). Options under the 1992 Option Plan
became exercisable at various dates beginning on January 1, 1994. If not
exercised, options under the 1992 Option Plan will expire 15 years after their
issuance (if not sooner due to termination of employment). If the employment of
an optionee under the 1992 Option Plan is terminated for any reason, AFC may be
required to repurchase the shares of Common Stock acquired by such optionee
pursuant to such plan. Up to 1,808,864 shares of Common Stock have been reserved
for issuance under the 1992 Option Plan. Prior to April 1996, options with
respect to 669,334, 200,000, 170,000, 35,000 and 35,000 shares of Common Stock
were issued to Messrs. Belatti, Holbrook, Frankel and Van Epps and Ms.
Moddelmog, respectively, at an exercise price of $0.10. On April 11, 1996, this
exercise price was adjusted to $0.08 per share and additional options with
respect to 196,849, 58,860, 50,000, 10,300 and 10,300 shares of Common Stock
were issued to Messrs. Belatti, Holbrook, Frankel and Van Epps and Ms.
Moddelmog, respectively, also at an exercise price of $0.08 per share. As of
December 27, 1998, options with respect to 1,635,757 shares of Common Stock were
outstanding under the 1992 Option Plan, of which options with respect to
1,560,563 shares of Common Stock were exercisable.

1996 NONQUALIFIED PERFORMANCE STOCK OPTION PLAN--EXECUTIVE

     Certain senior executives of AFC are eligible to participate in AFC's 1996
Nonqualified Performance Stock Option Plan--Executive (the "Executive
Performance Option Plan"). Up to 1,507,489 shares of Common Stock may be issued
under the Executive Performance Option Plan. Under the Executive Performance
Option Plan, participants may be granted options to purchase shares of Common
Stock at an option price determined by the Board of Directors of AFC. Options
under the Executive Performance Option Plan are not intended to qualify for
treatment as incentive stock options under Section 422A. The Executive
Performance Option Plan is administered by the compensation committee of the
Board of Directors (the "Compensation Committee"). All options granted under the
Executive Performance Option Plan may vest over four to five years commencing on
the first anniversary of the date of grant according to performance criteria
relating to AFC's earnings on a fiscal year basis. Pursuant to the Executive
Performance Option Plan, on April 26, 1996 AFC granted options with respect to
800,000, 400,000 and 225,000 shares of Common Stock to Messrs. Belatti, Holbrook
and Frankel, respectively, at an exercise price of $3.317 per share. In 1997,
AFC granted options with respect to 10,019, 4,517 and 4,517 shares of Common
Stock to Messrs. 

                                       52
<PAGE>
 
Belatti, Holbrook and Frankel, respectively, at an exercise price of $4.95 per
share. In 1998, AFC granted options with respect to 23,328, 20,000 and 20,000
shares of Common Stock to Messrs. Belatti, Holbrook and Frankel, respectively,
at an exercise price of $7.50 per share.

     All options granted under the Executive Performance Option Plan will expire
ten years from the date of grant unless terminated earlier due to certain
circumstances. The exercisability of options under the Executive Performance
Option Plan may be accelerated, at the discretion of the Compensation Committee.
Additionally, the Executive Performance Option Plan provides that, at any time
prior to five years after the date of grant of an option, AFC may elect to
repurchase all or any portion of the shares of Common Stock acquired by the
participant by the exercise of the options for a period of six months after the
date of termination of the participant's employment. The purchase price for such
repurchased shares shall be their "fair market value" thereof, as determined by
the Board of Directors. The Executive Performance Option Plan contains
provisions relating to certain "tag-along" and "drag-along" rights should the FS
Entities (as defined herein) find a third-party buyer for all of the Common
Stock held thereby.

     Effective on December 15, 1998, the Company's Board of Directors approved
the cancellation of 510,842, 263,428 and 158,428 unvested options as of December
27, 1998 held by Messrs. Belatti, Holbrook and Frankel, respectively. These
options had exercise prices that ranged from $3.32 per share to $7.50 per share.
In connection with the cancellation, the Board of Directors also approved the
grant of 510,842, 263,428 and 158,428 options for Messrs. Belatti, Holbrook and
Frankel, respectively at an exercise price of $7.75 per share, which was the
fair value of the Company's Common Stock at the date of grant. Additionally,
Messrs. Belatti, Holbrook and Frankel became fully vested in these options upon
the date of grant. As of December 27, 1998, options with respect to 1,507,489
shares of Common Stock were outstanding and exercisable under the Executive
Performance Option Plan.

1996 NONQUALIFIED PERFORMANCE STOCK OPTION PLAN--GENERAL

     Certain officers and key employees not covered by the Executive Performance
Option Plan are eligible to receive options to purchase Common Stock under AFC's
1996 Nonqualified Performance Stock Option Plan--General ("General Performance
Option Plan"). Up to 1,205,806 options to purchase shares of Common Stock are
issuable under the General Performance Option Plan. Options under the General
Performance Option Plan are not intended to qualify for treatment as incentive
stock options under Section 422A. Pursuant to the General Performance Option
Plan, on April 26, 1996, AFC granted options with respect to 100,000 shares of
Common Stock to each of Mr. Van Epps and Mrs. Moddelmog at an exercise price of
$3.317 per share. In 1997, AFC granted options with respect to 8,547 and 2,377
shares of Common Stock to Mr. Van Epps and Mrs. Moddelmog, respectively, at an
exercise price of $4.95 per share. The General Performance Option Plan has a
number of terms that are substantially similar to terms found in the Executive
Performance Option Plan. All options granted under the General Performance
Option Plan may vest over four to five years commencing on the first anniversary
of the date of grant according to a performance criteria relating to 

                                       53
<PAGE>
 
AFC's earnings. Such options expire ten years from the date of grant unless
terminated earlier due to certain circumstances. Additionally, the General
Performance Option Plan restricts employees from transferring any shares of
Common Stock received on the exercise of options under the General Performance
Option Plan prior to the fifth anniversary of the date of the grant. Following
such fifth anniversary, AFC has a right of first refusal with respect to any
proposed transfer of such shares of Common Stock. Finally, the General
Performance Option Plan contains provisions relating to certain "tag-along" and
"drag-along" rights should the FS Entities (as defined herein) find a third-
party buyer for all of the Common Stock held thereby. As of December 27, 1998,
options to purchase 1,187,476 shares of Common Stock were outstanding under the
General Performance Option Plan, of which options to purchase 690,699 shares of
Common Stock were exercisable.

1996 NONQUALIFIED STOCK OPTION PLAN

     Certain officers and key employees are eligible to receive options to
purchase Common Stock under AFC's 1996 Nonqualified Stock Option Plan (the "1996
Option Plan"). The 1996 Option Plan authorizes AFC to issue up to 1,808,863
options to purchase shares of Common Stock. Options under the 1996 Option Plan
are not intended to qualify for treatment as incentive stock options under
Section 422A. On April 11, 1996, options to purchase 90,000, 55,000 and 35,000
shares of Common Stock were granted to Messrs. Belatti, Holbrook and Frankel,
respectively, at an exercise price of $3.317 per share. On April 26, 1996,
options to purchase 5,000 shares of Common Stock were granted under the 1996
Option Plan to Mr. Van Epps and Ms. Moddelmog also at an exercise price of
$3.317 per share. In 1997, options to purchase 32,390, 14,963, 14,963, 7,782 and
7,782 shares of Common Stock were granted to Messrs. Belatti, Holbrook, Frankel,
Van Epps and Ms. Moddelmog at an exercise price of $4.95 per share. On January
1, 1998, options to purchase 16,672 and 5,000 shares were granted to Messrs.
Belatti and Holbrook at an exercise price of $7.50 per share. On October 1,
1998, options to purchase 8,000 and 20,000 shares were granted to Mr. Van Epps
and Ms. Moddelmog at an exercise price of $7.50 per share. The 1996 Option Plan
contains many of the same provisions of the Executive Performance Option Plan
and the General Performance Option Plan. All options granted under the 1996
Option Plan vest in 25% increments upon each of the first, second, third and
fourth anniversaries of the date of grant and expire seven years from the date
of grant, unless terminated earlier due to certain circumstances. The 1996
Option Plan includes the same repurchase rights found in the Executive
Performance Option Plan and the General Performance Option Plan. Additionally,
the 1996 Option Plan contains the transfer restrictions, rights of first refusal
and "tag-along" and "drag-along" rights as found in the General Performance
Option Plan. As of December 27, 1998, options with respect to 1,036,143 shares
of Common Stock were outstanding under the 1996 Option Plan, of which options to
purchase 241,968 shares of Common Stock were exercisable.

                                       54
<PAGE>
 

     The following table sets forth information concerning the number and value
of securities underlying unexercised options held by each of the Named Executive
Officers at December 28, 1997.

                   AFC OPTION GRANTS IN THE LAST FISCAL YEAR


<TABLE>
<CAPTION>
                                                                                
                                       Individual Grants(1)                                 Potential Realizable      
                       -------------------------------------------------------------       Value at Assumed Annual
                         Number of          % of Total                                       Rates of Stock Price 
                         Securities          Options                                       Appreciation for Option
                         Underlying         Granted to       Exercise                               Term(2)
                         Options            Employees in       or        Expiration       --------------------------
     Name                Granted (#)        Fiscal Year     Base Price       Date             5%              10%
     ----              --------------     -------------   -------------  -----------      ----------      ----------
<S>                    <C>                <C>             <C>            <C>             <C>              <C>      
Frank J. Belatti         510,842             54.77%          $ 7.750       12/15/08       $2,489,810       $6,309,667
                          16,672              4.09             7.500        1/1/05           50,904          118,628

Dick R. Holbrook         263,428             28.24             7.750       12/15/08        1,283,931        3,253,732
                           5,000              1.23             7.500        1/1/05           15,266           35,577

Samuel N. Frankel        158,428             16.99             7.750       12/15/08          772,168        1,956,824
                                                                                                  
William M. Van Epps        8,000              1.96             7.500       10/1/05           24,426           56,923
                                                                                                  
Hala Moddelmog            20,000              4.91             7.500       10/1/05           61,065          142,308
</TABLE>

_____________
  (1) Option grants to the Named Executive Officers set forth in the table were
granted under the Executive Performance Option Plan, with respect to Messrs.
Belatti, Holbrook and Frankel and the 1996 Option Plan, with respect to Messrs.
Belatti, Holbrook and Van Epps and Ms. Moddelmog.

  (2) These columns indicate the hypothetical gains of "option spreads" of the
outstanding options granted, based on assumed annual compound stock appreciation
rates of 5% and 10% over the options' terms. The 5% and 10% assumed rates of
appreciation are mandated by the rules of the Commission and do not represent
AFC's estimate or projection of the future prices or market value of Common
Stock.

                                       55
<PAGE>
 
     The following table sets forth information concerning the number and value
of securities underlying unexercised options held by each of the Named Executive
Officers as of December 27, 1998.

              AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES


<TABLE>
<CAPTION>
                                        Securities Unexercised               Value of Unexercised
                                        Underlying Options at               In-the-Money Options at
                                          Dec 27, 1998 (#)                  Dec. 27, 1998 ($)(1)(2)
                                   ---------------------------------     ----------------------------
                                                            Not                               Not
                                     Exercisable        Exercisable      Exercisable      Exercisable
                                   ---------------     -------------     -----------      -----------
<S>                                <C>                 <C>               <C>              <C>
Frank J. Belatti                      1,752,637           85,965           8,291,434        271,673                           
Dick R. Holbrook                        719,672           38,722           2,831,569        153,329                           
Samuel N. Frankel                       319,893           41,213           2,128,359        158,263                           
William M. Van Epps                     109,797           68,662             604,883        266,478                           
Hala Moddelmog                           93,860           86,599             502,336        344,025
</TABLE>


_____________
    (1) Because there is no established public trading market for Common Stock,
the Board of Directors of AFC must, under certain circumstances, determine the
fair market value of the Common Stock.  AFC believes that the fair market value
of the Common Stock was $7.75 per share as of December 27, 1998.

    (2) Values for "in-the-money" outstanding options represent the positive
spread between the respective exercise prices of the outstanding options and the
fair market value of the underlying Common Stock of $7.75 per share as described
in Note 1.

1998 SCC PLAN

     In connection with the SCC acquisition in March 1998, the Company executed
the Substitute Nonqualified Stock Option Plan ("1998 SCC Plan").  This plan was
established to enable the Company to issue AFC options to former SCC option
holders in order to purchase 100% of SCC's common stock pursuant to the purchase
agreement.  The 1998 SCC Plan authorizes the issuance of approximately 0.5
million options at exercise prices that range from $3.91 to $6.75 per share. The
Company issued approximately 0.4 million options at the closing date of the
acquisition.  The issuance of the remaining 0.1 million is subject to a
reduction of a holdback provision in the agreement.  At December 27, 1998, the
weighted-average price per share was $4.74. The options vest when issued by the
Company and expire at various dates through October 31, 2007.  At December 27,
1998, the weighted-average contractual life of these options was 6.6 years.  As
of December 27, 1998, 457,398 options were exercisable.

STOCK BONUS PLANS

     Officers, key employees and certain consultants of AFC have received shares
of Common Stock under AFC's 1996 Employee Stock Bonus Plan--Executive (the
"Executive Bonus Plan") and the 1996 Stock Bonus Plan--General (the "General
Bonus Plan").  On April 26, 1996, an aggregate of 2,649,969 shares of Common
Stock were issued under the Executive Bonus Plan and an aggregate of 364,803
shares of Common Stock were issued under the General Bonus Plan at a fair market
value of $3.317 per share.  On such date, Messrs. Belatti, Holbrook and Frankel
were issued 1,329,969, 660,000 and 660,000 shares of Common Stock, respectively,
under the Executive Bonus Plan and Mr. Van Epps and Ms. Moddelmog were each
issued 34,700 shares of Common Stock under the General Bonus Plan.  Under each
such plan, at any time prior to five years after the date of grant of Common
Stock bonuses, AFC has the option, in certain circumstances, to repurchase all
or any portion of the shares of Common Stock acquired by the plan participant
for a period of six months after the date of termination of the participant's
employment.  The price for such repurchase will be the fair market value of the
shares as determined by the Board of Directors, except for termination of
employment other than death or disability under the General Bonus Plan.  In such
instances, the repurchase price shall be a certain fraction of the fair market
value, depending on the length of employment by such employee.  This repurchase
option terminates upon AFC's initial public offering of Common Stock or a change
of control with respect to AFC.  In addition, shares issued under the General
Bonus Plan are also subject to the same transfer restrictions, rights of first
refusal and "tag-along" and "drag-along" rights that are found in the General
Option Plan.  No further shares are available for issuance under either the
Executive Bonus Plan or the General Bonus Plan.

                                       56
<PAGE>
 
     In connection with the issuance of shares of Common Stock under the
Executive Bonus Plan and the General Bonus Plan, AFC offered to loan the
participating employee an amount sufficient to pay for the employee's tax
obligation resulting from the issuance of shares of Common Stock to such
employee.  If accepted by the employee, such loan would be evidenced by a
promissory note which will be due on December 31, 2003 and accrues interest at
6.25% per annum.  Such notes are secured by the pledge of the shares issued to
the employee.  As of December 27, 1998, under the Executive Bonus Plan and the
General Bonus Plan, Messrs. Belatti, Holbrook, Frankel and Van Epps and Ms.
Moddelmog had issued promissory notes to AFC in the outstanding principal
amounts of $2,078,726, $1,030,028, $1,030,028, $51,795 and $51,795,
respectively.

OTHER EMPLOYEE BENEFIT PLANS

     On April 19, 1994, AFC adopted a nonqualified retirement, disability and
death benefit plan ("Retirement Plan") for certain officers.  Retirement
benefits under the Retirement Plan are unfunded.  Annual benefits are equal to
30% of the executive's average base compensation for the five years preceding
retirement.  The benefits are payable in 120 equal monthly installments
following the executive officer's retirement date.  Death benefits under the
Retirement Plan cover certain executive officers and are up to five times the
officer's base compensation at the time of employment.  AFC has the discretion
to increase the employee's death benefits.  Death benefits are funded by split
dollar life insurance arrangements.  The accumulated benefit obligation relating
to the Retirement Plan was approximately $1.5 million on December 27, 1998.  AFC
also provides post-retirement medical benefits (including dental coverage) for
certain retirees and their spouses.  This benefit begins on the date of
retirement and ends after 120 months or upon the death of both parties.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     AFC's executive committee of the Board of Directors oversees compensation
matters.  Messrs. Belatti and Frankel, two Named Executive Officers, serve on
the executive committee but neither Mr. Belatti nor Mr. Frankel participated in
matters regarding his own compensation.

                                       57
<PAGE>
 
ITEM  12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table shows the total number and percentage of the
outstanding shares of the Company's Common Stock beneficially owned as of March
29, 1999, with respect to each person (including any "group" as used in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended) the Company knows
to have beneficial ownership of more than 5% of the Common Stock.  The Company
computed the percentage ownership amounts in accordance with the provisions of
Rule 13d-3(d), which includes as beneficially owned all shares of Common Stock
which the person or group has the right to acquire within the next 60 days.  The
percentages are based upon 39,233,441 shares outstanding as of March 29, 1999.

                         OWNERSHIP OF AFC COMMON STOCK

<TABLE>
<CAPTION>
                                                                  Shares of           Percentage of
                           Name(1)                              Common Stock           Common Stock
                           -------                             ---------------        -------------
<S>                                                            <C>                    <C> 
Freeman Spogli & Co. Incorporated(2)(3)......................       21,212,421              54.1%     
Canadian Imperial Bank of Commerce(4)........................        6,312,724              16.1%     
PENMAN Private Equity and Mezzanine Fund, L.P.(5)............        2,361,954               6.0%     
ML IBK Positions, Inc.(6)....................................        2,050,000               5.2%     
Frank J. Belatti(7)(8).......................................        3,234,140               7.9%     
Dick R. Holbrook(7)(9).......................................        1,401,326               3.5%     
Samuel N. Frankel(7)(10).....................................        1,211,275               3.0%     
William M. Van Epps(7)(11)...................................          132,807                 *      
Hala Moddelmog(7)(12)........................................          128,765                 *      
Mark J. Doran(3).............................................               --                --      
Paul Farrar(13)..............................................               --                --      
Matt L. Figel(14)............................................               --                --      
Peter Starrett(3)............................................           44,000                 *      
Kelvin J. Pennington(5)......................................               --                --      
John M. Roth(3)..............................................               --                --      
Ronald P. Spogli(3)..........................................               --                --      
William M. Wardlaw(3)........................................               --                --      
Directors and officers as a group (34 persons) (15)..........       30,578,339              71.0%      
                                                               ---------------     
</TABLE>

______________
     *   Less than 1.0% of outstanding shares of Common Stock.

     (1) The persons named in this table have sole voting power and investment
power with respect to all shares of Common Stock shown as beneficially owned by
them, subject to community property laws where applicable and the information
contained in this table and these notes.

     (2) The shares shown as beneficially owned by FS&Co. are held of record as
follows: 18,259,483 shares owned by FS Equity Partners III, L.P. ("FSEP III") ,
733,583 shares owned by FS Equity Partners International, L.P. ("FSEP
International")and 2,219,355 shares owned by FS Equity Partners IV, L.P. ("FSEP
IV").  FS Capital Partners, L.P. ("FS Capital"), an affiliate of FS&Co., is the
sole general partner of FSEP III.  FS Holdings, Inc. ("FSHI") is the sole
general partner of FS Capital.  The sole general partner of FSEP International
is FS&Co. International, L.P. ("FS&Co. International").  The sole general
partner of FS&Co. International is FS International Holdings Limited ("FS
International Holdings"), an affiliate of FS&Co.  As the general partners of FS
Capital (which is the general partner of FSEP III) and FS&Co. International
(which is the general partner of FSEP International), respectively, FSHI and FS
International Holdings have the sole power to vote and dispose of the shares of
AFC held by each of FSEP III and FSEP International, respectively.

     (3) Messrs. Spogli, Roth and Wardlaw, each of whom is a member of the
Board, and Mr. Bradford M. Freeman, Mr. J. Frederick Simmons and Mr. Charles P.
Rullman, Jr. are the sole directors, officers and shareholders of FS&Co., FSHI
and FS International Holdings, and as such may be deemed to be the beneficial
owners of the shares indicated as beneficially owned by FS&Co. Messrs. Doran and
Starrett, each of whom is a member of the Board, are affiliated with FS&Co. The
business address of

                                       58
<PAGE>
 
each of FS&Co. and its general partners, FSHI and its sole directors, officers
and shareholders, FS Capital and FSEP III and Mr. Starrett is 11100 Santa Monica
Boulevard, Suite 1900, Los Angeles, California 90025. The business address of
each of FS International Holdings, FS&Co. International and FSEP International
is c/o Paget-Brown & Company, Ltd., West Winds Building, Third Floor, P.O. Box
1111, Grand Cayman, George Town, Cayman Islands, B.W.I. The business address of
Mr. Doran is 599 Lexington Avenue, 18th Floor, New York, New York 10022.

     (4)  The business address for Canadian Imperial Bank of Commerce is BCE
Place, Bay Street, P.O. Box 500, Toronto, Ontario MBJ258.

     (5)  Mr. Pennington, who is a member of the Board, and Mr. Lawrence C.
Manson, Jr. are general partners of PENMAN Asset. Management, L.P. ("PENMAN
Asset"), the general partner of PENMAN Private Equity and Mezzanine Fund, L.P.
("PENMAN Equity"), and as such may be deemed to be the beneficial owners of the
shares indicated as beneficially owned by PENMAN. The business address of PENMAN
Equity, PENMAN Asset and each of its general partners is 333 West Wacker Drive,
Suite 700, Chicago, Illinois 60606.

     (6)  The business address of ML IBK Positions, Inc. is c/o Merrill Lynch &
Co., Inc., Corporate Credit Division, World Financial Center, South Tower, 7th
Floor, New York, New York 10080.

     (7)  The business address of AFC's executive officers is c/o AFC
Enterprises, Inc., Six Concourse Parkway, Suite 1700, Atlanta, Georgia 30328.

     (8)  Includes 1,775,138 shares of Common Stock issuable with respect to
options exercisable within 60 days as of March 29, 1999.

     (9)  Includes 728,422 shares of Common Stock issuable with respect to
options exercisable within 60 days as of March 29, 1999.

     (10) Includes 499,622 shares of Common Stock issuable with respect to
options exercisable within 60 days as of March 29, 1999.

     (11) Includes 98,107 shares of Common Stock issuable with respect to
options exercisable within 60 days as of March 29, 1999.

     (12) Includes 94,065 shares of Common Stock issuable with respect to
options exercisable within 60 days as of March 29, 1999.

     (13) Mr. Farrar's mailing address is c/o Canadian Imperial Bank of
Commerce, BCE Place, Bay Street, P.O. Box 500, Toronto, Ontario MBJ258.

     (14) Mr. Figel's business address is c/o Doramar Capital, 300 South Grand
Avenue, Suite 2900, Los Angeles, California 90071.

     (15) Includes 21,212,421 shares of Common Stock held by affiliates of
FS&Co., 2,361,954 shares of Common Stock held by an affiliate of PENMAN Equity
and 3,812,067 shares of Common Stock issuable with respect to options granted to
certain executive officers that are exercisable within 60 days as of March 29,
1999.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In October 1998, the Company issued 2,795,703 shares of AFC Common Stock to
certain existing "qualified" shareholders and option holders at a purchase price
of $7.75 per share.  The buyers of stock included an affiliate, Freeman Spogli
and Co., Inc. ("FS"), which through other affiliates, is AFC's majority
shareholder, and PENMAN Private Equity and Mezzanine Fund, L.P.  Freeman Spogli
purchased 2,219,355 shares of Common Stock for a purchase price of $17.2
million. PENMAN Private Equity and Mezzanine Fund, L.P. purchased 251,613 shares
of Common Stock for a purchase price of approximately $2.0 million. Messrs.
Belatti, Holbrook and Frankel purchased 129,033, 12,904 and 51,613 shares of
Common Stock, respectively, for a purchase price of $1.0 million, $0.1 million
and $0.4 million, respectively.

     Messrs. Belatti, Holbrook and Frankel borrowed $0.8 million, $0.1 million
and $0.3 million, respectively, from AFC to cover a portion of the purchase
price of the shares of Common Stock referred to above.  Each officer delivered a
promissory note to AFC with respect to the amount borrowed. The notes bear
interest at 7.0% per annum 

                                       59
<PAGE>
 
with principal and interest payable at the end of the term of the note, which is
December 31, 2005. The notes are secured by the number of shares of common stock
purchased by the employee with the note proceeds. At December 27, 1998, the
outstanding principal balances plus accrued interest due from Messrs. Belatti,
Holbrook and Frankel was approximately $0.8 million, $0.1 million and $0.3
million, respectively.

     As part of the stock offering in October 1998, the Company paid FS $1.0
million, which represented stock issuance costs.

     In 1996, Messrs. Belatti, Holbrook, Frankel, Van Epps and Ms. Moddelmog
borrowed approximately $2.0 million, $1.0 million, $1.0 million, $0.1 million
and $0.1 million, respectively, from AFC to cover certain income tax liabilities
arising as a result of the issuance of shares of Common Stock in connection with
a 1996 recapitalization.  In 1997, AFC additionally loaned each of Messrs.
Belatti, Holbrook and Frankel approximately $0.1 million with respect to the
above. Each officer delivered a promissory note to AFC with respect to the
amount borrowed thereby and each such promissory note is due on December 31,
2003 with a simple interest rate of 6.25% per annum.  In connection with these
notes, each officer also entered into a pledge agreement with AFC whereby each
note is secured by the pledge of shares of Common Stock issued to them.  At
December 27, 1998, the outstanding principal balances plus accrued interest due
from Messrs. Belatti, Holbrook, Frankel, Van Epps and Ms. Moddelmog was
approximately $2.4 million, $1.2 million, $1.2 million, $0.1 million and $0.1
million, respectively.

                                       60
<PAGE>
 
                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) FINANCIAL STATEMENTS

     The following consolidated financial statements of the Company appear
immediately following this Item 14:

<TABLE>
<CAPTION>
                                                                               Pages
                                                                               -----
<S>                                                                            <C>
     Report of Independent Public Accountants.............................       F-1
     Consolidated Balance Sheets as of December 27, 1998 and December
       28, 1997...........................................................      F-2
     Consolidated Statements of Operations for the Years ended December
       27, 1998, December 28, 1997 and December 29, 1996..................      F-4
     Consolidated Statements of Changes in Shareholders' Equity for
       the Years ended December 27, 1998, December 28, 1997 and December
       29, 1996...........................................................      F-5
     Consolidated Statements of Cash Flows for the Years Ended December
       27, 1998, December 28, 1997 and December 29, 1996..................      F-6
     Notes to Consolidated Financial Statements...........................      F-8
</TABLE>

(B) FINANCIAL STATEMENT SCHEDULES

     The Company has omitted all other schedules because the conditions
requiring their filing do not exist or because the required information appears
in the Company's Consolidated Financial Statements, including the notes to those
statements.


(C) EXHIBITS

     The Company has filed the exhibits listed below with this report.

     Exhibit
     Number              Description
     ------              -----------
 
     3.1 (a)   Articles of Incorporation of AFC Enterprises, Inc. ("AFC"), as
               amended to date.

     3.2 (a)   Amended and Restated Bylaws of AFC (formerly known as America's
               Favorite Chicken Company), as amended to date.

     4.1 (a)   Indenture dated as of May 21, 1997 between AFC and United States
               Trust Company of New York, as Trustee, with respect to the 10
               1/4% Senior Subordinated Notes due 2007.

     4.2 (a)   Exchange and Registration Rights Agreement, dated as of May 21,
               1997, by and among AFC, Goldman, Sachs & Co., CIBC Wood Gundy
               Securities Corp. and Donaldson, Lufkin & Jenrette Securities
               Corporation.

                                       61
<PAGE>
 
      4.3 (h)    Amended and Restated Credit Agreement, dated as of October 15,
                 1998, among AFC Enterprises, Inc. and Goldman Sachs Credit
                 Partners L.P., as Syndication Agent and Lead Arranger and the
                 financial institutions listed therein (collectively "Lenders")
                 and Canadian Imperial Bank of Commerce, as Administrative
                 Agent.

      4.4 (a)    Security Agreement, dated as of May 21, 1997, by and between
                 AFC and CIBC, as Administrative Agent.

      4.5 (a)    Pledge Agreement, dated as of May 21, 1997, by and between AFC
                 and CIBC, as Administrative Agent.

      4.6 (a)    Trademark Security Agreement, dated as of May 21, 1997, by and
                 between AFC and CIBC, as Administrative Agent.

      4.7 (a)    Patent and Copyright Security Agreement, dated as of May 21,
                 1997, by and between AFC and CIBC, as Administrative Agent.

      4.8 (a)    Collateral Account Agreement, dated as of May 21, 1997, by and
                 between AFC and CIBC, as Administrative Agent.

      4.9 (a)    Form of Mortgage, Assignment of Rents, Security Agreement and
                 Fixture Filing, dated as of May 21, 1997, between AFC and CIBC,
                 as Administrative Agent.

     10.1 (a)    Stock Purchase Agreement dated February 23, 1996 among AFC, FS
                 Equity Partners, L.P. III ("FSEP III"), and FS Equity Partners
                 International, L.P. ("FSEP International").

     10.2 (a)    Stockholders Agreement dated April 11, 1996 among FSEP III and
                 FSEP International, CIBC, Pilgrim Prime Rate Trust, Van Kampen
                 American Capital Prime Rate Income Trust, Senior Debt
                 Portfolio, ML IBK Positions Inc., Frank J. Belatti, Dick R.
                 Holbrook, Samuel N. Frankel (collectively, the "Stockholders")
                 and AFC.

     10.3 (a)    Amendment No. 1 to Stockholders Agreement dated May 1, 1996
                 among the Stockholders, AFC and PENMAN Private Equity and
                 Mezzanine Fund, L.P.

     10.4 (a)    Asset Purchase Agreement dated March 24, 1997 by and between
                 AFC and Atlanta Franchise Development Company, LLC.

     10.5 (a)    Asset Purchase Agreement dated May 5, 1997 among AFC, The
                 American Bagel Company d/b/a Chesapeake Bagel Bakery, Michael
                 Robinson, and Alan Manstof.
                 
     10.6 (a)    Form of Popeye's Development Agreement
  
     10.7 (a)    Form of Church's Development Agreement
 
     10.8 (a)    Form of Popeye's Franchise Agreement

     10.9 (a)    Form of Church's Franchise Agreement

                                       62
<PAGE>
 
     10.10 (a)   Formula Agreement dated July 2, 1979 among Alvin C. Copeland,
                 Gilbert E. Copeland, Mary L. Copeland, Catherine Copeland,
                 Russell J. Jones, A. Copeland Enterprises, Inc. and Popeyes
                 Famous Fried Chicken, Inc. (a predecessor of AFC).

     10.11 (a)   Amendment to Formula Agreement dated March 21, 1989 by and
                 among Alvin Copeland, New Orleans Spice Company, Inc. and
                 Biscuit Investments, Inc. (a predecessor of AFC). 

     10.12 (a)   Second Amendment to Formula Agreement dated March 21, 1989 by
                 and among Alvin C. Copeland, Biscuit Investments, Inc. and New
                 Orleans Spice Company, Inc.

     10.13 (a)   Supply Agreement dated March 21, 1989 between New Orleans Spice
                 Company, Inc. and Biscuit Investments, Inc.

     10.14 (a)   Recipe Royalty Agreement dated March 21, 1989 by and among
                 Alvin C. Copeland, New Orleans Spice Company, Inc. and Biscuit
                 Investments, Inc.

     10.15 (a)   Licensing Agreement dated March 11, 1976 between King Features
                 Syndicate Division of The Hearst Corporation and A. Copeland
                 Enterprises, Inc.
                 
     10.16 (a)   Assignment and Amendment dated January 1, 1981 between A.
                 Copeland Enterprises, Inc., Popeyes Famous Fried Chicken, Inc.
                 and King Features Syndicate Division of The Hearst Corporation.
                 
     10.17 (a)   Popeye License Agreement dated January 1, 1981 between King
                 Features Syndicate Division of The Hearst Corporation and
                 Popeyes Famous Fried Chicken, Inc.
                 
     10.18 (a)   Letter Agreement dated September 17, 1981 between King Features
                 Syndicate Division of The Hearst Corporation, A. Copeland
                 Enterprises, Inc. and Popeyes Famous Fried Chicken, Inc.
                 
     10.19 (a)   License Agreement dated December 19, 1985 by and between King
                 Features Syndicate, Inc., The Hearst Corporation, Popeyes, Inc.
                 and A. Copeland Enterprises, Inc.
                 
     10.20 (a)   Letter Agreement dated July 20, 1987 by and between King
                 Features Syndicate, Division of The Hearst Corporation,
                 Popeyes, Inc. and A. Copeland Enterprises, Inc.
                 
     10.21 (a)   Employment Agreement dated November 5, 1992 between AFC and
                 Frank J. Belatti.
                 
     10.22 (a)   Amendment No. 1 to Employment Agreement dated November 5, 1995
                 between AFC and Frank J. Belatti.
                 
     10.23 (a)   Employment Agreement dated as of November 5, 1992 between AFC
                 and Dick 

                                       63
<PAGE>
 
                 R. Holbrook.
                 
     10.24 (a)   Amendment No. 1 to Employment Agreement dated November 5, 1995
                 between AFC and Dick R. Holbrook.
                 
     10.25 (a)   Employment Agreement dated December 5, 1995 between AFC and
                 Samuel N. Frankel.
                 
     10.26 (a)   1992 Stock Option Plan of AFC (formerly America's Favorite
                 Chicken Company) effective as of November 5, 1992.
                 
     10.27 (a)   First Amendment to 1992 Stock Option Plan dated July 19, 1993.
                 
     10.28 (a)   Second Amendment to 1992 Stock Option Plan dated December 17,
                 1993.
                 
     10.29 (a)   Third Amendment to 1992 Stock Option Plan dated April 11, 1996.
                 
     10.30 (a)   1996 Nonqualified Performance Stock Option Plan (Executive) of
                 AFC effective as of April 11, 1996.
                 
     10.31 (a)   1996 Nonqualified Performance Stock Option Plan (General) of
                 AFC effective as of April 11, 1996.
                 
     10.32 (a)   1996 Nonqualified Stock Option Plan of AFC effective as of
                 April 11, 1996.
                 
     10.33 (a)   Form of Nonqualified Stock Option Agreement (General) between
                 AFC and stock option participants.
                 
     10.34 (a)   Form of Nonqualified Stock Option Agreement (Executive) between
                 AFC and certain key executives.
                 
     10.35 (a)   1996 Employee Stock Bonus Plan (Executive) of AFC effective as
                 of April 11, 1996.
                 
     10.36 (a)   1996 Employee Stock Bonus Plan (General) of AFC effective as of
                 April 11, 1996.
                 
     10.37 (a)   Form of Stock Bonus Agreement (Executive) between AFC and
                 certain executive officers.
                 
     10.38 (a)   Form of Stock Bonus Agreement (General) between AFC and certain
                 key officers and employees.
                 
     10.39 (a)   Form of Secured Promissory Note issued to certain members of
                 management.
                 
     10.40 (a)   Form of Stock Pledge Agreement between AFC and certain members
                 of management.
                 
                                       64
<PAGE>
 
     10.41 (a)   AFC 1994 Supplemental Benefit Plan for Executive Officers dated
                 May 9, 1994.
                 
     10.42 (a)   AFC 1994 Supplemental Benefit Plan for Senior and Executive
                 Staff Officers dated April 19, 1994.
                 
     10.43 (a)   AFC 1994 Supplemental Benefit Plan for Senior Officers/General
                 Managers dated May 9, 1994.
                 
     10.44 (a)   AFC 1994 Supplemental Benefit Plan for Designated Officers
                 dated May 9, 1994.
                 
     10.45 (a)   Settlement Agreement between Alvin C. Copeland, Diversified
                 Foods and Seasonings, Inc., Flavorite Laboratories, Inc. and
                 AFC dated May 29, 1997.
                 
     10.46 (a)   Sublease dated March 1, 1997 by and between AFC and Foresight
                 Software, Inc.
                 
     10.47 (a)   Lease dated December 31, 1992 by and between Concourse VI
                 Associates and AFC.
                 
     10.48 (a)   First Amendment to Lease Agreement dated January 1993 by and
                 between AFC and Concourse VI Associates.
                 
     10.49 (a)   Second Amendment to Lease Agreement dated June 24, 1993 by and
                 between AFC and Concourse VI Associates.
                 
     10.50 (a)   Third Amendment to Lease Agreement dated June 17, 1994 by and
                 between AFC and Concourse VI Associates.
                 
     10.51 (a)   Indemnification Agreement dated April 11, 1996 by and between
                 AFC and William M. Wardlaw.
                 
     10.52 (a)   Indemnification Agreement dated April 11, 1996 by and between
                 AFC and Ronald P. Spogli.
                 
     10.53 (a)   Indemnification Agreement dated April 11, 1996 by and between
                 AFC and John M. Roth.
                 
     10.54 (a)   Indemnification Agreement dated May 1, 1996 by and between AFC
                 and Kelvin J. Pennington.
                 
     10.55 (a)   Indemnification Agreement dated April 11, 1996 by and between
                 AFC and Dick R. Holbrook.
                 
     10.56 (a)   Indemnification Agreement dated April 11, 1996 by and between
                 AFC and Todd W. Halloran.
                 
     10.57 (a)   Indemnification Agreement dated April 11, 1996 by and between
                 AFC and Samuel N. Frankel.

                                       65
<PAGE>
 
     10.58 (a)   Indemnification Agreement dated April 11, 1996 by and between
                 AFC and Matt L. Figel.
                 
     10.59 (a)   Indemnification Agreement dated July 2, 1996 by and between AFC
                 and Paul H. Farrar.
                 
     10.60 (a)   Indemnification Agreement dated July 2, 1997 by and between AFC
                 and Mark J. Doran.
                 
     10.61 (a)   Indemnification Agreement dated April 11, 1996 by and between
                 AFC and Frank J. Belatti.
                 
     10.62 (b)   Credit Agreement dated August 12, 1997, between AFC and Banco
                 Popular ("Banco Popular") De Puerto Rico for Turnkey
                 Development program financing.
                 
     10.63 (b)   Exhibit A (the Budget) of Credit Agreement dated August 12,
                 1997 between AFC and Banco Popular.
                 
     10.64 (b)   Exhibit B (Form of Notes) of Credit Agreement dated August 12,
                 1997 between AFC and Banco Popular.
                 
     10.65 (b)   Exhibit C (Form of Leasehold Mortgage) of Credit Agreement
                 dated August 12, 1997 between AFC and Banco Popular.
                 
     10.66 (b)   Exhibit D (Form of Owned Property Mortgage) of Credit Agreement
                 dated August 12, 1997 between AFC and Banco Popular.
                 
     10.67 (b)   Exhibit E (Form of Assignment of Contracts) of Credit Agreement
                 dated August 12, 1997 between AFC and Banco Popular.
                 
     10.68 (b)   Exhibit F (Form of Environmental Indemnity Agreement) of Credit
                 Agreement dated August 12, 1997 between AFC and Banco Popular.
                 
     10.69 (b)   Exhibit G (Form of Borrowing Certificate) of Credit Agreement
                 dated August 12, 1997 between AFC and Banco Popular.
                 
     10.70 (b)   Exhibit H (Terms and Conditions of Standard Franchise Loans) of
                 Credit Agreement dated August 12, 1997 between AFC and Banco
                 Popular.
                                  
     10.71 (b)   Exhibit I (Terms and Conditions of Popular Plus Loans) of
                 Credit Agreement dated August 12, 1997 between AFC and Banco
                 Popular.                 

     10.72 (b)   Exhibit J (Description of Borrower's "Plus Program") of Credit
                 Agreement dated August 12, 1997 between AFC and Banco Popular.

                                       66
<PAGE>
 
     10.73 (b)   Exhibit K-1 (Franchise Loan Commitment) of Credit Agreement
                 dated August 12, 1997 between AFC and Banco Popular.
                 
     10.74 (b)   Exhibit K-2 (Forms of Franchise Loan Documents) of Credit
                 Agreement dated August 12, 1997 between AFC and Banco Popular.
                 
     10.75 (c)   Form of Chesapeake Bagel Development Agreement
                 
     10.76 (c)   Form of Chesapeake Bagel Franchise Agreement
                 
     10.77 (d)   Agreement and Plan of Merger among AFC Enterprises, Inc. and
                 Seattle Coffee Company, all of the Principal Shareholders of
                 Seattle Coffee Company (collectively "SCC") and AFC Acquisition
                 Corp (the "Merger Agreement").
                 
     10.78 (d)   Exhibit A of Merger Agreement with SCC - Disclosure Statement
                 
     10.79 (d)   Exhibit B of Merger Agreement with SCC - Stockholders Agreement
                 
     10.80 (d)   First Amendment to Merger Agreement with SCC
                 
     10.81 (e)   Agreement and Plan of Merger by and among Cinnabon
                 International, Inc., AFC Enterprises, Inc. and AFC Franchise
                 Acquisition Corp., effective August 13, 1998
                 
     10.82 (f)   First Amendment to the Agreement and Plan of Merger by and
                 among Cinnabon International, Inc., AFC Enterprises, Inc. and
                 AFC Franchise Acquisition Corp. dated August 13, 1998
                 ("Cinnabon Merger Agreement")
                 
     10.83 (f)   Second Amendment to the Cinnabon Merger Agreement
                 
     10.84 (f)   Stockholder Agreement by and among AFC Franchise Acquisition
                 Corp. and other parties signatories dated as of August 13, 1998
                 
     10.85 (h)   AFC Deferred Compensation Plan dated March 1, 1998.

     10.86 (h)   First Amendment to the AFC Deferred Compensation Plan dated
                 March 1, 1998

     21.1 (h)    Subsidiaries of AFC.
 
     23.2 (g)    Consent of Ernst and Young LLP.
 
     27.1 (h)    Financial Data Schedule

                                       67
<PAGE>
 
___________________ 
(a) Filed as an exhibit to the Company's Registration Statement on Form S-4
    (Registration No. 333-29731) on July 2, 1997 and incorporated by reference
    herein.

(b) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
    September 7, 1997 on October 21, 1997 and incorporated by reference herein.

(c) Filed as an exhibit to the Company's Form 10-K for the year ended December
    28, 1998 on March 15, 1998 and incorporated by reference herein.

(d) Filed as an exhibit to the Company's Form 10-Q for the quarter ended March
    22, 1998 on May 6, 1998 and incorporated by reference herein.

(e) Filed as an exhibit to the Company's Current Report on Form 8-K dated August
    13, 1998 and incorporated by reference herein.

(f) Filed as an exhibit to the Company's Current Report on Form 8-K dated
    October 15, 1998 and incorporated by reference herein.

(g) Filed as an exhibit to the Company's Current Report on Form 8-K/A dated
    October 15, 1998 and incorporated by reference herein.

(h) Included in this filing.


(D) REPORTS ON FORM 8-K
 
     The Company filed a Current Report on Form 8-K dated October 29, 1998 under
Item 2, Acquisition or Disposition of Assets and Item 7, Financial Statements
and Exhibits, to report the Company's execution of a definitive agreement to
acquire all of the common stock of Cinnabon International, Inc.

     The Company filed a Current Report on Form 8-K/A dated December 23, 1998
under Item 7, Financial Statements and Exhibits, to include Cinnabon
International, Inc.'s (i) audited financial statements as of March 30, 1997 and
March 29, 1998, (ii) unaudited financial statements for the six months ended
September 27, 1998 and pro forma financial information.

                                       68
<PAGE>
 
                                   SIGNATURES
                                        
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                              AFC Enterprises, Inc.
 
                                              By: /s/   Frank J. Belatti
                                                  ----------------------
                                                      Frank J. Belatti
                                                      Chairman of the Board and
                                                      Chief Executive Officer

                                              Date:  March 29, 1999

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
       Signatures                              Title                        Date
       ----------                              -----                        ----
<S>                                <C>                                <C>
     /s/  Frank J. Belatti           Chairman of the board and        March 29, 1999
     ------------------------
          Frank J. Belatti            Chief Executive Officer
                                   (Principal Executive Officer)

     /s/  Gerald J. Wilkins           Chief Financial Officer         March 29, 1999
     ------------------------
          Gerald J. Wilkins          (Principal Financial and
                                        Accounting Officer)

     /s/  Dick R. Holbrook          President, Chief Operating        March 29, 1999
     ------------------------
          Dick R. Holbrook             Officer and Director

     /s/  Samuel N. Frankel          Executive Vice President,        March 29, 1999
     ------------------------
          Samuel N. Frankel         Secretary, General Counsel
                                           and Director

     /s/  John M. Roth                       Director                 March 29, 1999
     ------------------------
          John M. Roth

     /s/  Mark J. Doran                      Director                 March 29, 1999
     ------------------------
          Mark J. Doran

     /s/  Paul Farrar                        Director                 March 29, 1999
     ------------------------
          Paul Farrar
</TABLE> 

                                       69
<PAGE>
 
<TABLE> 
<S>                                          <C>                      <C> 
     /s/  Matt L. Figel                      Director                 March 29, 1999
     -------------------------
          Matt L. Figel

     /s/  Peter Starrett                     Director                 March 29, 1999
     -------------------------
          Peter Starrett

     /s/  Kelvin J. Pennington               Director                 March 29, 1999
     -------------------------
          Kelvin J. Pennington

     /s/  Ronald P. Spogli                   Director                 March 29, 1999
     -------------------------
          Ronald P. Spogli

     /s/  William M. Wardlaw                 Director                 March 29, 1999
     -------------------------
          William M. Wardlaw
</TABLE>

                                       70
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
AFC Enterprises, Inc.

We have audited the accompanying consolidated balance sheets of AFC Enterprises,
Inc. (a Minnesota corporation) and subsidiaries (collectively referred to
hereafter as "the Company") as of December 27, 1998, and December 28, 1997, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the years ended December 27, 1998, December 28, 1997,
and December 29, 1996.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 27,
1998, and December 28, 1997, and the results of its operations and its cash
flows for the years ended December 27, 1998, December 28, 1997, and December 29,
1996, in conformity with generally accepted accounting principles.


                                                        /s/ ARTHUR ANDERSEN LLP

Atlanta, Georgia
March 12, 1999

                                      F-1
<PAGE>
 
                             AFC ENTERPRISES, INC.
                          CONSOLIDATED BALANCE SHEETS
                 As of December 27, 1998 and December 28, 1997
                     ( In thousands, except share amounts)
--------------------------------------------------------------------------------
                                                             1998      1997
                                                           --------  --------
ASSETS:
CURRENT ASSETS:
  Cash and cash equivalents..............................  $ 17,066  $ 32,964
  Accounts and current notes receivable, net of reserve..    16,728     8,305
  Income taxes refundable................................     3,327     2,477
  Inventories............................................    13,182     4,447
  Deferred income taxes..................................     4,577     3,366
  Prepaid expenses and other.............................     2,344     1,539
                                                           --------  --------
     Total current assets................................    57,224    53,098
 
LONG-TERM ASSETS:
  Notes receivable, net..................................     4,066     4,477
  Deferred income taxes..................................     4,416         -
  Property and equipment, net............................   263,141   207,807
  Other assets...........................................    19,498    17,049
  Trademarks, net........................................    82,913    95,504
  Goodwill, net..........................................   122,334     3,347
  Other intangible assets, net...........................     2,873     1,422
                                                           --------  --------
     Total long-term assets..............................   499,241   329,606
                                                           --------  --------
 
          Total assets...................................  $556,465  $382,704
                                                           ========  ========
 
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
  Accounts payable.......................................  $ 40,579  $ 22,123
  Bank overdrafts........................................     6,248     9,707
  Current portion of long-term debt......................     8,356     4,993
  Current portion of capital lease obligations...........     6,050     6,001
  Short-term borrowings..................................     7,000         -
  Accrued interest.......................................     2,863     2,765
  Accrued insurance expenses.............................     4,437     5,123
  Accrued employee compensation..........................     4,700     7,114
  Accrued employee benefit expenses......................     4,332     5,767
  Other accrued expenses.................................     6,715     3,154
                                                           --------  --------
     Total current liabilities...........................    91,280    66,747
 
LONG-TERM LIABILITIES:
  Long-term debt, net of current portion.................   262,744   220,150
  Capital lease obligations, net of current portion......     8,561    12,738
  Acquisition facility...................................    68,000         -
  Deferred income taxes..................................         -     2,702
  Other liabilities......................................    37,963    31,908
                                                           --------  --------
     Total long-term liabilities.........................   377,268   267,498
                                                           --------  --------
 
          Total liabilities..............................   468,548   334,245
                                                           --------  --------

  (Continued)

See accompanying notes to consolidated financial statements.
 

                                      F-2
<PAGE>
 
                             AFC ENTERPRISES, INC.
                    CONSOLIDATED BALANCE SHEETS (CONTINUED)
                 As of December 27, 1998 and December 28, 1997
                     ( In thousands, except share amounts)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                   1998       1997
                                                                 --------   --------
<S>                                                              <C>        <C>
COMMITMENTS AND CONTINGENCIES
 
SHAREHOLDERS' EQUITY:
  Common stock ($.01 par value; 50,000,000 shares authorized;
     39,232,329 and 34,448,604 shares issued and outstanding
     at period end, respectively)..............................       392        344
  Capital in excess of par value...............................   151,632    101,840
  Notes receivable - officers, including accrued interest......    (6,138)    (4,402)
  Accumulated deficit..........................................   (57,969)   (49,323)
                                                                 --------   --------
 
     Total shareholders' equity................................    87,917     48,459
                                                                 --------   --------

          Total liabilities and shareholders' equity...........  $556,465   $382,704
                                                                 ========   ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
 
                             AFC ENTERPRISES, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
            For the Years Ended December 27, 1998, December 28, 1997
                             and December 29, 1996
                                 (In thousands)
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                     For                    For               For
                                                                 Year Ended             Year Ended        Year Ended
                                                                December 27,           December 28,      December 29,
                                                                    1998                   1997              1996
                                                                -------------          -------------     ------------
                                                                 (52 Weeks)             (52 Weeks)        (52 Weeks)
<S>                                                             <C>                    <C>               <C> 
REVENUES:
 Restaurant sales.............................................  $    488,574           $    403,285      $    430,280
 Franchise revenues...........................................        66,606                 64,055            51,336
 Wholesale revenues...........................................        36,411                      -                 -
 Manufacturing revenues.......................................         7,561                  7,647             8,222
 Other revenues...............................................         9,939                  8,766             8,005
                                                                ------------           ------------      ------------
  Total revenues..............................................       609,091                483,753           497,843
 
COSTS AND EXPENSES:
 Restaurant cost of sales.....................................       155,627                131,374           142,199
 Restaurant operating expenses................................       246,448                197,324           211,275
 Wholesale cost of sales......................................        18,466                      -                 -
 Wholesale operating expenses.................................         8,313                      -                 -
 Manufacturing cost of sales..................................         5,802                  6,381             7,201
 General and administrative...................................        89,457                 79,541            76,071
 Depreciation and amortization................................        46,078                 33,803            30,904
 Impairment of Chesapeake intangible..........................         6,800                      -                 -
 Charges for restaurant closings..............................         9,183                    479             1,304
 Provision for software write-offs............................         5,000                      -                 -
 Gain on sale of fixed assets from AFDC transaction...........             -                 (5,319)                -
                                                                ------------           ------------      ------------ 
  Total costs and expenses....................................       591,174                443,583           468,954
                                                                ------------           ------------      ------------
 
INCOME FROM OPERATIONS........................................        17,917                 40,170            28,889
 
OTHER EXPENSES:
 Interest, net................................................        30,786                 20,645            15,875
                                                                ------------           ------------      ------------
 
NET INCOME (LOSS) BEFORE INCOME TAXES AND
 EXTRAORDINARY LOSS...........................................       (12,869)                19,525            13,014
 Income tax expense (benefit).................................        (4,223)                 8,525             5,163
                                                                ------------           ------------      ------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS...................        (8,646)                11,000             7,851
 Extraordinary loss on early retirement of debt, (net
  of income taxes of $2,673)..................................             -                      -            (4,456)
                                                                ------------           ------------      ------------
 
NET INCOME (LOSS).............................................        (8,646)                11,000             3,395
 
8% Preferred Stock dividends..................................             -                      -             1,316
10% Preferred Stock dividends payable in kind.................             -                  2,240             3,956
Accelerated accretion of 8% Preferred Stock
 Discount upon retirement.....................................             -                      -             8,719
Accretion of 8% Preferred Stock discount......................             -                      -               813
                                                                ------------           ------------      ------------
 
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK................  $     (8,646)          $      8,760      $    (11,409)
                                                                ============           ============      ============
</TABLE> 

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
 
                             AFC ENTERPRISES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
            For the Years Ended December 27, 1998, December 28, 1997
                             and December 29, 1996
                                 (In thousands)

--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                        For                  For                  For
                                                    Year Ended           Year Ended           Year Ended
                                                   December 27,         December 28,         December 29,
                                                       1998                 1997                 1996
                                                   ------------         ------------         ------------
<S>                                                    <C>                  <C>                  <C>
Common stock:                                                                        
 Balance at beginning of period..................      $    344             $    344             $    100
 Issuance of common stock........................            48                    -                  244
                                                       --------             --------             --------
 Balance at end of period........................      $    392             $    344             $    344
                                                       --------             --------             --------
                                                                                     
Capital in excess of par value:                                                      
 Balance at beginning of period..................      $101,840             $ 99,482             $ 24,909
 Issuance of common stock, options and warrants..        48,720                    6               73,709
 Adjust stock issuance cost accrual to actual....             -                  135                    -
 Deferred compensation...........................         1,072                2,217                  864
                                                       --------             --------             --------
 Balance at end of period........................      $151,632             $101,840             $ 99,482
                                                       --------             --------             --------
                                                                                     
Notes receivable - officers:                                                         
 Balance at beginning of period..................      $ (4,402)            $ (3,841)            $      -
 Notes receivable additions, net of discount.....        (1,345)                (202)              (3,593)
 Note receivable payments........................            12                   19                    -
 Interest receivable.............................          (307)                (284)                (194)
 Amortization of discount........................           (96)                 (94)                 (54)
                                                       --------             --------             --------
 Balance at end of period........................      $ (6,138)            $ (4,402)            $ (3,841)
                                                       --------             --------             --------
                                                                                     
Accumulated deficit:                                                                 
 Balance at beginning of period..................      $(49,323)            $(58,083)            $(46,674)
 Net income (loss)...............................        (8,646)              11,000                3,395
 Accretion of 8% Preferred Stock discount........             -                    -                 (813)
 Accelerated accretion of 8% Preferred Stock                                         
  discount upon retirement.......................             -                    -               (8,719)
 10% and 8% Preferred Stock dividends............             -               (2,240)              (5,272)
                                                       --------             --------             --------
 Balance at end of period........................      $(57,969)            $(49,323)            $(58,083)
                                                       --------             --------             --------
                                                                                     
Total shareholders' equity.......................      $ 87,917             $ 48,459             $ 37,902
                                                       ========             ========             ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
 
                             AFC ENTERPRISES, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
           For the Years Ended December 27, 1998, December 28, 1997
                             and December 29, 1996
                                (In thousands)

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                 For            For            For
                                                             Year Ended     Year Ended     Year Ended
                                                            December 27,   December 28,   December 29,
                                                                1998           1997           1996
                                                            -------------  -------------  -------------
                                                             (52 Weeks)     (52 Weeks)     (52 Weeks)
<S>                                                         <C>            <C>            <C>            
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:      
 Net income (loss)..........................................    $  (8,646)      $ 11,000       $  3,395
 Adjustments to reconcile net income (loss) to net
  cash provided by operating activities:
  Depreciation and amortization.............................       46,078         33,803         30,904
  Provision for credit losses...............................        1,063          1,214            816
  (Gain) loss on disposition and retirement of
     long-lived assets......................................          987         (2,652)         1,715
  Charges for restaurant closings...........................        9,183            479          1,304
  Impairment of Chesapeake intangible.......................        6,800              -              -
  Provision for software write-offs.........................        5,000              -              -
  Amortization of notes payable discount....................            -              -          7,729
  Amortization of debt issuance costs.......................        1,477            886              -
  Notes receivable - officers discount......................            -              -            876
  Amortization of notes receivable - officers
     discount...............................................          (96)           (94)           (54)
  Deferred compensation.....................................        1,072          2,217            864
  Deferred tax expense (benefit)............................       (7,628)         3,863            380

 Change in operating assets and liabilities:
  (Increase) decrease in accounts receivable................       (6,325)          (905)        (4,137)
  (Increase) decrease in inventories........................       (3,565)          (487)         2,154
  (Increase) decrease in prepaid expenses/other.............       (1,546)         4,076          1,694
  (Increase) decrease in other assets.......................       (6,681)            21           (856)
  Increase (decrease) in accounts payable...................       14,747          4,157          1,101
  Increase (decrease) in accrued expenses...................       (3,298)        (3,097)         2,469
  Increase (decrease) in other liabilities..................       (3,085)        (1,966)        (2,553)
                                                                ---------       --------       --------
     Total adjustments......................................       54,183         41,515         44,406
                                                                ---------       --------       --------
 Net cash provided by operating activities..................    $  45,537       $ 52,515       $ 47,801
                                                                ---------       --------       --------

 CASH FLOWS USED IN INVESTING ACTIVITIES:

 Proceeds from disposition of property held for sale........    $     479       $ 19,681       $  3,158
 Investment in property and equipment.......................      (38,135)       (42,136)       (33,951)
 Investment in Chesapeake intangible asset..................            -        (14,116)             -
 Investment in Pinetree intangible and fixed
  assets....................................................      (41,449)             -              -
 Investment in SCC intangible and fixed
  assets....................................................      (43,970)             -              -
 Investment in CII intangible and fixed assets..............      (67,484)             -              -
 Notes receivable additions.................................         (359)        (2,657)          (136)
 Payments received on notes.................................        2,631          3,446          1,541
                                                                ---------       --------       --------
 Net cash used in investing activities......................    $(188,287)      $(35,782)      $(29,388)
                                                                ---------       --------       --------
</TABLE>
(Continued)

See accompanying footnotes to consolidated financial statements.

                                      F-6
<PAGE>
 
                             AFC ENTERPRISES, INC.
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
           For the Years Ended December 27, 1998, December 28, 1997
                             and December 29, 1996
                                (In thousands)

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                            For                 For                   For
                                                        Year Ended          Year Ended            Year Ended
                                                        December 27,        December 28,          December 29,
                                                            1998                1997                  1996  
                                                        ------------        ------------          ------------
                                                         (52 Weeks)          (52 Weeks)             (52 Weeks)
<S>                                                     <C>                 <C>                   <C>
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
 Principal payments of long-term debt.................  $ (5,321)           $(128,365)            $(69,054)
 Proceeds from long-term debt.........................    50,000               50,000                    -
 Proceeds from subordinated notes.....................         -              175,000                    -
 Net borrowings under Acquisition line of credit......    68,000                    -                    -
 Net borrowings under Revolving line of credit........     7,000                    -                    -
 Increase (decrease) in bank overdrafts, net..........    (3,459)              (1,105)               2,729
 Principal payments for capital lease obligations.....    (7,421)             (25,182)              (3,904)
 Redemption of 10% preferred stock....................         -              (59,957)                   -
 Notes receivable additions to officers...............         -                 (202)              (4,469)
 Notes receivable officers-payments...................        12                   19                    -
 Notes receivable officers-accrued interest...........      (307)                (284)                (194)
 Issuance of common stock.............................    20,350                    6               70,205
 Stock issuance costs.................................    (1,016)                   -               (6,115)
 Debt issuance costs..................................      (986)             (10,675)                   -
 Preferred stock dividends paid.......................         -               (2,240)              (2,004)
                                                        --------            ---------             --------
 Net cash provided by (used in) financing activities..   126,852               (2,985)             (12,806)
                                                        --------            ---------             --------
 
Net increase (decrease) in cash and cash equivalents..   (15,898)              13,748                5,607
Cash and cash equivalents at beginning
  of the period.......................................    32,964               19,216               13,609
                                                        --------            ---------             --------
Cash and cash equivalents at end of the period........  $ 17,066            $  32,964             $ 19,216
                                                        ========            =========             ========
</TABLE>

               SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION

<TABLE>
<CAPTION>
 
<S>                                                     <C>                 <C>                   <C>
Cash interest paid (net of capitalized amounts).......  $ 29,388            $  19,579             $ 13,763
Cash paid for income taxes............................     4,064                6,747                2,060
</TABLE> 

                  NONCASH INVESTING AND FINANCING ACTIVITIES
 
<TABLE> 
<CAPTION> 

<S>                                                     <C>                 <C>                   <C>
Capital lease and note payable additions..............  $ 3,899             $  20,485             $ 12,404
Issuance of Common Stock..............................   28,090                     -                    -
Notes receivable to officers (See Note 14)............    1,345                     -                    -
Retirement of 8% Preferred Stock (See Note 1).........        -                     -              (56,000)
Issuance of 10% Preferred Stock (See Note 1)..........        -                     -               56,000
Issuance of common stock to executives in connection
 with 1996 Executive Compensation Award...............        -                     -               10,000
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>
 
                             AFC ENTERPRISES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           For the Years Ended December 27, 1998, December 28, 1997
                             and December 29, 1996
 
1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

     The consolidated financial statements include the accounts of AFC
Enterprises, Inc., a Minnesota corporation, and its wholly-owned subsidiaries,
AFC Properties, Inc., a Georgia corporation, Seattle Coffee Company ("SCC"), a
Washington corporation, and Cinnabon International, Inc. ("CII"), a Delaware
corporation. All significant intercompany balances and transactions are
eliminated in consolidation. The consolidated entity is referred to herein as
"AFC" or "the Company".

     SCC is the parent company of two wholly-owned subsidiaries, Seattle's Best
Coffee, Inc. and Torrefazione Italia, Inc., both of which are Washington
corporations. CII is the parent company of one subsidiary, Cinnabon Inc., a
Delaware corporation.

Nature of Operations
 
     AFC is primarily a multi-concept quick-service restaurant company. The
Company operates and franchises quick-service restaurants under the primary
trade names of Popeyes Chicken & Biscuits ("Popeyes"), Churchs Chicken
("Churchs") and Chesapeake Bagel Bakery ("Chesapeake"). In 1998, the Company
added SCC, which operates and franchises cafes under the "Seattle's Best" and
"Torrefazione Italia" brands (collectively "Seattle Coffee") and operates a
wholesale coffee business. Also in 1998, the Company acquired CII, an operator
and franchisor of retail cinnamon roll bakeries under the Cinnabon trade name
("Cinnabon"). The Company also operates a manufacturing plant that produces
proprietary gas fryers and other custom-fabricated restaurant equipment for sale
to distributors and franchisees. The following table outlines the number of
restaurants operated by the Company and franchised by brand at the end of the
indicated periods:

<TABLE>
<CAPTION>
                                         December 27,  December 28,  December 29,
                                             1998          1997          1996
                                         ------------  ------------  ------------
<S>                                      <C>           <C>           <C>
     Popeyes:
       Domestic-Company-operated.......           171           119           120
       Domestic-Franchised.............           899           830           774
       International-Franchised........           222           182           127
                                                -----         -----         -----
         Total.........................         1,292         1,131         1,021
                                                =====         =====         =====
 
     Churchs:
       Domestic-Company-operated.......           491           480           622
       Domestic-Franchised.............           615           590           367
       International-Franchised........           293           286           268
                                                -----         -----         -----
         Total.........................         1,399         1,356         1,257
                                                =====         =====         =====
</TABLE> 
 

                                      F-8
<PAGE>
 
<TABLE> 
<CAPTION> 
                                             December 27,  December 28,  December 29,
                                                 1998          1997          1996
                                                -----         -----         -----
 <S>                                            <C>           <C>           <C> 
     CII:
       Domestic-Company-operated.......           212             -             -
       Domestic-Franchised.............           140             -             -
       International-Franchised........            17             -             -
                                                -----         -----         -----
         Total.........................           369             -             -
                                                =====         =====         =====

     SCC:
       Domestic-Company-operated.......            57             -             -
       Domestic-Franchised.............            11             -             -
       International-Company-operated               2             -             -
       International-Franchised........             1             -             -
                                                -----         -----         -----
         Total.........................            71             -             -
                                                =====         =====         =====
 
     Chesapeake:
       Domestic-Company-operated.......             4             1             -
       Domestic-Franchised.............           103           154             -
       International-Franchised........             -             -             -
                                                -----         -----         -----
         Total.........................           107           155             -
                                                =====         =====         =====
</TABLE>

     A substantial portion of the domestic Company-operated restaurants are
located in the South and Southwest areas of the United States. With the
exception of two Company-operated SCC cafes in Canada, the Company does not
currently own or operate any restaurants outside of the United States. The
Company's international franchisees operate primarily in Mexico, Canada, Puerto
Rico and numerous countries in Asia.

     On March 18, 1998, the Company acquired all of SCC's common stock. As a
result of this transaction, the Company acquired 59 Company-operated cafes and
10 franchised cafes under the Seattle's Best and Torrefazione Italia brands and
a wholesale distribution business, including 13 offices and more than 5,000
accounts (See Note 17).

     On October 15, 1998, the Company acquired all of CII's's common stock. At
acquisition, CII operated and franchised 363 retail cinnamon roll bakeries
operating in 39 states, Canada and Mexico. At the date of the acquisition, 211
of the bakeries were Company-operated and located within the United States (See
Note 17).

Basis of Presentation

     The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities.
These estimates affect the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

                                      F-9
<PAGE>
 
     The Company has a 52/53-week fiscal year ending on the last Sunday in
December. The 1998, 1997 and 1996 fiscal years all consisted of 52 weeks.
Certain items in the prior period consolidated financial statements, and notes
thereto, have been reclassified to conform with the current presentation.

     In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start-up activities and organization costs to be expensed as incurred. SOP 
98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company will adopt SOP 98-5 in fiscal year 1999. It is
management's belief that SOP 98-5 will not have a material effect on the
Company's financial position or results of operations.
 
     In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130") was issued. FAS 130 establishes
standards for reporting and displaying comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. This standard requires that all items required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement with the same prominence as other financial
statements. FAS 130 is effective for fiscal years beginning after December 15,
1997. Presently, the Company does not have any items which are considered to be
components of comprehensive income, and therefore, FAS 130 does not impact the
Company's financial statements at this time.

     In February 1998, Statement of Financial Accounting Standards No. 132,
"Employer's Disclosure about Pensions and Other Post-Retirement Benefits" ("FAS
132") was issued. FAS 132 revises employer's disclosures about pension and other
post-retirement benefit plans. It does not change the measurement or recognition
of those plans. This statement is effective for fiscal years beginning after
December 15, 1997 and impacts the presentation of financial statement
disclosures. The Company adopted FAS 132 in fiscal year 1998.

     In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), was
issued. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for financial statements
for periods beginning after June 15, 1999. It is management's belief that FAS
133 will not have a material effect on the Company's financial position or
results of operations when adopted.

Cash and Cash Equivalents

     The Company considers all money market investment instruments and
certificates of deposit with maturities of three months or less to be cash
equivalents for the purpose of preparing the accompanying consolidated
statements of cash flows. At December 28, 1997 and December 29, 1996, cash
equivalents included $23.2 million and $10.9 million, respectively, of 

                                      F-10
<PAGE>
 
domestic commercial paper. At December 27, 1998, there were no short-term
marketable securities included in cash and cash equivalents.

     The Company does not believe it is exposed to any significant credit risk
on money market investments with commercial banks, because its policy is to make
such deposits only with highly rated institutions.

     Bank overdrafts represent checks issued on zero balance bank accounts which
do not have a formal right of offset against the Company's other bank accounts.
These amounts have not yet cleared the bank and are presented as a current
liability in the accompanying consolidated financial statements.

Accounts Receivable

     Accounts receivable consists primarily of amounts due from franchisees
related to royalties, rents and miscellaneous equipment sales and food service
accounts related to wholesale coffee sales. The accounts receivable balances are
stated net of reserves for doubtful accounts.

     A summary of changes in the allowance for doubtful accounts is as follows
(in thousands):

<TABLE>
<CAPTION>
 
                                     December 27,   December 28,   December 29,
                                         1998           1997           1996
                                     ------------   ------------   ------------
<S>                                  <C>            <C>            <C>
                                     
       Balance, beginning of period..      $4,040         $1,457        $ 2,078
       Provisions....................       1,185          2,423            816
       Recoveries....................          12            340          1,193
       Write-offs....................        (669)          (180)        (2,630)
                                           ------         ------        -------
       Balance, end of period........      $4,568         $4,040        $ 1,457
                                           ======         ======        =======
</TABLE>

Notes Receivable

     Notes receivable consists primarily of notes from franchisees and third
parties to finance acquisitions of certain restaurants from the Company and to
finance certain past due royalties, rents, interest or other amounts due. The
Company has also provided financial support to certain franchisees in converting
their restaurants to the Popeyes concept. The current portion of notes
receivable of $0.9 million and $0.8 million as of December 27, 1998 and December
28, 1997, respectively, are included in current accounts and notes receivable.
The notes receivable balances are stated net of allowances for uncollectibility.
The negative provision of $0.1 million and $1.2 million in 1998 and 1997,
respectively, relate to several fully reserved notes that were subsequently
determined to be collectible.

                                      F-11
<PAGE>
 
     A summary of changes in the allowance for uncollectible notes is as follows
(in thousands):

                                      December 27,  December 28,  December 29,
                                          1998          1997          1996
                                      ------------  ------------  ------------
                                                                 
       Balance, beginning of period..        $ 584       $ 1,871       $ 3,371
       Provisions....................         (122)       (1,209)            -
       Recoveries....................           22           232            20
       Write-offs....................          (54)         (310)       (1,520)
                                             -----       -------       -------
       Balance, end of period........        $ 430       $   584       $ 1,871
                                             =====       =======       =======

Inventories

     Inventories, consisting primarily of food and beverage items, packaging
materials, and restaurant equipment, are stated at the lower of cost (determined
on a first-in, first-out basis) or market.

Property and Equipment

     Property and equipment is stated at cost, including capitalized interest
and overhead incurred throughout the construction period for certain assets. The
Company calculates an interest rate factor based on the Company's long-term debt
and applies this factor to its construction work in progress balance each
accounting period to arrive at capitalized interest expense. Capitalized
overhead costs include personnel expenses related to employees directly involved
in the Company's development projects such as new restaurant projects,
remodeling/re-imaging initiatives and other projects of this nature. Provisions
for depreciation and amortization are made principally on the straight-line
method over the estimated useful lives of the assets or, in the case of leases,
the term of the applicable lease, if shorter. The ranges of estimated useful
lives used in computing depreciation and amortization are as follows:

          Asset Classification                         Number of Years
          --------------------                         ---------------

          Buildings..............................           7 - 20
          Equipment..............................           3 - 8
          Leasehold improvements.................           3 - 15
          Capital lease buildings and equipment..           3 - 20

                                      F-12
<PAGE>
 
Intangible Assets

     Intangible assets consist primarily of franchise value and trademarks and
goodwill. These assets are being amortized on a straight-line basis. The
estimated useful lives used in computing amortization are as follows:

<TABLE> 
<CAPTION> 
          Asset Classification              Number of Years
          --------------------              ---------------
<S>                                         <C>
          Franchise value and trademarks..      20-35
          Goodwill........................      20-40
          Other...........................      10-20
</TABLE>

Long-Lived Assets

     Management periodically reviews the performance of restaurant properties.
If it is determined that a restaurant will be closed, a provision is made to
adjust the carrying value of the restaurant's property and equipment to net
realizable values.  Property held for sale includes closed restaurant properties
and other corporate property held for sale and is recorded at its estimated net
realizable value.

     The Company periodically reviews the realizability of its long-lived assets
as set forth in   Statement of Financial Accounting Standards No. 121 ("FAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of".  It is the Company's policy to evaluate (i) operating
restaurant properties on a market basis, (ii) other assets, such as assets held
for sale and income producing assets, on an individual property basis and, (iii)
intangible assets based on the cash flows from the underlying operations which
generated the intangible asset.  The identifiable cash flows of long-lived
assets and their carrying values are compared to estimates of the recoverability
of the asset values.

     In 1998, the Company recorded a $6.8 million write-down of its Chesapeake
intangible asset under FAS 121 accounting.  The write-down was based on an
analysis of future cash flows expected to be generated from Chesapeake's
operations.  The Company did not incur FAS 121 write-downs in 1997 or 1996.

     In 1998, the Company closed fourteen Popeyes Company-operated restaurants
that were acquired in 1998 in connection with the acquisition of Pinetree Foods,
Inc. (See Note 17).  The total charges resulting from the closures were
approximately $8.5 million and included the write-off of the related restaurant
assets, related goodwill allocated to these restaurants and a provision for the
remaining minimum lease payments due under the respective restaurant operating
leases.  The $8.5 million charge is included in "charges for restaurant
closings" in the accompanying consolidated statements of operations.

     During the past four years, the Company has been in the process of
replacing its restaurant accounting and control systems.  This project includes
the installation of new point-of-sale hardware and software systems, the
installation of work stations in each Company-operated restaurant and the
implementation of a "back office" automation system.  The Company anticipates
that upon the implementation of all these systems it will have customized
restaurant

                                     F-13
<PAGE>
 
systems that will provide better food cost controls, better labor controls and
labor scheduling, better marketing information, more timely restaurant operating
results and more efficient accounting processes. The Company estimated that the
total cost of these systems would be approximately $36.5 million. While a large
portion of the total project has been completed, certain elements of the
restaurant accounting and control systems have not been implemented because of
delays caused by technological problems related to the "back office" automation
system. The Company recently engaged a third party technology expert to evaluate
these technological problems. The technology expert concluded that certain
elements of the software being developed were not stable in the AFC information
technology environment. The technology expert recommended that the Company
investigate alternatives, including purchasing other commercially available
"back-office" software. Management is in the process of performing its own
review of these systems, but believes that it is probable that certain of the
"back office" software development costs will be deemed to have little or no
value. Therefore, management reduced the carrying value of its software
development costs by $5.0 million at December 27, 1998.

Stock-Based Employee Compensation

     In October 1995, the Financial Accounting Standards Board issued Statement
of  Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123").  This standard defines a fair value based method of
accounting for an employee stock option or similar equity instrument.  FAS 123
gives entities a choice of recognizing related compensation expense by adopting
the new fair value method or to continue to measure compensation using the
intrinsic value approach under APB No. 25.  If APB No. 25 is used by an entity,
FAS 123 requires supplemental disclosure to show the effects of using FAS 123
for stock option issuances effective after December 15, 1994.  The Company
continues to account for stock options under APB No. 25.  Had compensation
expense for all of the Company's stock option plans been determined consistent
with FAS 123, the Company's net income (loss) would have been reduced or
increased to the following pro forma amounts (in thousands):

<TABLE>
<CAPTION>
 
                                For           For           For
                            Year Ended     Year Ended    Year Ended
                           December 27,   December 28,  December 29,
                               1998           1997          1996
                           ------------   ------------  ------------
<S>                        <C>            <C>           <C>
 
     Net income (loss):
       As reported.......    $ (8,646)       $11,000        $3,395  
       Pro forma.........     (10,247)        11,528         3,310   
</TABLE> 
 
     Because the fair value method of accounting has not been applied to options
issued prior to December 15, 1994, the resulting pro forma compensation expense
may not be representative of that to be expected in future years.

     The fair value of each option is estimated on the date of grant using the
"minimum value" method with the following weighted-average assumptions used for
grants in 1998, 1997 and 1996: risk-free interest rate of approximately 5.0%;
expected lives of approximately 12 years, 10

                                     F-14
<PAGE>
 
years and 7 years for the 1992 Stock Option Plan, the 1996 Performance-based
Stock Option Plan and the 1996 Stock Option Plan, respectively (See Note 12).

Segment Disclosures

     In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131").  FAS 131 establishes standards for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers (See Note 16).

Revenues from Franchising

     The Company generates revenues from franchising through the following
agreements with its franchisees:

     FRANCHISE AGREEMENTS. In general, the Company's franchise agreements
     provide for the payment of a franchise fee for each opened franchised
     restaurant. The franchise agreements also generally require the franchisees
     to pay a royalty ranging from 3% to 5% of sales to the Company and an
     advertising fund contribution ranging from 1% to 4% of sales. Certain
     franchise agreements provide for lower royalties and advertising fund
     contributions.

     DOMESTIC DEVELOPMENT AGREEMENTS. Domestic development agreements provide
     for the development of a specified number of restaurants within a defined
     domestic geographic territory in accordance with a schedule of restaurant
     opening dates. Development schedules generally cover three to five years
     and typically have benchmarks for the number of restaurants to be opened
     and in operation at six to twelve month intervals. Development agreement
     payments are made when the agreement is executed and are nonrefundable.

     INTERNATIONAL DEVELOPMENT AGREEMENTS. International development agreements
     are similar to domestic development agreements but pertain to franchised
     restaurants in jurisdictions outside of the United States. In that regard,
     these agreements include provisions to address the international aspects of
     the franchise agreement (foreign currency exchange, taxation, dispute
     resolution, etc.). Prior to December 27, 1998, these agreements generally
     included a territorial fee related to establishing a franchise in a new
     country. International development agreement payments and related
     territorial fees are normally received when the agreement is executed and
     are nonrefundable.

     Franchise fees, domestic development fees and international development
fees are recorded as deferred revenues when received and are recognized as
revenue when the restaurants covered by the fees are opened and/or all material
services or conditions relating to the fees have been substantially performed or
satisfied by the Company. Royalties are recorded as revenues by the Company when
the restaurant sales by the franchisee occurs.

                                     F-15
<PAGE>
 
Wholesale Revenues

     Wholesale revenues are generated from the Company's coffee wholesaling
operations, which it acquired in 1998 through its acquisition of SCC. Revenues
consist of coffee sales to food service retailers, supermarkets and to its own
coffee cafes.

Manufacturing Revenues

     The Company's manufacturing revenues consist primarily of sales of
proprietary gas fryers and other custom-fabricated restaurant equipment from its
manufacturing business to distributors and franchisees.

Other Revenues

     The Company's other revenues consist of net rental income from properties
owned and leased by the Company which are leased or subleased to franchisees and
third parties and interest income earned on notes receivable from franchisees
and other parties.

Insurance Programs

     The Company maintains insurance plans for general and auto liability
insurance, employee medical insurance and workers' compensation insurance,
except for workers' compensation liabilities in the state of Texas, where the
Company is self-insured against such liabilities. All of the Company's insurance
programs, including its self-insured liabilities, have provisions, which limit
the Company's exposure on a per-incident basis. In October 1998, the Company
converted its insurance coverages for general and auto liability insurance and
workers' compensation insurance, excluding workers' compensation in the State of
Texas, to a "guaranteed cost" insurance arrangement. Prior to October 1998, the
Company was liable for claims on a per-incident basis ranging between $0.2
million to $0.5 million, at which time the Company's stop loss insurance
coverage would cover the excess amount of each claim. Under the "guaranteed
cost" insurance coverage, the Company pays an annual premium and is covered up
to the first $1.0 million per claim. The Company has umbrella coverage in cases
where a claim may exceed $1.0 million.

     In the State of Washington, the Company participates in the state-sponsored
workers' compensation insurance program, which requires the Company to pay
annual premiums into an insurance pool administered by the state.

     The Company has established reserves with respect to the programs described
above based on the estimated total losses the Company will experience. The
portion of the reserves for the amount of claims expected to be settled during
the succeeding year are included in accrued expenses in the accompanying
consolidated balance sheets, and the balance of the reserves are included in
other liabilities. The Company's insurance reserves are partially collateralized
by letters of credit and/or cash deposits.

                                     F-16
<PAGE>
 
International Operations

     As of December 27, 1998, the Company franchised 533 restaurants to
franchisees in 24 foreign countries and plans to expand its foreign franchising
program significantly in the future. The Company currently operates two SCC
cafes and a sales office that are located in Canada. The Company does not own
any other property, operate any other restaurants or have equity ownership in
any other companies that are located in foreign countries. Included in the
Company's revenues are foreign franchise royalties and other fees that are
based, in part, on sales generated by its foreign franchised restaurants,
including a significant number of franchised restaurants in Asia. Therefore, the
Company is exposed, to a limited degree, to changes in international economic
conditions and currency fluctuations. The Company has not historically and did
not at the end of 1998 maintain any hedges against foreign currency
fluctuations. Losses recorded by the Company during the past three years related
to foreign currency fluctuations have not been material to the Company's results
of operations. For fiscal years 1998, 1997 and 1996, royalties and other
revenues from foreign franchisees represented 1.9%, 2.4% and 2.4%, respectively,
of the Company's total revenues.

Equity Investment

     On April 11, 1996, a private investor group (the "Investor Group") and the
Company executed a stock purchase agreement in which the Investor Group
purchased approximately 21.1 million shares of AFC common stock for a purchase
price of $70.0. As a result of this purchase, the Investor Group became the
majority common shareholder of AFC with 58.33 percent of the Company's common
stock on a fully diluted basis at the date of the transaction.

     With the proceeds from the sale of common stock, the Company retired
approximately $64.0 million of its term debt and paid transaction fees in the
amount of approximately $6.0 million. The remaining term debt was refinanced
into a new term loan and the Company's 8% Preferred Stock was exchanged for new
10% Preferred Stock. The new 10% Preferred Stock was subsequently repaid
pursuant to a debt offering completed in May 1997. In connection with the
refinancing of the Company's term debt, the Company wrote-off approximately $7.0
million in unamortized debt issuance costs related to the retired debt.

2.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following methods and assumptions were used to estimate the fair value
of each class of financial instruments held by the Company:

     Current assets and current liabilities: The carrying value approximates
fair value due to the short-term maturity of these items.

     Long-term notes receivable: The fair value of long-term notes receivable
approximates the carrying value as management believes the respective interest
rates are commensurate with the credit and interest rate risks involved. In
addition, management maintains reserves for doubtful note receivable accounts
(See Note 1).

                                     F-17
<PAGE>
 
     Long-term debt: The fair value of the Company's Term Loans, Lines of Credit
and Other notes (See Note 8) are based on secondary market indicators. Since
these debt instruments are not quoted, estimates are based on each obligation's
characteristics, including remaining maturities, interest rate, credit rating,
collateral, amortization schedule and liquidity. The carrying value approximates
fair value. The fair value of the Company's 10.25% Senior Subordinated Notes
(See Note 8) is based on quoted market prices.

     The carrying amount and fair value of the Company's 10.25% Senior
Subordinated Notes at December 27, 1998 and December 28, 1997 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                     1998                   1997                            
                                             ------------------     -------------------                          
                                             Carrying    Fair       Carrying     Fair                            
                                              Value      Value        Value      Value                            
                                             --------  --------     --------   --------                          
<S>                                          <C>       <C>          <C>        <C>                               
       10.25% Senior                                                                                                    
            Subordinated Notes               $175,000  $182,000     $175,000   $184,625                           
 </TABLE> 
 
    3.  INVENTORIES
 
          The major components of inventory are as follows (in thousands):
 
<TABLE> 
<CAPTION> 
                                                                                  December 27,      December 28,
                                                                                       1998               1997
                                                                                  -----------       -----------
<S>                                                                               <C>               <C> 
       Food and beverage items, preparation                                                        
          and packaging materials...........................................       $ 10,269           $  2,390
       Restaurant equipment.................................................          2,913              2,057
                                                                                  -----------       -----------
                                                                                   $ 13,182           $  4,447
                                                                                  ===========       ===========
</TABLE>

                                     F-18
<PAGE>
 
4.  PROPERTY AND EQUIPMENT
 
     The major components of property and equipment are as follows (in
thousands):

<TABLE>
<CAPTION>
                                             December 27,  December 28,
                                                 1998          1997
                                             ------------  ------------
<S>                                          <C>           <C>
       Owned properties:
          Land.............................    $ 43,289      $ 40,491  
          Buildings........................      71,827        65,423  
          Equipment........................     146,507       113,715  
          Leasehold improvements...........      80,045        42,260  
          Construction work in process.....       8,008         5,336  
          Properties held for sale.........       3,683         2,960  
                                                                       
       Capital leases:                                                 
          Buildings........................       3,811         3,863  
          Equipment........................      21,818        21,514  
                                             ------------  ------------  
                                                378,988       295,562  
       Less: accumulated depreciation and                              
         amortization......................     115,847        87,755  
                                             ------------  ------------  
                                               $263,141      $207,807  
                                             ============  ============   
</TABLE>

     Depreciation and amortization expense related to property and equipment,
including property and equipment held under capital leases, was approximately
$35.2 million, $27.2 million and $25.0 million for the years ended December 27,
1998, December 28, 1997 and December 29, 1996, respectively.

     Properties held for sale consists of land, buildings and equipment
currently not in use by the Company. These assets include both restaurant and
corporate assets.


5.  OTHER ASSETS

     Other assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                        December 27,  December 28,
                                            1998          1997
                                        ------------  ------------
<S>                                     <C>           <C>
 
       Deposits.......................    $ 2,297       $ 1,860   
       Information technology costs...      4,888         3,007   
       Debt issuance costs, net.......      9,298         9,789   
       Real estate development costs..      1,602         1,447   
       Other..........................      1,413           946   
                                        ------------  ------------   
                                          $19,498       $17,049   
                                        ============  ============    
</TABLE>

                                     F-19
<PAGE>
 
6.  INTANGIBLE ASSETS

          Intangible assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                           December 27,  December 28,
                                               1998          1997
                                           ------------  ------------
<S>                                        <C>           <C>
 
       Franchise value and trademarks....    $117,278      $124,116    
       Goodwill..........................     126,043         4,765    
       Other.............................       7,088         2,771    
                                           ------------  ------------
                                              250,409       131,652    
       Less:   accumulated amortization..      42,289        31,379    
                                           ------------  ------------  
                                             $208,120      $100,273    
                                           ============  ============   
</TABLE>

     Amortization expense for the years ended December 27, 1998, December 28,
1997 and December 29, 1996, was approximately $10.9 million, $6.6 million and
$5.9 million, respectively.

7.  OTHER LIABILITIES
 
          A summary of other liabilities is as follows (in thousands):
<TABLE>
<CAPTION>
                                       December 27,  December 28,
                                           1998          1997
                                       ------------  ------------
<S>                                    <C>           <C>
       Insurance reserves............    $ 8,598       $11,015   
       Deferred franchise revenues...      6,472         5,863   
       Litigation and environmental..      6,314         7,393   
       Other.........................     16,579         7,637   
                                       ------------  ------------   
                                         $37,963       $31,908   
                                       ============  ============    
</TABLE>

     The majority of liabilities comprising "other liabilities" are not subject
to a fixed cash payment schedule but are primarily payable upon the occurrence
of specific events, which are not estimable as of December 27, 1998.

8.  LONG-TERM DEBT

     In May 1997, the Company completed a debt offering of $175.0 million of
Senior Subordinated Notes (the "Notes") under Rule 144A of the Securities Act of
1933, as amended (the "Rule 144A Offering"). In connection with the Rule 144A
Offering, the Company also entered into a new $175.0 million Senior Secured
Credit Facility (the "1997 Credit Facility") whereby the Company was provided
with a $50.0 million term loan (the "Term Loan A"), a $25.0 million revolving
credit facility ("Revolving Facility") and a $100.0 million facility to be used
for future acquisitions ("Acquisition Facility"). The 1997 Term Loan and the
Notes were funded at closing, providing $225.0 million, which was used to repay
long-term debt balances under the Company's existing credit facility, repay and
retire the 10% Preferred Stock, repay certain capital lease obligations, pay
fees and expenses associated with the above described transactions and provide
working capital.

                                     F-20
<PAGE>
 
     In October 1998, the Company amended and restated the 1997 Credit Facility
to include a $50.0 million term loan (the "Term Loan B") which was primarily
used to fund the acquisition of CII (See Note 17).

     A summary of the Company's long-term debt is as follows (in thousands):

<TABLE>
<CAPTION>
                                           December 27,  December 28,
                                               1998          1997
                                           ------------  ------------
<S>                                        <C>           <C>
       Term Loans:
          Term Loan A....................    $ 44,250      $ 49,000  
          Term Loan B....................      50,000             -  
       10.25% Senior Subordinated Notes..     175,000       175,000  
       Other notes.......................       1,850         1,143  
                                             --------      --------  
                                              271,100       225,143  
            Less: current maturities.....       8,356         4,993  
                                             --------      --------  
                                             $262,744      $220,150  
                                             ========      ========   
</TABLE>

     The following is a schedule of the aggregate maturities of long-term debt
as of December 27, 1998, for each of the succeeding five years and thereafter
(in thousands):

<TABLE>
<CAPTION>
     YEAR                              AMOUNT
     ----                             --------
<S>                                   <C>     
                                              
     1999.........................    $  8,356
     2000.........................      13,223
     2001.........................       8,476
     2002.........................      21,665
     2003.........................      15,000
     Thereafter...................     204,380
                                      --------
                                      $271,100
                                      ======== 
</TABLE>

     The Company's Term Loans A and B and certain letter of credit facilities
described below were provided by various financial institutions, some of which
hold a minority interest in the Company.
 
1997 CREDIT FACILITY (AS AMENDED AND RESTATED AS OF OCTOBER 15, 1998)

     The Term Loan A, the Term Loan B, the Acquisition Facility and the
Revolving Facility (collectively "the 1997 Credit Facility") bear interest, at
the Company's election, at either (i) a defined base rate plus 1.25% per annum
(1.75% for Term Loan B) or (ii) LIBOR plus 2.25% per annum (2.75% for Term Loan
B), subject to reduction based on the achievement of certain leverage ratio
levels. At December 27, 1998, the interest rates ranged from 7.4% to 8.0%. The
Company is obligated to pay commitment fees of 0.5% per annum (subject to
reduction based on the achievement of certain leverage ratio levels) on the
unused portions of the Acquisition Facility and the Revolving Facility from time
to time, as well as a customary annual agent's fee. Fees relating to the
issuance of letters of credit under the Revolving Facility will include a fee

                                     F-21
<PAGE>
 
equal to the then applicable margin over LIBOR plus a fronting fee of 0.25% per
annum (payable to the issuing institution) based on the face amount of letters
of credit, plus standard issuance and administrative charges.

     In addition to the scheduled amortization, the Company is required to make
prepayments under certain conditions, including without limitation, upon certain
asset sales or issuance of debt or equity securities. The Company is also
required to make annual prepayments in an amount equal to a percentage of excess
cash flow (as defined in the 1997 Credit Facility) beginning with fiscal year
1998. During the fiscal year ended December 27, 1998, there were no prepayments
required of the Company under the agreement.

Term Loans

     Term Loan A principal is payable in quarterly installments ranging from
$1.0 to $7.5 million beginning September 1997 and maturing in June 2002.
Interest is paid in one, two, three or six month periods as defined in the 1997
Credit Facility.

     Term Loan B principal is payable in quarterly installments as follows: $0.1
million from December 31, 1998 to June 30, 2002; $3.8 million from September 30,
2002 to March 31, 2004; and a balloon payment of $21.9 million at maturity on
June 30, 2004. Interest is paid in one, two, three or six month periods as
defined in the 1997 Credit Facility.

Acquisition Facility

     The Company may borrow under the Acquisition Facility at anytime during the
period from the closing date of May 21, 1997 through the third anniversary of
the closing date. Amounts outstanding under the Acquisition Facility on the
third anniversary of the closing will be converted to a term loan. The Company
will be required to make scheduled annual amortization payments on the term loan
portion of the Acquisition Facility. At December 27, 1998, there was an
outstanding balance of $68.0 million, which if converted to a term loan would
result in the following principal payment amortization by fiscal year: $6.8
million in 2000; $13.6 million in 2001; and $47.6 million in 2002.

Revolving Facility

     Under the terms of the Revolving Facility, the Company may borrow and
obtain letters of credit up to an aggregate of $25.0 million. At December 27,
1998, there was $7.0 million in outstanding borrowings and $6.8 million of
outstanding letters of credit leaving unused revolving credit available for
short-term borrowings and letters of credit of $11.2 million.

Other Terms

     The 1997 Credit Facility is secured by a first priority security interest
in substantially all of the Company's assets (subject to certain exceptions).
Any future material subsidiaries of the Company will be required to guarantee
the 1997 Credit Facility and the Company will be required to pledge the stock of
such subsidiaries to secure the facility.

                                     F-22
<PAGE>
 
     The 1997 Credit Facility contains certain financial covenants, including,
but not limited to, covenants related to minimum fixed charge coverage, minimum
cash interest coverage and maximum leverage. In addition, the 1997 Credit
Facility contains other affirmative and negative covenants relating to, among
other things, limitations on capital expenditures, other indebtedness, liens,
investments, guarantees, restricted junior payments (dividends, redemptions and
payments on subordinated debt), mergers and acquisitions, sales of assets,
leases, transactions with affiliates and investments in the Company's deferred
compensation plan. The amendment made to the 1997 Credit Facility in October 15,
1998 included the addition of a Year 2000 covenant that requires that the
Company be Year 2000 compliant. The 1997 Credit Facility contains customary
events of default, including certain changes of control of the Company. At
December 27, 1998, the Company was in compliance with all covenants.

10.25% SENIOR SUBORDINATED NOTES

     In August 1997, the Notes issued pursuant to the Rule 144A Offering were
exchanged for $175.0 million of publicly registered 10.25% Senior Subordinated
Notes (the "Senior Notes"). The Senior Notes contain substantially the same
provisions as the Notes. The Senior Notes bear interest at 10.25% per annum and
interest will be due and payable on May 15 and November 15 of each year,
commencing on November 15, 1997. The Senior Notes mature on May 15, 2007 and
will not be redeemable prior to May 15, 2002. On or after such date, the Senior
Notes will be subject to redemption, at the option of the Company, in whole or
in part, at any time before maturity. The Senior Notes are redeemable at prices
set forth in the agreement, plus accrued and unpaid interest to the date of
redemption.

     The Senior Notes are unsecured and rank subordinate in right of payment to
all existing and future Senior Indebtedness, as defined, of the Company
including all indebtedness under the 1997 Credit Facility and the Company's
capital lease obligations.

     The Senior Notes restrict, among other things, the ability of the Company
and its wholly-owned subsidiaries a) to incur additional indebtedness and
subsidiary preferred stock, b) to sell assets and to use the proceeds from asset
sales, c) to engage in certain transactions with affiliates, d) to pay
dividends, make certain investments and make other restricted payments, as
defined, and e) to maintain a certain interest coverage financial ratio. At
December 27, 1998, the Company was in compliance with all covenants.

DEBT ISSUANCE COSTS

     In connection with the 1997 Credit Facility and the Notes, the Company
incurred approximately $10.7 million in debt issuance costs, which were
capitalized. These costs are being amortized into interest expense over a period
of 5 to 10 years. Amortization is calculated using the straight-line method and
the unamortized balance is included in other assets in the accompanying
consolidated balance sheets. During 1998 and 1997, the Company amortized as 
interest expense approximately $1.4 million and $0.8 million, respectively.

     As a result of amending and restating the 1997 Credit Facility in October
1998, the Company incurred approximately $0.9 million in debt issuance costs,
which were capitalized. These costs are being amortized into interest expense
over a period of six years. Amortization is

                                     F-23
<PAGE>
 
calculated using the straight-line method, and the unamortized balance is
included in other assets in the accompanying consolidated balance sheets.

9.  LEASES

     The Company maintains leases covering restaurant land and building
properties, computer software, hardware and other equipment which expire on
various dates through 2016 and generally require additional payments for
property taxes, insurance and maintenance. Certain leases provide for rentals
based upon a percentage of sales by Company-operated restaurants in addition to
the minimum annual rental payments. Future minimum payments under capital and
non-cancelable operating leases, as of December 27, 1998 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                        Capital  Operating
                                                        Leases    Leases
                                                        -------  ---------
<S>                                                     <C>      <C>
 
1999.............................................       $ 7,112   $ 30,632 
2000.............................................         5,018     28,584 
2001.............................................         2,331     27,117 
2002.............................................           520     25,291 
2003.............................................           304     21,316 
Thereafter.......................................         3,319     66,419  
                                                        -------   --------   
     Future minimum lease payments...............        18,604   $199,359
                                                                  ========
     Less: amounts representing interest.........         3,993
                                                        -------
     Total obligations under capital leases......        14,611
     Less: current portion.......................         6,050
                                                        -------
     Long-term obligations under capital leases..       $ 8,561
                                                        =======
</TABLE>

     On August 29, 1997, the Company repaid certain capital lease obligations
totaling $16.7 million. The Company used a portion of the proceeds from the
refinancing transaction that took place during the second quarter of 1997 to
repay these capital lease obligations (See Note 8).

     Rent expense for operating leases for the fiscal years ended December 27,
1998, December 28, 1997 and December 29, 1996, amounted to $20.5 million, $11.0
million and $9.9 million, respectively, including percentage rents of $1.3
million, $0.7 million and $0.7 million, respectively.

     As of December 27, 1998, the Company leases Company-owned restaurant
properties with an aggregate book value of $15.8 million to certain franchisees
and others. The Company also leases from third parties and sub-leases these
properties to franchisees and others. Rental income from these leases was
approximately $7.9 million, $7.5 million and $6.4 million for the fiscal years
ended in 1998, 1997 and 1996, respectively, and was primarily based upon a
percentage of restaurant sales. The lease terms under these agreements expire on
various dates through 2027. Future minimum rentals receivable under these non-
cancelable lease and sub-lease arrangements as of December 27, 1998 are as
follows (in thousands):

                                     F-24
<PAGE>
 
                                         Rental
                                         Income
                                         -------
 
          1999.........................  $ 7,304
          2000.........................    7,077
          2001.........................    6,837
          2002.........................    6,104
          2003.........................    5,375
          Thereafter...................   38,553
                                         -------
               Future minimum rentals..  $71,250
                                         =======

     10. INCOME TAXES

          The components of income tax expense (benefit) included in the
     statements of operations are as follows (in thousands):


<TABLE>
<CAPTION>
                                                     For            For           For
                                                 Year Ended     Year Ended     Year Ended
                                                December 27,   December 28,   December 29,
                                                    1998           1997           1996
                                                -------------  -------------  ------------
     <S>                                        <C>            <C>            <C>         
 
     Current income tax expense consists of:    
       Federal................................       $  1,094       $  1,557      $    363
       Foreign................................          1,543          1,804         1,705
       State..................................            768          1,301            42
                                                      -------         ------        ------
            Total.............................          3,405          4,662         2,110
                                                      -------         ------        ------
 
     Deferred income tax expense (benefit)
     consists of:
       Federal................................         (6,801)         4,338           152
       State..................................           (827)          (475)          228
                                                      -------         ------        ------
            Total.............................         (7,628)         3,863           380
                                                      -------         ------        ------
 
              Income tax expense (benefit)....        $(4,223)        $8,525        $2,490
                                                      =======         ======        ======
</TABLE>

         The Company does not currently own or participate in the ownership of
     any material non-U.S. operations and does not file income tax returns with
     any foreign jurisdictions.  However, applicable foreign withholding taxes
     are generally deducted from royalties and certain other revenues collected
     from international franchisees.  Foreign taxes withheld are eligible for
     credit against the Company's U.S. income tax liabilities.

                                      F-25
<PAGE>
 
          A reconciliation of the Federal statutory income tax rate to the
     Company's effective tax rate is as follows:

<TABLE>
<CAPTION>
                                                    For             For            For
                                                Year Ended     Year Ended     Year Ended
                                                December 27,   December 28,   December 29,
                                                    1998           1997           1996
                                               --------------  -------------  -------------
       <S>                                     <C>             <C>            <C>
 
       Statutory Federal income tax expense
            (benefit) rate...................         (35.0%)          35.0%          34.0%
       Non-deductible items including
            goodwill amortization............           5.3             2.0            1.6
       State taxes, net of federal benefit...          (2.1)            4.2            4.6
       Other items, net......................          (1.0)            2.4            2.1
                                                     ------            ----           ----
            Effective income tax expense
               (benefit) rate................         (32.8%)          43.6%          42.3%
                                                     ======            ====           ====
</TABLE>

          Significant components of the Company's net deferred tax asset and net
     deferred tax liability were as follows (in thousands):

<TABLE>
<CAPTION>
                                                   December 27,   December 28,
                                                       1998           1997
                                                   -------------  -------------
     <S>                                           <C>            <C>
 
     Current deferred tax asset (liability):
       Payroll accruals..........................      $    919       $    683
       Allowance for doubtful accounts...........         1,903          1,734
       Other accruals............................         1,755            949
                                                       --------       --------
          Total current deferred tax asset.......         4,577          3,366
                                                       --------       --------
 
     Noncurrent deferred tax asset (liability):
       Franchise value and trademarks............      $(23,939)      $(31,662)
       Property, plant and equipment.............         4,476          4,167
       Net operating loss carryforwards..........         7,633          3,352
       General business and AMT credit
          carryforwards..........................         4,836          3,424
       Foreign tax credit carryforwards..........         3,732          4,924
       Deferred compensation.....................         3,165          2,665
       Insurance accruals........................         5,684          6,944
       Litigation/environmental accruals.........         2,739          2,774
       Deferred franchise fee revenue............         2,427          2,679
       Other items, net..........................          (177)        (1,969)
                                                       --------       --------
                                                         10,576         (2,702)
       Valuation allowance.......................        (6,160)             -
                                                       --------       --------
          Total noncurrent deferred tax asset
              (liability)........................         4,416         (2,702)
                                                       --------       --------
 
          Net deferred tax asset.................      $  8,993       $    664
                                                       ========       ========
</TABLE>

                                      F-26
<PAGE>
 
          Certain prior period balances above have been reclassified to conform
     to the current presentation to adjust estimates to actual per the 1997 tax
     return.

          As of December 27, 1998, the Company had U.S. Net Operating Losses
     ("NOLs") and tax credit carryforwards in the amounts of $17.5 million and
     $8.6 million, respectively. Certain acquired NOLs and tax credit
     carryforwards are subject to limitations under Section 382 and 383 of the
     Internal Revenue Code of 1986, as amended.  Management has determined that
     it is more likely than not that the deferred tax assets attributable to
     these acquired NOLS and tax credit carryforwards will not be realized and
     as such has established a valuation allowance of $6.2 million for the
     fiscal year ended December 27, 1998.  Based on management's assessment, it
     is more likely than not that the remaining net deferred tax assets will be
     realized through future reversals of existing temporary differences and
     future taxable income.

     11. COMMON STOCK
     
          In October 1998, the Company issued 2,795,703 shares of AFC common
     stock to existing shareholders and option holders at $7.75 per share. The
     Company received approximately $20.3 million in cash and approximately $1.3
     million in notes receivable from certain officers of the Company. The cash
     proceeds from the stock offering were used to fund a portion of the
     purchase price to acquire CII (See Note 17).

     12. STOCK OPTION PLANS

     The 1992 Stock Option Plan

          The 1992 Stock Option Plan is a nonqualified stock option plan
     authorizing the issuance of options to purchase approximately 1.8 million
     shares of the Company's common stock. The options currently granted and
     outstanding allow certain officers of the Company to purchase approximately
     1.8 million shares of common stock at $0.08 per share and are exercisable
     at various dates beginning January 1, 1994. If not exercised, the options
     expire 15 years after the date of issuance. The options issued in 1992
     under the 1992 Stock Option Plan were issued with option exercise prices
     below market value of the Company's common stock. In prior years,
     compensation expense of approximately $2.4 million related to certain
     options was being amortized over their respective vesting periods of 25.0%
     per year. For the years ended December 27, 1998 and December 28, 1997, the
     Company did not recognize any compensation expense related to these
     options. In 1996, the Company recognized an immaterial amount of
     compensation expense related to certain of these options. As of 
     December 27, 1998, 1,560,563 options were exercisable.

          Pursuant to certain anti-dilution provisions, in April 1996 the 1992
     Stock Option Plan was amended whereby the option price was reduced from
     $0.10 per share to $0.08 per share. In connection with the price reduction
     per share, approximately 0.4 million additional options were issued to the
     officers currently holding options under this plan. The Company did not
     recognize compensation expense with respect to the reduction of the option
     price and the issuance of the 0.4 million options.

                                      F-27
<PAGE>
 
The 1996 Performance-Based Stock Option Plan

     In April 1996, the Company executed the Nonqualified Performance Stock
Option Plan ("1996 Performance-Based Stock Option Plan"). This plan currently
authorizes the issuance of approximately 2.7 million options to purchase one
share each of AFC's common stock at prices ranging from $3.317 to $7.50 per
share. At December 27, 1998, the weighted-average exercise price was $4.94 per
share. The options currently granted and outstanding allow certain employees of
the Company to purchase approximately 2.7 million shares of common stock.
Vesting, as defined in the stock option agreement, is based upon the Company
achieving annual levels of earnings before interest, taxes, depreciation and
amortization, as defined in the stock option agreement, over fiscal year periods
beginning with fiscal year 1996 and ending with fiscal year 2000. If not
exercised, the options expire ten years from the date of issuance. At December
27, 1998, the weighted-average contractual life of these options was 8.5 years.
Under this plan, compensation expense is determined and recorded when employees
vest in their respective options. During the fiscal year ended December 27,
1998, December 28, 1997 and December 29, 1996, the Company recorded
approximately $1.1 million, $2.2 million and $0.8 million, respectively, in
compensation expense related to the options, which vested in 1998, 1997 and 1996
under this plan. As of December 27, 1998, 2,198,188 options were exercisable.

     In 1998, the Board of Directors approved the cancellation of 932,698
unvested options under this plan held by the Company's top three executives. The
cancelled options had exercise prices that ranged from $3.32 per share to $7.50
per share. In connection with the cancellation, the Board granted to these three
individuals 932,698 options with an exercise price of $7.75 per share, which was
the fair value of the Company's common stock at the date of grant. In addition,
the executives became fully vested in these options upon the grant date. The
Company did not recognize compensation expense regarding the subsequent grant of
the 932,698 options since they were issued at an exercise price that equaled the
fair value of the Company's common stock at the date of grant.

The 1996 Stock Option Plan

     In April 1996, the Company executed the Nonqualified Stock Option Plan
("1996 Stock Option Plan").  This plan authorizes the issuance of approximately
1.8 million options.  The Company granted approximately 0.3 million options in
1996 at $3.317 per share whereby the compensation expense associated with this
grant was immaterial.  In 1997, the Company granted approximately 0.3 million
options at $4.95 per share, which was the market value of the Company's common
stock at the date of grant.  In 1998, the Company granted 0.4 million options at
$7.50 per share which approximated the market value of the Company's common
stock at the date of grant.  At December 27, 1998, the weighted-average price
per share was $5.42.  The options currently granted and outstanding allow
certain employees of the Company to purchase approximately 1.0 million shares of
common stock, which vest at 25% per year beginning April 1997.  If not
exercised, the options expire seven years from the date of issuance. At December
27, 1998, the weighted-average contractual life of these options was 5.6 years
and 241,968 options were exercisable.

                                      F-28
<PAGE>
 
The 1998 SCC Plan

     In connection with the SCC acquisition in March 1998, the Company executed
the Substitute Nonqualified Stock Option Plan ("1998 SCC Plan"). This plan was
established to enable the Company to issue AFC options to former SCC option
holders in order to purchase 100% of SCC's common stock pursuant to the purchase
agreement. The 1998 SCC Plan authorizes the issuance of approximately 0.5
million options at exercise prices that range from $3.91 to $6.75 per share. The
Company issued approximately 0.4 million options at the closing date of the
acquisition. The issuance of the remaining 0.1 million is subject to a reduction
of options based on a holdback provision in the acquisition agreement. Regarding
the remaining options to be issued, a determination on the number of options
will be made on or about March 31, 1999, a year from the closing date of the
transaction. At December 27, 1998, the weighted-average exercise price per share
was $4.74. The options vest when issued by the Company and expire at various
dates through October 31, 2007. At December 27, 1998, the weighted-average
contractual life of these options was 6.6 years. As of December 27, 1998,
457,398 options were exercisable. These options were issued in connection with
the acquisition of SCC and the related value placed upon these options was added
to the goodwill resulting from this acquisition (See Note 17).

Warrants

     Also in connection with the SCC acquisition, the Company authorized the
issuance of 177,958 warrants to the former SCC shareholders to purchase AFC
Common Stock at prices that range from $3.91 to $6.00 per share.  At closing,
154,468 warrants were issued to the former SCC shareholders.  On or about March
31, 1999, the remaining 23,490 warrants will be issued subject to possible
reductions in the number of warrants based on a holdback provision in the
acquisition agreement.  Most of the warrants expire on May 4, 1999, with 23,353
warrants expiring on September 30, 2001.  At December 27, 1998, 160,340 warrants
were exercisable. These warrants were issued in connection with the acquisition
of SCC and the related value placed upon these warrants was added to the
goodwill resulting from this acquisition (See Note 17).

                                      F-29
<PAGE>
 
A Summary of Plan Activity

     A summary of the status of the Company's four stock option plans and
warrants at December 27, 1998 and December 28, 1997 and changes during the years
is presented in the table and narrative below:

<TABLE>
<CAPTION>
                                                     1998               1997
                                               -----------------  -----------------
                                               Shares   Wtd.Avg.  Shares   Wtd.Avg.
                                               (000's)  Ex.Price  (000's)  Ex.Price
                                               -------  --------  -------  --------
 <S>                                           <C>      <C>       <C>      <C>
 
 Outstanding at beginning of year............   5,013      $2.36   4,643      $2.06
 Granted options and warrants................   2,021       6.73     496       4.95
 Exercised options and warrants..............     (10)      2.62     (75)       .08
 Cancelled options and warrants..............  (1,039)      3.37     (51)      2.61
                                               ------             ------
 Outstanding at end of year..................   5,985       3.66   5,013       2.36
                                               ------             ------
 
 Exercisable at end of year..................   4,618       3.34   2,663       1.48
 
 Weighted average fair value of options and
     warrants granted (See Note 1)...........              $2.36              $1.69
</TABLE>

     Approximately 0.4 million, 0.5 million and 3.0 million options granted in
1998, 1997 and 1996, respectively, were at prices that equaled the market price
of the common stock at the grant date.
 
13.   OTHER EMPLOYEE BENEFIT PLANS

Pre-Tax Savings and Investment Plan

     The Company maintains a qualified employee benefit plan under Section
401(k) of the Internal Revenue Code for the benefit of employees meeting certain
eligibility requirements. Under the plan, employees may contribute up to 16.0%
of their eligible compensation to the plan on a pre-tax basis up to statutory
limitations and the Company may make both voluntary and matching contributions
to the plan. The Company expensed approximately $0.2 during 1998, 1997 and 1996
for its contributions to the plan.

     SCC maintains an employee benefit plan under Section 401(k) of the Internal
Revenue Code for the benefit of employees meeting certain eligibility
requirements.  The Company is in the process of integrating the SCC plan into
the Company's plan, which is anticipated to be completed in the fall of 1999.

Deferred Compensation Plan

     Effective March 1, 1998, the Company established the AFC Deferred
Compensation Plan.  The plan is an unfunded, nonqualified deferred compensation
plan that benefits certain designated employees who are within a select group of
key management or highly compensated employees.  Under this plan, an employee
may defer up to 20% of base salary and 100% of any 

                                      F-30
<PAGE>
 
bonus award in increments of 5% on a pre-tax basis. The Company may make both
voluntary and matching contributions to the plan. The minimum annual deferral is
5%. The funds are invested in variable life insurance policies that have an
aggregate cash surrender value of approximately $0.4 million at December 27,
1998. All plan assets are held in a trust that is subject to the Company's
creditors. The Company's 1997 Credit Facility (See Note 8) limits the Company's
investment in the plan to $5.0 million. The Company expensed approximately
$26,000 in 1998 for its contributions to the plan.

Executive Retirement and Benefit Plans

     During 1994, the Company adopted a nonqualified, unfunded retirement,
disability and death benefit plan for certain executive officers.  Annual
benefits are equal to 30% of the executive officer's average base compensation
for the five years preceding retirement. The benefits are payable in 120 equal
monthly installments following the executive officer's retirement date. Death
benefits under this plan cover certain executive officers and are up to five
times the officer's base compensation during the time of employment. The Company
has the discretion to increase the employee's death benefits.  Death benefits
are funded by split dollar life insurance arrangements.  The accumulated benefit
obligation related to this plan was approximately $1.5 million, $1.2 million and
$1.0 million as of December 27, 1998, December 28, 1997 and December 29, 1996,
respectively.

     Expense for the retirement plan for the years ended December 27, 1998,
December 28, 1997, and December 29, 1996, was approximately $0.4 million, $0.2
million and $0.3 million, respectively.
 
     The Company's assumptions used in determining the plan cost and liabilities
include a discount rate of 7.5% per annum in 1998, 1997 and 1996 and a 5% rate
of salary progression in 1998, 1997 and 1996.

     The Company also provides post-retirement medical benefits (including
dental coverage) for certain retirees and their spouses. This benefit begins on
the date of retirement and ends after 120 months or upon the death of both
parties. The accumulated post-retirement benefit obligation for the plan as of
December 27, 1998 and December 28, 1997, was approximately $0.4 million and $0.2
million, respectively, and the net periodic expense for the medical coverage
continuation plan for 1998, 1997 and 1996 was approximately $42,000, $204,500,
and $71,000, respectively.

14.  RELATED PARTY TRANSACTIONS

     In 1996, the Company received legal services from a law firm associated
with a member of the Company's Board of Directors.  During the fiscal year ended
December 29, 1996, the total amount paid to this law firm was $0.5 million.

     In April 1996, the Company loaned certain officers of the Company an
aggregate of $4.5 million to pay personal withholding tax liabilities incurred
as a result of a $10.0 million executive compensation award earned in 1995.  All
the individual notes have similar terms.  The 

                                      F-31
<PAGE>
 
notes bear interest at 6.25% per annum with principal and interest payable at
the end of the term of the note, which is approximately seven and one half years
from the date of issuance. Each note is secured by the common stock awarded to
the officers. At the date of issuance, a discount was recorded to present the
notes at fair market value. Accordingly, compensation expense was recognized in
an amount of $0.9 million for the fiscal year ended December 29, 1996. The note
receivable balance, net of the unamortized discount, and interest receivable
balance as of December 27, 1998 and December 28, 1997 are included as a
reduction to shareholders' equity in the accompanying consolidated balance
sheets and consolidated statements of shareholders' equity since the common
stock awarded to the officers secures payment of the individual notes.

     In October 1998, the Company loaned certain officers of the Company an
aggregate of $1.3 million to pay for shares of common stock offered by AFC in
connection with the acquisition of CII. All the individual notes have similar
terms.  The notes bear interest at 7.0% per annum with principal and interest
payable at the end of the term of the note, which is December 31, 2005.  The
notes are secured by the number of shares of common stock purchased by the
employee with the note proceeds.  The note receivable balance and interest
receivable balance as of December 27, 1998 is included as a reduction to
shareholders' equity in the accompanying consolidated balance sheets and
consolidated statements of shareholders' equity.

     In connection with the Company's common stock offering described in Note
11, the Company paid stock issuance costs of approximately $1.0 million to
Freeman Spogli and Co., Inc., which through other affiliates is the Company's
majority common shareholder.

15.  COMMITMENTS AND CONTINGENCIES

Employment Agreements

     The three most senior executives and the Company have entered into
employment agreements containing customary employment terms which provide for an
annual base salary of $500,000, $350,000 and $315,000, respectively, subject to
annual adjustment by the Board of Directors, an annual incentive bonus, stock
options, fringe benefits, participation in Company-sponsored benefit plans and
such other compensation as may be approved by the Board of Directors.  The terms
of the agreements terminate in 2001, unless earlier terminated or otherwise
renewed, pursuant to the terms thereof.  Pursuant to the terms of the
agreements, if employment is terminated without cause or if written notice not
to renew employment is given by the Company, the terminated executive would be
entitled to, among other things, one to two-and-one-half times his base annual
salary and the bonus payable to the individual for the fiscal year in which such
termination occurs.  Under the agreements, upon (i) a change of control of the
Company, (ii) a significant reduction in the executive's responsibilities, title
or duties or (iii) the relocation of the Company's principal office more than 45
miles from its current location, the executive may terminate his employment and
would be entitled to receive, among other things, the same severance pay he
would have received had his employment been terminated by the Company without
cause.

                                      F-32
<PAGE>
 
Supply Contracts

     With respect to Popeyes and Churchs, the Company's and its franchisees'
principal raw material is fresh chicken.  The Company maintained purchase
agreements with its fresh chicken suppliers that provided for a "ceiling", or
highest price, and a "floor", or lowest price, that the Company paid for chicken
over the contract term and the ceilings were generally set at prices above the
current market price.  Such supply contracts were generally for one to two
years.  The Company recognized chicken cost of sales at the amounts paid under
the contracts.  For the periods presented, the Company has not experienced any
material losses as a result of these contracts. In order (i) to ensure favorable
pricing for the Company's chicken purchases in the future, (ii) to reduce
volatility in chicken prices and (iii) to maintain an adequate supply of fresh
chicken, the Company has entered and will enter into two types of chicken
purchasing arrangements with its suppliers. The first of these contracts is a
grain-based "cost-plus" pricing arrangement that provides chicken prices based
upon the cost of feed grains, such as corn and soybean meal, plus certain agreed
upon non-feed and processing costs. The other contract is similar to the grain
based "cost-plus" arrangement but contains price provisions which limit how far
up or down prices may move in any year. Both contracts have terms ranging from
three to five years with provisions for certain annual price adjustments as
defined in the contracts.

     SCC's principal raw material is green coffee beans. The Company typically
enters into supply contracts to purchase a pre-determined quantity of green
coffee beans at a fixed price per pound. These contracts usually cover periods
up to a year as negotiated with the individual supplier. At December 27, 1998,
the Company had commitments to purchase approximately 5.3 million pounds of
green coffee beans at a total cost of approximately $7.7 million. The contract
terms cover a period from January 1999 to September 1999.

Litigation

     The Company has been named as a defendant in various actions arising from
its normal business activities in which damages in various amounts are claimed.
The Company has established reserves in the accompanying consolidated balance
sheets to provide for the defense and settlement of current litigation and
management believes that the ultimate resolution of these matters will not have
a material adverse effect on the financial condition or results of operations of
the Company.

     In July 1997, CP Partnership ("CP") filed a complaint against the Company
alleging patent infringement regarding the design of the proprietary gas fryer
manufactured by the Company's manufacturing division. This case was segregated
into a patent infringement claim and a contract claim.  In August 1998, the
Court dismissed CP's patent infringement claim.  CP has appealed this judgment.
In November 1998, the Company settled the contract claim for an immaterial
amount.  It is management's belief that the final outcome of the patent
infringement claim will not have an adverse effect on the Company's consolidated
financial position or results of operations.

                                      F-33
<PAGE>
 
Environmental Matters

     Approximately 200 of the Company's owned and 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.  Many of these properties previously contained underground
storage tanks ("USTs") and some of these properties may currently contain
abandoned USTs.  As a result of the use of oils and solvents typically
associated with automobile repair facilities and gas stations, 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, the Company, as the current owner or operator of these
sites, may be jointly and severally liable for the costs of investigation and
remediation of any such contamination.  As a result, after an analysis of its
property portfolio, including testing of soil and groundwater at a
representative sample of its facilities, the Company believes that it has
accrued adequate reserves for environmental remediation liabilities.  The
Company is currently not subject to any administrative or court order requiring
remediation at any of its properties.

Information Technology Outsourcing

     The Company entered into an agreement with IBM Global Services, a division
of IBM ("IGS") commencing on August 1, 1994, for a ten-year term, to outsource
the Company's information technology, programming and computer operations.  This
agreement allows the Company to update its corporate and restaurant systems with
state-of-the-art computer software and hardware.  IGS will guarantee levels of
performance, maintain the operating systems and hardware, perform applications
development and maintenance, and provide other administrative, management and
support functions.  Initially, IGS purchased the hardware and software under the
outsourcing contract and leased the hardware and software to the Company, which
the Company recorded as capital leases.  In August 1997, the Company repaid
certain of these capital lease obligations totaling $16.7 million.

     Future minimum payments under this agreement, exclusive of payments
included in Note 9 as capital lease payments for systems installed as of
December 27, 1998, are as follows at that date (in thousands):

 
          YEAR                      AMOUNT
          ----                      ------

          1999........             $ 6,925
          2000........               5,089
          2001........               4,170
          2002........               5,055
          2003........               5,968
          Thereafter..               3,617
                                   -------
                                   $30,824
                                   ======= 

                                      F-34
<PAGE>
 
     It is estimated that the remaining payments due under the contract of
approximately $30.8 million will be reflected as restaurant operating or general
and administrative costs and expenses.

     Operating expenses of approximately $10.5 million, $8.1 million and $7.5
million related to the outsourcing contract have been included in the statements
of operations for the years ended December 27, 1998, December 28, 1997 and
December 29, 1996, respectively.

Year 2000 Compliance (Unaudited)

     The Company relies to a large extent on computer technology to carry out
its day-to-day operations. The Company is currently working to resolve the
potential impact of the Year 2000 on the processing of date-sensitive
information by the Company's information technology ("IT") systems and non-IT
systems that are reliant on computer technology. The Year 2000 problem is the
result of computer programs being written using two digits (rather than four) to
define the applicable year. Any of the Company's programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This problem could result in a system failure or miscalculations
causing disruptions of operations, including, but not limited to, a temporary
inability to process transactions or engage in normal business activities.

     The Company is in the process of completing a Year 2000 compliance
assessment of both its IT systems and non-IT systems, including those recently
acquired. All IT-related systems are in the process of being assessed using a
standard Year 2000 approach that includes five phases. These phases are: 1)
inventory 2) assess 3) remediate 4) test and 5) maintain. Although the pace of
the work varies among IT and non-IT systems and the phases are often conducted
in parallel, the inventory and assess phases have been substantially completed
as of December 27, 1998 and the remediation phase is in progress. Under its
current plan, remediation and testing of IT systems is scheduled to be completed
by the end of the Company's third quarter of 1999. The Company anticipates the
timely completion of this compliance assessment, which should mitigate the Year
2000 issue.

     Based upon this compliance assessment, the Company does not expect the Year
2000 problem, including the cost of making the Company's IT and non-IT systems
Year 2000 compliant, to have a material adverse impact on the Company's
financial position or results of operations in future periods. However, the
inability of the Company to resolve all potential Year 2000 problems in a timely
manner could have a material adverse impact on the Company.

     Under the Company's Franchise Awareness Program and Vendor/Supplier Letter
Program, the Company has and will be initiating communications with its
significant suppliers and vendors and its franchisee community in an effort to
determine the extent to which the Company's business is vulnerable to the
failure by these third parties to remediate their Year 2000 problems. While the
Company has not been informed of any material risks associated with the Year
2000 problem on these entities, there can be no assurance that the IT and non-IT
systems of these third parties will be Year 2000 compliant on a timely basis.
The inability of these third parties to remediate their Year 2000 problems could
have a material adverse impact on the Company's financial position and results
of operations.

                                      F-35
<PAGE>
 
     To date, the Company has incurred approximately $0.1 million in Year 2000
costs. These costs are primarily related to fees paid to outside consultants who
helped develop a strategy to assess the Company's Year 2000 issues. The Company
estimates that the total costs of addressing the Year 2000 issue will
approximate $0.9 million, including the amount that has already been expended.
These costs will be funded through operating cash flows.

     The Company has not yet ascertained what the impact would be on the
Company's financial position and results of operations in the event of failure
of the Company's or third parties' IT and non-IT systems due to the Year 2000
issue. The Company began developing a contingency plan in the fourth quarter of
1998 and will continue to develop such plan during the first quarter of 1999
designed to allow continued operations in the event that such failures should
occur.

Formula Agreement

     The Company has a formula licensing agreement, as amended (the "Formula
Agreement"), with Alvin C. Copeland, the former owner of the Popeyes and Churchs
restaurant systems, and Diversified Foods and Seasonings, Inc. ("Diversified"),
which calls for the worldwide exclusive licensing to the Popeyes system of the
spicy fried chicken formula and certain other ingredients used in Popeyes
products. The Formula Agreement provides for monthly royalty payments of
$237,500 until April 1999 and, thereafter, monthly royalty payments of $254,166
until March 2029. Total royalty payments were $2.9 million in the fiscal years
ended December 27, 1998, December 28, 1997 and December 29, 1996.

Supply Agreements

     The Company has a supply agreement with Diversified under which the Company
is required to purchase certain proprietary products made exclusively by
Diversified. This contract expires in 2029 subject to further renewal.

     Supplies are generally provided to franchised and Company-operated
restaurants in the Popeyes and Churchs systems pursuant to supply agreements
negotiated by Popeyes Operators Purchasing Cooperative Association, Inc.
("POPCA") and Churchs Operators Purchasing Association, Inc. ("COPA"),
respectively, each a not-for-profit corporation that was created for the purpose
of consolidating the collective purchasing power of the franchised and Company-
operated restaurants and negotiating favorable terms therefor. The purchasing
cooperatives are not obligated to purchase, and do not bind their members to
commitments to purchase, any supplies. Membership in each cooperative is open to
all franchisees. Since 1995, the Company's franchise agreements related to
Popeyes and Chuchs have required that each franchisee joins its respective
purchasing cooperative. All Company-operated Popeyes and Churchs restaurants are
members of POPCA or COPA, respectively. Substantially all of the Company's
domestic Popeyes and Churchs franchisees participate in POPCA or COPA. COPA also
purchases certain ingredients and supplies for Chesapeake and Cinnabon
franchised and Company-operated restaurants in order to further leverage the
collective buying power of AFC.

                                      F-36
<PAGE>
 
Advertising Funds

     In accordance with the Popeyes and Churchs franchise agreements,
advertising funds have been established (the "Advertising Funds") whereby the
Company contributes a percentage of sales (generally 5%) to the Advertising
Funds in order to pay for the costs of funding advertising and promotional
activities. In accordance with the franchise agreement, the net assets and
transactions of the Advertising Funds are not commingled with the working
capital of the Company. The net assets and transactions of the Advertising Funds
are, therefore, not included in the accompanying consolidated financial
statements. The Company's contributions to the Advertising Funds are recorded in
restaurant operating expenses in the accompanying consolidated financial
statements.

License Agreement

     The Company currently has a number of domestic and international agreements
with The Hearst Corporation, King Features Syndicate Division ("King Features")
under which the Company has the exclusive license to use the image and likeness
of the cartoon character "Popeye" (and certain companion characters such as
"Olive Oyl") in connection with the operations of franchised and Company-
operated Popeyes restaurants worldwide. Under the current agreements, the
Company is obligated to pay King Features a royalty of 0.1% of the first $1.0
billion of Popeyes systemwide sales and 0.05% for the next $2.0 billion of such
sales. The King Features agreements automatically renew annually.

Other Commitments

     The Company has guaranteed certain loans and lease obligations
approximating $1.6 million and $1.9 million at December 27, 1998 and December
28, 1997, respectively.

16. SEGMENT AND GEOGRAPHIC INFORMATION

     The Company operates exclusively in the food service industry.
Substantially all revenues result from the sale of menu products at restaurants
operated by the Company, franchise royalty and fee income earned from franchised
restaurant operations and wholesale revenues from the sale of coffee products.
The Company's reportable segments are based on specific products and services
within the food service industry. The Company combined Popeyes' and Churchs'
domestic operations to form its chicken segment. The Company also aggregated the
operations of Chesapeake and Cinnabon to form its bakery cafe segment. The
Company's coffee segment consists of SCC's domestic operations, which includes
wholesale operations. The international segment is comprised of the Company's
international franchised operations, which mainly consists of Popeyes and
Churchs international franchised restaurants.

     The "other" segment includes the Company's manufacturing division,
Ultrafryer. The "corporate" component of operating income includes revenues from
1) interest income from notes receivable and rental revenue from leasing and 
sub-leasing agreements with franchisees and third parties, less 2) corporate
general and administrative expenses, depreciation, amortization and interest
expense.

                                      F-37
<PAGE>
 
     Operating income (loss) represents each segment's earnings before income
taxes, depreciation, amortization, non-cash items related to gains/losses on
asset dispositions and write-downs and compensation expense related to stock
option activity.
 
<TABLE>
<CAPTION>
     REVENUES:
                                           1998       1997       1996
                                        ----------  ---------  ---------
                                                 (in thousands)
     <S>                                <C>         <C>        <C>
     Chicken........................      $495,770   $452,799   $469,553
     Coffee.........................        58,113          -          -
     Bakery cafe....................        27,290      2,442          -
     International..................        11,712     12,273     12,388
     Other..........................         9,866      8,557     12,065
     Inter-segment revenues.........        (2,261)      (857)    (3,815)
     Corporate......................         8,601      8,539      7,652
                                          --------   --------   --------
       Total Revenues...............      $609,091   $483,753   $497,843
                                          ========   ========   ========
</TABLE>

     Inter-segment revenues represent Ultrafryer sales to Company-operated
restaurants.  These revenues are eliminated in consolidation.

<TABLE>
<CAPTION>
     OPERATING INCOME (LOSS):
                                           1998        1997      1996
                                        ----------  ---------  ---------
                                                 (in thousands)
     <S>                                <C>         <C>        <C>
     Chicken........................      $ 90,441   $ 90,457   $ 84,308
     Coffee.........................         7,774          -          -
     Bakery cafe....................         3,133        258          -
     International..................         6,912      7,684      8,011
     Other..........................         1,220        901        546
     Corporate......................       (22,443)   (25,283)   (27,999)
                                          --------   --------   --------
       Total Operating Income
           (Loss)...................      $ 87,037   $ 74,017   $ 64,866
                                          ========   ========   ========

<CAPTION> 
     DEPRECIATION AND AMORTIZATION:
                                           1998        1997      1996
                                        ----------  ---------  --------- 
                                                  (in thousands)
     <S>                                <C>         <C>        <C>       
     Chicken........................      $ 24,935   $ 17,308   $ 18,446
     Coffee.........................         4,502          -          -
     Bakery cafe....................         2,237        271          -
     International..................            87         39         51
     Other..........................           316        288        388
     Corporate......................        14,001     15,897     12,019
                                          --------   --------   --------
       Total Depreciation and
           Amortization.............      $ 46,078   $ 33,803   $ 30,904
                                          ========   ========   ========
</TABLE>

                                      F-38
<PAGE>
 
<TABLE>
<CAPTION>
     SIGNIFICANT NON-CASH ITEMS:
                                           1998        1997      1996
                                        ----------  ---------  ---------
                                                  (in thousands)
     <S>                                <C>         <C>        <C>
     Chicken.........................      $ 9,956     $2,094     $2,858
     Coffee..........................            -          -          -
     Bakery cafe.....................        7,125          -          -
     International...................            -          -          -
     Other...........................            -         31         11
     Corporate.......................        5,000      1,021        309
                                           -------     ------     ------
       Total Significant
           Non-cash Items............      $22,081     $3,146     $3,178
                                           =======     ======     ======
</TABLE>

       Significant non-cash items include (i) charges for restaurant closings
which are primarily write-offs of tangible and intangible assets and (ii) losses
on the disposition of long-lived assets which includes both operating and non-
operating assets.

<TABLE>
<CAPTION>
     ASSETS:
                                           1998       1997       1996
                                        ----------  ---------  ---------
                                                  (in thousands)
     <S>                                <C>         <C>        <C>
     Chicken..........................    $281,005   $246,138   $244,602
     Coffee...........................      82,164          -          -
     Bakery cafe......................      83,350     14,530          -
     International....................      15,236     15,625     14,122
     Other............................       5,730      5,425      4,721
     Corporate........................      88,980    100,986     76,223
                                          --------   --------   --------
       Total Assets...................    $556,465   $382,704   $339,668
                                          ========   ========   ========

     <CAPTION> 
     CAPITAL EXPENDITURES:
                                           1998       1997       1996
                                        ----------  ---------  ---------
                                                  (in thousands)
     <S>                                <C>         <C>        <C>   
     Chicken..........................    $ 26,453   $ 29,472   $ 29,639
     Coffee...........................       4,602          -          -
     Bakery cafe......................       2,360        309          -
     International....................         148          -          -
     Other............................         140          -         57
     Corporate........................       7,822     33,138     16,576
                                          --------   --------   --------
       Total Capital Expenditures.....    $ 41,525   $ 62,919   $ 46,272
                                          ========   ========   ========
</TABLE>

     Not included in the 1998 capital expenditures is approximately $21.1
million in funds spent in 1998 to convert the acquired Pinetree restaurants to
Company-operated Popeyes restaurants (See Note 17).

                                      F-39
<PAGE>
 
17. ACQUISITIONS

Pinetree Foods, Inc. Acquisition

     On February 10, 1998, the Company acquired all of the assets of 81
restaurant properties operated by Pinetree Foods, Inc. ("Pinetree") for a
purchase price of approximately $24.3 million. In addition, the Company recorded
liabilities of approximately $4.0 million in connection with the acquisition. Of
the 81 restaurants, 66 were converted to Popeyes Company-operated restaurants,
with the remaining restaurants closed concurrently with the purchase. The
restaurants are primarily located in North and South Carolina and Georgia. The
Company funded the purchase price with internal funds and its Acquisition
Facility.

     The Pinetree acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion Number 16, "Accounting for Business
Combinations" ("APB 16"). The unamortized goodwill recorded in connection with
this acquisition was $23.1 million at December 27, 1998. The Company will
amortize this goodwill amount on a straight-line basis over a forty- year
period.

Seattle Coffee Company Acquisition

     On March 18, 1998, the Company acquired all of Seattle Coffee Company's
("SCC") common stock for an adjusted purchase price of approximately $68.8
million plus the assumption of approximately $4.8 million of debt. The Company
paid approximately $37.6 million in cash funded by its Acquisition Facility and
approximately $25.5 million in AFC common stock, resulting in the issuance of
1,837,834 common shares, 440,645 options to purchase common shares and 154,468
warrants to purchase common shares. In addition, the Company established a
payable of approximately $3.8 million and placed 139,914 shares of AFC's common
stock into an escrow account pursuant to a holdback payment provision in the
acquisition agreement. As a result of the transaction, SCC became a wholly-owned
subsidiary of the Company. The transaction included the acquisition of a
roasting and packaging facility, 59 Company-operated cafes and 10 franchised
cafes under the Seattle's Best and Torrefazione Italia brands, a wholesale
business including 13 sales offices with more than 5,000 wholesale accounts and
two major distribution centers. The acquisition agreement provides for a
contingent earn out payable to former SCC shareholders. Actual payment to former
SCC shareholders is contingent upon SCC operations achieving a level of
earnings, as defined in the acquisition agreement, over a 52-week period from
September 29, 1997 to September 27, 1998 (the "Contingency Period"). Based on
SCC's operating results during the Contingency Period that ended on September
27, 1998, the Company expects to pay $1.9 million in cash, stock and stock
options to former SCC shareholders as a contingent payment pursuant to the
provision in the agreement mentioned above. The contingent payable of $1.9
million is included in the adjusted purchase price of $68.8 million.

     The Company accounted for this acquisition as a purchase in accordance with
APB 16. The allocation of the purchase price resulted in the Company recording
goodwill. At December 27, 1998, the unamortized goodwill balance was
approximately $53.0 million, which is amortized on a straight-line basis over a
forty-year period. The Company is in the process of analyzing the fair value and
allocation of its intangible asset acquired from SCC, which may

                                      F-40
<PAGE>
 
result in a purchase price adjustment to the current amounts initially recorded
on the acquisition date. The Company anticipates completing this process by mid
1999.

     The following unaudited pro forma results of operations for the fifty-two
weeks ended December 27, 1998, December 28, 1997 and December 29, 1996, assumes
the acquisition of SCC occurred as of the beginning of the respective periods
(in thousands).

<TABLE>
<CAPTION>
                                  52 Weeks   52 Weeks   52 Weeks
                                   Ended       Ended      Ended
                                  12/27/98    12/28/97   12/29/96
                                 ---------   ---------  ---------
     <S>                         <C>         <C>        <C> 
     Total revenues............  $ 617,638   $ 534,549  $ 536,179
                                 =========   =========  =========
 
     Net income (loss) before
      Extraordinary loss.......  $  (9,178)  $  10,213  $   4,987
                                 =========   =========  =========
 
     Net income (loss).........  $  (9,178)  $  10,213  $     531
                                 =========   =========  =========
</TABLE>

     The 52 weeks ended December 27, 1998 include SCC's operations for the two-
month period ended February 28, 1998 since the Company acquired SCC in March
1998. The 52 weeks ended December 28, 1997 include SCC's operations for the
twelve-month period ended September 28, 1997. The 52 weeks ended December 28,
1996 include SCC's operations for the twelve-month period ended September 30,
1996.

     These pro forma results have been prepared for comparative purposes only
and include certain adjustments that result in (i) an increase in amortization
expense related to the recording of SCC goodwill, (ii) an increase in interest
expense related to the Acquisition Facility (See Note 8) used to partially fund
the acquisition, (iii) a decrease in interest expense related to SCC debt that
was paid off at the time of the acquisition and (iv) a decrease in amortization
expense related to the write-off of SCC's intangible assets at the time of the
acquisition. These results do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition been in effect
at the beginning of the respective periods or of future results of operations of
the consolidated entities.

Cinnabon International, Inc.

     On October 15, 1998, the Company acquired Cinnabon International, Inc.
("CII"), the operator and franchisor of 363 retail cinnamon roll bakeries
operating in 39 states, Canada and Mexico. Two hundred and eleven of the retail
cinnamon roll bakeries are Company-operated and are located within the United
States. In connection with the acquisition, which was accounted for as a
purchase, CII became a wholly-owned subsidiary of AFC through the merger of AFC
Franchise Acquisition Corp. into CII (the "Acquisition").

     The Company acquired CII for $64.0 million in cash. The Company obtained
$44.7 million of the cash consideration from its 1997 Credit Facility as amended
and restated (See Note 8). The remaining $19.3 million cash consideration was
funded with the proceeds from the sale

                                      F-41
<PAGE>
 
of approximately 2.8 million shares of AFC common stock to certain "qualified"
investors who are existing AFC shareholders and option holders (See Note 11).

     The Company accounted for this acquisition as a purchase in accordance with
APB 16.  The allocation of the purchase price resulted in the Company recording
goodwill in the amount of approximately $43.7 million, which will be amortized
on a straight-line basis over a forty-year period.  The Company is in the
process of analyzing the fair values of the tangible and intangible assets
acquired from CII, which may result in a purchase price adjustment to the
current amounts initially recorded on the acquisition date.  The Company
anticipates completing this process by mid 1999.

     The Company is also in the process of developing an exit plan involving
CII's corporate headquarters in Seattle, Washington.  The exit plan will include
severance, relocation and integration costs.  At December 27, 1998, the Company
has not recorded a liability to recognize this anticipated liability since the
plan has not been finalized.  The Company expects to finalize the plan within a
year from the acquisition date and record the related liability at that time.
The liability will be accounted for as a purchase price adjustment, which will
increase goodwill recorded as a result of the CII acquisition.

     The following unaudited pro forma results of operations for the fifty-two
weeks ended December 27, 1998, December 28, 1997 and December 29, 1996, assumes
the acquisition of CII occurred as of the beginning of the respective periods
(in thousands).

<TABLE>
<CAPTION>
 
 
                                  52 Weeks   52 Weeks    52 Weeks
                                   Ended       Ended      Ended
                                  12/27/98    12/28/97   12/29/96
                                 ---------   ---------  ---------
     <S>                         <C>         <C>        <C> 
     Total revenues............  $ 663,030   $ 562,612  $ 574,483
                                 =========   =========  =========
 
     Net income (loss) before
      Extraordinary items......  $ (18,962)  $   1,041  $   2,439
                                 =========   =========  =========
 
     Net income (loss).........  $ (18,962)  $   1,041  $    (346)
                                 =========   =========  =========
</TABLE>

     The 52 weeks ended December 27, 1998 include CII's operations for the nine-
month period ended September 27, 1998 since the Company acquired SCC in October
1998.  The 52 weeks ended December 28, 1997 include SCC's operations for the
twelve-month period ended March 29, 1998.  The 52 weeks ended December 28, 1996
include SCC's operations for the twelve-month period ended March 30, 1997.

     These pro forma results have been prepared for comparative purposes only
and include certain adjustments that result in (i) an increase in amortization
expense related to the recording of CII goodwill, (ii) an increase in interest
expense related to the Term Loan B debt (See Note 8) used to partially fund the
acquisition, (iii) a decrease in interest expense related to CII debt that was
paid off at the time of the acquisition and (iv) a decrease in amortization
expense related to the write-off of CII's intangible assets at the time of the
acquisition. These results do not purport

                                      F-42
<PAGE>
 
to be indicative of the results of operations which actually would have resulted
had the acquisition been in effect at the beginning of the respective periods or
of future results of operations of the consolidated entities.

                                      F-43