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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 29,
    2002                                             
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-32369

(AFC ENTERPRISES LOGO)

(Exact name of registrant as specified in its
charter)


|                                                                                                   |  |                                         
|-------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Minnesota                                                                                          |  | 58-2016606                              
|(State or other jurisdiction of
    incorporation or organization)                                 |  | (I.R.S. Employer
    Identification No.)
|                                                                                                  
|Six Concourse Parkway, Suite 1700
    Atlanta, Georgia(Address of principal executive
    offices) |  | 30328-5352(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:

Title of each class

Common stock, $0.01 par value per
share


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 o          No þ

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.     Yes o          No þ

Indicate by check
mark whether the registrant is an accelerated filer (as defined
in Exchange Act
Rule 12b-2).     Yes þ          No o

The aggregate
market value of the voting stock held by non-affiliates of the
registrant as of July 13, 2003 (the last day of the
registrants second quarter for 2003), as quoted by the
National Quotation Service, was approximately $327,106,000. As
of November 30, 2003, there were 27,954,510 shares of the
registrants common stock outstanding.

Documents incorporated by reference:None.



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|                                                  |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I.                                          
|                                                  | Item 1. BUSINESS                                                                                       
|                                                  | Item 2. PROPERTIES                                                                                     
|                                                  | Item 3. LEGAL PROCEEDINGS                                                                              
|                                                  | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            
|PART II.                                         
|                                                  | Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                          
|                                                  | Item 6. SELECTED FINANCIAL DATA                                                                        
|                                                  | Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          
|                                                  | Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                    
|                                                  | Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                       
|                                                  | Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           
|                                                  | Item 9A. CONTROLS AND PROCEDURES                                                                       
|PART III.                                        
|                                                  | Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                            
|                                                  | Item 11. EXECUTIVE COMPENSATION                                                                        
|                                                  | Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|                                                  | Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                
|                                                  | Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                        
|PART IV.                                         
|                                                  | Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                               
|SIGNATURES                                       
|EX-10.79 CONSULTING AGREEMENT                    
|EX-10.80 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT 
|EX-10.81 SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
|EX-10.82 THIRD AMENDMENT TO EMPLOYMENT AGREEMENT 
|EX-21.1 SUBSIDIARIES OF AFC                      
|EX-23.1 CONSENT OF INDEPENDENT AUDITORS          
|EX-31.1 302 CERTIFICATION OF CEO                 
|EX-31.2 302 CERTIFICATION OF CFO                 
|EX-32.1 906 CERTIFICATION OF CEO                 
|EX-32.2 906 CERTIFICATION OF CFO                 



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AFC ENTERPRISES, INC.

INDEX TO FORM 10-K

|         |  |                                                                                                    |  |  |    | 
|-------- |  | -------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I  
|Item 1.  |  | Business                                                                                           |  |  | 1  | 
|Item 2.  |  | Properties                                                                                         |  |  | 12 | 
|Item 3.  |  | Legal Proceedings                                                                                  |  |  | 14 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                            |  |  | 15 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |  |  | 16 | 
|Item 6.  |  | Selected Financial Data                                                                            |  |  | 17 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |  | 22 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures about
    Market Risk                                     |  |  | 53 | 
|Item 8.  |  | Consolidated Financial Statements and
    Supplementary Data                                       |  |  | 53 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  |  | 53 | 
|Item 9A. |  | Controls and Procedures                                                                            |  |  | 53 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                 |  |  | 56 | 
|Item 11. |  | Executive Compensation                                                                             |  |  | 58 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |  | 65 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                     |  |  | 69 | 
|Item 14. |  | Principal Accountant Fees and Services                                                             |  |  | 70 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |  |  | 71 | 

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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. Statements regarding future events, future developments
and future performance, as well as managements
expectations, beliefs, plans, estimates or projections relating
to the future, are forward-looking statements within the meaning
of these laws. These forward-looking statements are subject to a
number of risks and uncertainties.

Among the important factors that could cause
actual results to differ materially from those indicated by such
forward-looking statements are: adverse effects of litigation or
regulatory actions arising in connection with the restatement of
our previously issued financial statements, the loss of
franchisees and other business partners, failure of our
franchisees, the loss of senior management and the inability to
attract and retain additional qualified management personnel, a
decline in the number of new units to be opened by franchisees,
the inability to relist our securities with the Nasdaq National
Market or another major securities market or exchange, our
inability to address deficiencies and weaknesses in our internal
controls, limitations on our business under our credit facility,
our inability to enter into new franchise relationships and a
decline in our ability to franchise new units, increased costs
of our principal food products, labor shortages or increased
labor costs, slowed expansion into new markets, changes in
consumer preferences and demographic trends, as well as concerns
about health or food quality, the ability of our competitors to
successfully manage their respective operations in the
foodservice industry, unexpected and adverse fluctuations in
quarterly results, increased government regulation, growth in
our franchise system that exceeds our resources to serve that
growth, supply and delivery shortages or interruptions,
currency, economic and political factors that affect our
international operations, inadequate protection of our
intellectual property and liabilities for environmental
contamination. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Risk Factors that May Affect Financial
Condition and Results of Operations for a discussion of
these factors.

The financial data in this Annual Report on
Form 10-K for the first three quarters of 2002 and for
fiscal years 2001, 2000, 1999 and 1998 has been restated from
amounts previously reported. A discussion of the restatement in
relation to fiscal years 2001 and 2000 and to the affected
quarters of 2002, 2001 and 2000 is provided in Notes 23 and
25 to the Consolidated Financial Statements. A discussion
of the restatement in relation to 1999 and 1998 is provided in
Note 1 to the Selected Financial Data. An overview of the
restatement is provided in the introduction to Managements
Discussion and Analysis of Financial Condition and Results of
Operations.

General

AFC Enterprises, Inc. (AFC) develops,
operates and franchises quick service restaurants, bakeries and
cafes (generally referred to as QSRs,
units or stores throughout this filing)
in three distinct business segments: chicken, bakery and coffee.
Our chicken segment operates under the trade names Popeyes®
Chicken & Biscuits (Popeyes) and
Churchs Chicken (Churchs); our
bakery segment operates under the trade name Cinnabon®
(Cinnabon); and our coffee segment currently
franchises cafes under the trade name Seattles Best
Coffee®. Prior to July 14, 2003, our coffee segment
also operated under the trade name Torrefazione Italia®
Coffee. Financial information for these segments can be found in
Note 22 to the Consolidated Financial Statements.

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As of December 29, 2002, we operated or
franchised 4,071 QSRs that did business in the United
States, Puerto Rico (which we include in our international
operations), and 33 foreign countries. That total, by
brand, was as follows:

|                           |       |          |     |               |  |          |       |            |  |       |   |   |  |  |     |     |  |  |       |       | 
|-------------------------- | ----- | -------- | --- | ------------- |  | -------- | ----- | ---------- |  | ----- | - | - |  |  | --- | --- |  |  | ----- | ----- | 
|                           |       |          |     |               |  |         
|                           |       | Domestic |     | International |  |         
|                           |       |          |     |               |  |         
|                           |       | Company- |     |               |  | Company- |       |            |  |      
|                           |       | Operated |     | Franchised    |  | Operated |       | Franchised |  | Total
|                           |       |          |     |               |  |          |       |            |  |      
|Popeyes                    |       |          | 96  |               |  |          | 1,298 |            |  |       |  |   |  |  | 318 |     |  |  | 1,712 |      
|Churchs                   |       |          | 284 |               |  |          | 963   |            |  |       |  |   |  |  | 262 |     |  |  | 1,509 |      
|Cinnabon                   |       |          | 84  |               |  |          | 369   |            |  |       |  |   |  |  | 159 |     |  |  | 612   |      
|Seattles Best Coffee      |       |          | 54  |               |  |          | 79    |            |  |       |  |   |  |  | 84  |     |  |  | 217   |      
|Torrefazione Italia Coffee |       |          | 18  |               |  |          |      |            |  |       | 3 |   |  |  |    |     |  |  | 21    |      
|                           |       |          |     |               |  |          |       |            |  |       |   |   |  |  |     |     |  |  |       |      
|                           | Total |          |     | 536           |  |          |       | 2,709      |  |       |   | 3 |  |  |     | 823 |  |  |       | 4,071 | 
|                           |       |          |     |               |  |          |       |            |  |       |   |   |  |  |     |     |  |  |       |      

Brand Profiles

Popeyes® Chicken & Biscuits.Founded in New Orleans, Louisiana
in 1972, our Popeyes brand is renowned for its signature spicy
and mild fried chicken and its Louisiana inspired side items. As
of December 29, 2002, there were 1,712 Popeyes restaurants
worldwide. Whether measured by number of QSRs or system-wide
sales, Popeyes is currently the second largest chicken QSR
concept in the world.

As of December 29, 2002, Popeyes restaurants
were located in 42 states, the District of Columbia, Puerto
Rico and 19 foreign countries. Our 96 company-operated
Popeyes restaurants were concentrated in Georgia, Louisiana,
North Carolina, South Carolina and Tennessee. Over 70% of our
1,298 domestic franchised Popeyes restaurants were located in
California, Florida, Illinois, Louisiana, Maryland, Mississippi,
New York, Texas and Virginia. Over 60% of Popeyes 318
international franchised restaurants were located in Korea.

Churchs
Chicken. Founded in San
Antonio, Texas in 1952, our Churchs brand is one of the
oldest QSR systems in the United States. Churchs
restaurants focus on serving traditional Southern fried chicken
and other Southern specialties. As of December 29, 2002,
there were 1,509 Churchs restaurants worldwide. Measured
by number of QSRs, Churchs is currently the third largest
chicken QSR concept in the world (measured by sales it is the
fourth largest chicken QSR concept).

As of December 29, 2002, Churchs
restaurants were located in 28 states, Puerto Rico and
11 foreign countries. Our 284 company-operated
Churchs restaurants were concentrated in Alabama, Arizona,
Georgia, Mississippi, Tennessee and Texas. Over 70% of our 963
domestic franchised Churchs restaurants were located in
Alabama, California, Florida, Georgia, Illinois, Louisiana,
Michigan, Mississippi, New York, Ohio and Texas. Over 90% of
Churchs 262 international franchised restaurants were
located in Canada, Honduras, Indonesia, Mexico and Puerto Rico.

Cinnabon®.
Founded in Seattle, Washington in 1985, our Cinnabon brand is
the market leader among cinnamon roll bakeries. Cinnabon serves
fresh, aromatic, oven-hot cinnamon rolls as well as a variety of
other baked goods and specialty beverages. As of
December 29, 2002, Cinnabon had 612 bakeries worldwide.

As of December 29, 2002, Cinnabon bakeries
were located in 38 states, the District of Columbia, Puerto
Rico and 20 foreign countries, primarily in high traffic
venues such as shopping malls, airports, train stations and
travel plazas. Our 84 company-operated Cinnabon bakeries
were concentrated in California, Colorado, Georgia,
Massachusetts and Pennsylvania. Over 60% of our
369 domestic franchised Cinnabon bakeries were located in
California, Florida, Illinois, Maryland, Nevada, New York, North
Carolina, Ohio, Pennsylvania, Texas and Washington. Over 60% of
our 159 international franchised Cinnabon bakeries were
located in Canada, Japan, Korea, the Philippines, Saudi Arabia
and Venezuela.

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Seattles Best Coffee® and
Torrefazione Italia® Coffee.In
1994, Seattle Coffee Company (Seattle Coffee) was
created from the combination of Seattles Best Coffee, Inc.
and Torrefazione Italia, Inc. As of December 29, 2002, we
had 217 Seattles Best Coffee cafes and 21 Torrefazione
Italia Coffee cafes. Of these, 75 were company-operated and 163
were franchised. These cafes were located in 16 states and eight
foreign countries. As of December 29, 2002, Seattles
Best Coffee and Torrefazione Italia Coffee had 3,775 wholesale
accounts with approximately 11,000 points of distribution.

On July 14, 2003, we sold our Seattle Coffee
subsidiary to Starbucks Corporation (Starbucks) for
$72.0 million. Net proceeds of the sale, after transaction
costs and other adjustments, are expected to be approximately
$63.0 million, which is subject to adjustment based upon
the determination of certain financial results of Seattle Coffee
for pre-closing periods of operations. In this transaction, we
sold substantially all of the continental U.S. and Canadian
operations of Seattle Coffee, which included 52 company-operated
Seattles Best Coffee cafes, 21 company-operated
Torrefazione Italia cafes, Seattle Coffees existing
franchise business in North America (which consisted of 76
Seattles Best Coffee cafes) and its wholesale coffee
business. Following the transaction, we continue to franchise
the Seattles Best Coffee brand in retail locations in
Hawaii, in certain international markets outside North America
and on certain U.S. military bases.

Overall Business Strategy

AFCs business strategy incorporates the
following seven elements:



| |    |                                                                                                                                                                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Building and managing a portfolio of
    recognizable QSR brands.We will
    continue to focus on enhancing the value of our portfolio of
    recognizable QSR brands. Toward this end, we see our success and
    that of our shareholders and our franchisees as integrally
    linked.

We will continue our ongoing efforts to improve
our brands and our brand portfolio in ways that offer promising
opportunities to increase shareholder value. These efforts
include both strategic acquisitions and strategic divestitures
where appropriate. The sale of our Seattle Coffee subsidiary in
the third quarter of 2003 constitutes a strategic divestiture
designed to improve our brand portfolio. To our franchisees, we
will provide exceptional support, systems and services. We are
committed to being the Franchisor of Choice®.



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Growing Through Our Franchise
    Network.We will fuel our business
    growth principally through franchising activities. From
    time-to-time, we will also sell company-operated units to
    franchisees, when strategically desirable. We believe that our
    focus on franchising provides us with higher profit margins and
    enhanced investment returns. In addition, a franchising-based
    growth strategy requires significantly less operating capital.
    As of December 29, 2002, over 85% of our brands 4,071
    system-wide units were franchised, and we had development
    commitments from existing and new franchisees to open 2,622
    additional units. As of November 30, 2003, we had
    commitments to open 2,351 additional units. However, we
    have been required to temporarily suspend certain domestic
    franchising activities due to the delay in releasing our
    financial statements for 2002 and our quarterly financial
    information for 2003.
|
| | 3. | Building Our Model Markets
    Program.Each of our brands will
    continue to own and operate units in one or more markets. The
    objective is to have a limited number of company-operated units
    that are concentrated in only a few geographic markets. This
    will allow us to focus on establishing best practices and
    developing new menu items for each of our brands, thereby
    creating model markets. Innovations and best practices
    established in each of these model markets will be shared with
    our franchisees. We believe these best practices, combined with
    our marketing initiatives, will aid our efforts to improve
    same-store sales and operating margins throughout our systems.                                                                                                                                                                                                                                                                   
|
| | 4. | Promoting Uniquely Positioned
    Brands.We continually promote and
    refresh the image of our brands in order to increase consumer
    interest and sales. In the fourth quarter of 2000, we
    implemented a new re-imaging program that is designed to update
    the general publics perception                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | of our brands. We plan to have substantially all
    of the QSRs in our systems re-imaged by the end of 2007. Most of
    our Popeyes and Churchs franchisees are contractually
    required to re-image their restaurants every six to seven years.
    Most of our Cinnabon franchisees are contractually required to
    re-image their bakeries within a time frame specified by us. The
    re-imaging program typically involves an interior and exterior
    makeover of the QSR along with new logos, dining room upgrades,
    uniforms, menu boards and menu items.                                                             
|
| | 5. | Increasing Domestic Market
    Penetration.Currently, most of
    our brands domestic markets are under-penetrated. We are
    increasing the number of our QSRs in new and existing markets.
    In addition, we are expanding the number and type of
    non-traditional formats in which our Popeyes and Churchs
    chicken restaurants are located, including convenience stores,
    mall food courts and airports.                                                                                                                                                                                                                
|
| | 6. | Expanding Our Franchise Networks
    Internationally.We believe that
    we have the opportunity to establish or expand a leading market
    position in a number of countries, due to the appeal of our
    highly recognizable American brands. Our international
    operations have increased from 346 franchised units in Puerto
    Rico and 17 foreign countries at the end of 1995, to 823
    franchised units in Puerto Rico and 33 foreign countries at the
    end of 2002. Additionally, commitments to develop international
    franchised units have increased from 502 at the end of 1995 to
    1,261 at the end of 2002.
|
| | 7. | Improving Operational
    Efficiencies.Through our
    purchasing cooperative and various training initiatives, we seek
    to improve operational efficiencies for company-operated and
    franchised restaurants. We are also working to strengthen our
    brands franchise systems by inspecting operations and
    taking curative actions against chronically weak performers.                                                                                                                                                                                                                                                     

Site Selection

We employ a site identification and new unit
development process that assists our franchisees and us in
identifying and obtaining favorable sites for new domestic QSRs.
This process begins with an overall market plan for each
targeted market, which we develop together with our franchisees.
For our Popeyes and Churchs brands, we emphasize
free-standing sites with ample parking and easy dinnertime
access from high traffic roads. For our Cinnabon brand and our
Seattle Coffee brands, we emphasize high traffic venues such as
malls, in-line shopping centers, transportation facilities,
central business districts, airports and office buildings.
International sites are often located in densely populated urban
areas, and are generally built with a multi-floor layout because
of the scarcity and high cost of real estate and the higher
percentage of dine-in customers.

Franchise Development

Our strategy places a heavy emphasis on growth
through franchising activities. The following discussion
describes the standard arrangements we enter into with our
franchisees.

Domestic Development Agreements.Our domestic franchise development
agreements provide for the development of a specified number of
QSRs within a defined geographic territory. Generally, these
agreements call for the development of the specified number of
sites over a three to five year period with target opening dates
for each unit. Our Popeyes franchisees currently pay a
development fee of $7,500 per unit. Our Churchs
franchisees currently pay a development fee of $10,000 for the
first unit to be developed ($5,000 in the case of a convenience
store unit) and then a reduced fee of $7,500 for each additional
unit to be developed under the same agreement ($3,750 in the
case of convenience store units). Our Cinnabon franchisees
currently pay a development fee of $5,000 per unit. Our
Seattles Best Coffee franchisees currently pay a
development fee of $5,000 per unit. These development fees
typically are paid when the agreement is executed and they are
non-refundable.

International Development Agreements.Our international franchise
development agreements are similar to our domestic franchise
development agreements, though the fee can be as much as $45,000
for

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each unit developed, depending upon the brand.
Our international franchisees are also required to prepay as
much as $15,000 per unit in franchise fees at the time their
franchise development agreement is signed.


Franchise Agreements.Once we execute a development
agreement, approve a site to be developed under that agreement,
and our franchisee secures the property, we enter into a
franchise agreement with our franchisee that conveys the right
to operate the specific unit to be developed at the site. Our
current franchise agreements provide for payment of the
following franchise fees. Popeyes franchisees pay $30,000 per
location. Churchs franchisees pay $15,000 per
location for free-standing units and $10,000 per location for
units opened in convenience stores or travel plazas. Cinnabon
franchisees pay $30,000 for the first unit, $20,000 per location
for any second or third unit and $15,000 per unit for any
additional units developed under a single development agreement.
Our Seattles Best Coffee franchisees pay $20,000 per
location for traditional cafes.

Our Popeyes, Churchs and Cinnabon franchise
agreements generally require franchisees to pay a 5% royalty on
net QSR sales. Our Seattles Best Coffee franchise
agreements generally require franchisees to pay a
4% royalty on net QSR sales. In addition, our franchise
agreements require franchisees to participate in certain
advertising funds. Payments to the advertising funds are 3% of
net QSR sales for Popeyes franchisees; 4% of net QSR sales for
Churchs franchisees (reduced to a maximum of 1% if a local
advertising co-operative is formed); up to 3% of net QSR sales
for Cinnabon franchisees; and 3% of net QSR sales for our
Seattles Best Coffee franchisees. Some of our older
franchise agreements provide for lower royalties and advertising
fund contributions. These older agreements constitute a
decreasing percentage of our total outstanding franchise
agreements.

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

AFC Loan Guarantee Programs.In March 1999, we implemented a
program to assist qualified current and prospective franchisees
in obtaining competitive financing needed to purchase or develop
franchised units. Under the program, we guarantee up to 20% of
the loan amount and we have a maximum aggregate liability for
the entire pool of $1.0 million. As of December 29,
2002, approximately $8.8 million was borrowed by some of
our franchisees under this program, of which we were
contingently liable for $1.0 million.

In November 2002, we implemented a second loan
guarantee program to provide qualified franchisees with
financing to fund new construction, re-imaging and facility
upgrades. The duration of the loans made under this program is
five to seven years. Under its terms, we provide a first loss
guarantee to the lending institution in an aggregate amount not
to exceed 10% of the sum of the original funded principal
balances of all program loans. As of December 29, 2002,
there were no outstanding borrowings under this program.

Suppliers and Purchasing Cooperative

Suppliers.Our 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 have been approved by us.
These suppliers must demonstrate the ability to meet our
standards and specifications and possess adequate quality
controls and capacity to supply our franchisees reliably.

Purchasing Cooperative.Supplies are generally provided to
our franchised and company-operated QSRs, pursuant to supply
agreements negotiated by Supply Management Services, Inc.
(SMS), a not-for-profit purchasing cooperative. We
and our Popeyes, Churchs and Cinnabon franchisees hold
ownership interests in SMS in proportion to the number of QSRs
we each own. As of December 29, 2002, AFC owned
approximately 16% of SMS and held three of its eleven board
seats. For its part, AFC does not guarantee the operations,
indebtedness, or the contracts entered into by SMS.

Our Popeyes and Churchs franchise
agreements require that each franchisee join SMS.

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Generally, SMS does not commit itself, us, or our
franchisees to any purchase volumes for on-going menu items.
Occasionally though, for limited time offer programs, volume
commitments are obtained for each operator, including AFC.

Supply Agreements.The principal raw material for our
Popeyes and Churchs systems is fresh chicken, representing
approximately half of their restaurant food, beverages and
packaging costs. Our company-operated and franchised
restaurants purchase fresh chicken from approximately
13 suppliers who service us from 37 plant locations.
These costs are significantly affected by increases in the cost
of fresh chicken, which can result from a number of factors,
including increases in the cost of grain, disease, declining
market supply of fast-food sized chickens and other factors that
affect availability.

In order to ensure favorable pricing for chicken
purchases and to maintain an adequate supply of fresh chicken
for AFC and its franchisees, SMS has entered into four types of
chicken purchasing contracts with chicken suppliers. The first
is a grain-based cost-plus pricing contract that
utilizes prices based upon the cost of feed grains plus certain
agreed upon non-feed and processing costs. The second is a
market-priced formula that includes a premium for cut
specifications. The market-priced contracts have maximum and
minimum prices that AFC and its franchisees will pay for chicken
during the term of the contract. The third is a modified
fixed-price contract for dark meat, with adjustments that occur
only if market prices move outside of specific ranges, with
provisions for certain annual price adjustments. The fourth has
fixed prices for both eight-piece and dark meat, for periods up
to one year. These contracts have terms ranging from six months
to three years. These contracts establish pricing arrangements,
but do not establish any firm purchase commitments on the part
of AFC or its franchisees.

We have entered into long-term purchase
agreements with our beverage suppliers. These contracts are
customary to the QSR industry. Pursuant to the terms of these
agreements, the range of marketing rebates and the dollar volume
of purchases will vary according to our demand for beverage
syrup and fluctuations in the market rates for beverage syrup.

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

The principal raw material for our Seattle Coffee
brands is green coffee beans. Seattle Coffee 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 five years. As of December 29,
2002, Seattle Coffee had commitments to purchase green coffee
beans at a total cost of approximately $39.5 million
through December 2007. Seattle Coffees green coffee bean
purchase commitments were transferred in connection with the
July 14, 2003 sale of Seattle Coffee.

Marketing and Advertising

We generally market our food and beverage
products to customers using a three-tiered marketing strategy
consisting of (1) television and radio advertising,
(2) print advertisement and signage, and
(3) point-of-purchase materials. Each of our brands
frequently offers new programs that are intended to generate and
maintain consumer interest, address changing consumer
preferences and enhance the position of our brands. New product
introductions and limited time only promotional
items also play a major role in building sales and encouraging
repeat customers.

Sales at restaurants located in markets in which
we utilize television advertising are generally 5% to 10% higher
than the sales generated by restaurants that are located in
other markets. Consequently, we intend to target growth of our
Popeyes and Churchs restaurants primarily in markets where
we have or can achieve sufficient unit concentration to justify
the expense of television advertising.

Together with our franchisees, we contribute to a
national advertising fund to pay for the development of
marketing materials and also contribute to local advertising
funds to support programs in our local markets. In markets where
there is sufficient unit concentration to affect such savings,
our franchisees and

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we have experienced significant savings in our
marketing programs through our advertising cooperatives. In
2002, our franchisees and we contributed approximately
$85.6 million to these advertising funds.


Employees

As of December 29, 2002, we had
8,935 hourly employees working in our company-operated
restaurant, bakery and cafe operations. Additionally, we had
1,157 salaried employees involved in the management of
these same units, and 64 multi-unit managers and field
management employees. We also had 639 employees responsible for
corporate administration, franchise administration and business
development, and 60 employees responsible for coffee
roasting and distribution. None of our employees is covered by a
collective bargaining agreement. We believe that the dedication
of our employees is critical to our success and that our
relationship with our employees is good.

Community Activity

We believe strongly in supporting the communities
we serve. Through the AFC Foundation, Inc., we have sponsored
and helped construct more than 300 homes worldwide in
conjunction with Habitat for Humanity, a non-profit builder of
housing for the poor. In addition, each of our brands is
involved in various community support programs. For example,
Popeyes promotes music education and culinary education.
Churchs sponsors summer camp programs through the Boys and
Girls Clubs. Cinnabon encourages reading awareness through its
Reading Rewards Program. In 2002 and 2001, we contributed
approximately $500,000 to these programs and our franchisees and
employees contributed thousands of volunteer hours. We believe,
through our involvement with these programs, we have established
a meaningful presence in the communities we serve, while
building customer loyalty and positive brand awareness.

New Age of Opportunity®

Through our New Age of Opportunity program, we
make diversity a part of our culture. We believe the New Age of
Opportunity program gives us an important competitive advantage
by focusing on the following four areas:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | expanding franchise ownership opportunities for
    minorities and women;         
|
| |  | cultivating new supplier relationships for
    minorities and women;              
|
| |  | attracting and developing outstanding employees;
    and                          
|
| |  | enhancing the quality of life for people through
    meaningful community service.

Diversity enables us to look at a situation from
all angles and provides us with the capacity to better
understand our communities, our employees, our customers, our
suppliers and our businesses, and provides us with the vision to
meet emerging trends with creative ideas. Women and minorities
constitute approximately 50% of the total number of our
franchisees.

Intellectual Property and Other Proprietary
Rights

We own a number of trademarks and service marks
that have been registered with the U.S. Patent and
Trademark Office, including the marks AFC, AFC
Enterprises, Popeyes, Popeyes
Chicken & Biscuits, Churchs,
Cinnabon, World Famous Cinnamon Roll,
and each of the brand logos for Popeyes, Churchs and
Cinnabon, as well as the trademark Franchisor of
Choice. We also have registered trademarks for a number of
additional marks, including Gotta Love It, Day
of Dreams, Love That Chicken From Popeyes and
New Age of Opportunity. In addition, we have
registered, or made application to register, one or more of
these marks, or their linguistic equivalents, in approximately
150 foreign countries. There is no assurance that we can
obtain the registration for the marks in every country where
registration has been sought. We consider our intellectual
property rights to be important to our business and we actively
defend and enforce them.

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Seattle Coffees intellectual property
rights were transferred to Starbucks in connection with the
July 14, 2003 sale of Seattle Coffee. We retained a license
to the intellectual property necessary for the operation of the
Seattles Best Coffee franchising business in Hawaii, in
certain international markets and on certain U.S. military
bases.

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

King Features Agreements.We have several agreements with
the King Features Syndicate Division (King Features)
of Hearst Holdings, Inc. under which we have the exclusive right
to use the image and likeness of the cartoon character
Popeye, and other companion characters such as
Olive Oyl, in connection with Popeyes international
restaurants. We also have the exclusive right to use the image
and likeness of the Popeye character in connection
with Popeyes domestic restaurants. Under these agreements, as
amended, we are obligated to pay King Features a royalty of
$0.9 million annually, as adjusted for fluctuations in the
Consumer Price Index, plus twenty percent of our gross revenues
from the sale of Popeye products sold through retail
outlets and by way of Internet websites outside of the Popeyes
restaurant system. These agreements extend through June 30,
2010.

International Operations

An important component of our overall business
strategy is to expand our operations internationally through
franchising. As of December 29, 2002, we had franchised
internationally 318 Popeyes QSRs, 262 Churchs
QSRs, 159 Cinnabon QSRs and 84 Seattles Best
Coffee QSRs. In 2002, franchise revenues from these operations
constituted approximately 17% of our total franchise revenues.
For each of 2002, 2001 and 2000, foreign-sourced revenues
(principally royalties from international franchisees and coffee
sales to international customers) represented 4.4%, 4.1% and
3.3% of total revenues, respectively.

Insurance

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

Seasonality

Our Cinnabon bakeries and Seattle Coffee cafes
experience their strongest operating results during the holiday
shopping season between Thanksgiving and New Years.
Seasonality has little effect on the remaining portions of our
business.

Competition

The foodservice industry in general, and
particularly the QSR industry, is intensely competitive with
respect to price, quality, name recognition, service and
location. We compete against other QSRs, including chicken,
hamburger, pizza, Mexican and sandwich restaurants, other
purveyors of carryout food and convenience dining
establishments, including national restaurant chains. Many of
our competitors possess substantially greater financial,
marketing, personnel and other resources than we do. In
particular, KFC, our primary competitor in the chicken segment
of the QSR industry, has far more units, greater brand
recognition and greater financial resources, all of which may
affect our ability to compete.

Our Cinnabon bakeries compete directly with
national chains located in malls and transportation centers such
as Auntie Annes, The Great American Cookie Company and
Mrs. Fields, as well as

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numerous regional and local companies. Our
Cinnabon bakeries also compete indirectly with other QSRs,
traditional bakeries, donut shops, ice cream and frozen yogurt
shops and pretzel and cookie companies.


Following the sale of our Seattle Coffee
subsidiary to Starbucks, we continue to franchise the
Seattles Best Coffee brand in retail locations in Hawaii,
in certain international markets and on certain
U.S. military bases. The Seattles Best Coffee cafes
compete directly with specialty coffees sold at retail through
supermarkets, specialty retailers and a growing number of
specialty coffee cafes and kiosks and all restaurant and
beverage outlets that serve coffee.

Government Regulation

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

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

Many states and the Federal Trade Commission, as
well as certain foreign countries, require franchisors to
transmit specified disclosure statements to potential
franchisees before granting a franchise. Additionally, some
states and certain foreign countries require us to register our
franchise offering documents before we may offer a franchise. We
currently do not have effective domestic uniform franchise
offering circulars due to the delay in releasing our 2002
financial statements and the financial filings due thereafter.
See Risk Factors  The number of new units to be
opened by franchisees has been and may continue to be adversely
affected by our delay in releasing audited financial statements
for 2002 included in Item 7 hereof. We believe that
our international disclosure statements, franchise offering
documents and franchising procedures comply with the laws of the
foreign countries in which we have offered franchises.

Environmental Matters

We are subject to various federal, state and
local laws regulating the discharge of pollutants into the
environment. We believe that we conduct our operations in
substantial compliance with applicable environmental laws and
regulations, as well as other applicable laws and regulations
governing our operations. However, approximately 125 of our
owned and/or leased properties are known or suspected to have
been used by prior owners or operators as retail gas stations,
and a few of these properties may have been used for other
environmentally sensitive purposes. Many of these properties
previously contained underground storage tanks, and some of
these properties may currently contain abandoned underground
storage tanks. It is possible that petroleum products and other
contaminants may have been released at these properties into the
soil or groundwater. Under applicable federal and state
environmental laws, we, as the current owner or operator of
these sites, may be jointly and severally liable for the costs
of remediation of any contamination, as well as any other
environmental conditions at our properties that are unrelated to
underground storage tanks. In 2000, after an analysis of our
property portfolio and an initial assessment of our properties,
including testing of soil and groundwater at a representative
sample of our facilities, we obtained insurance coverage that we
believe is adequate to cover any potential environmental
remediation liabilities. We are currently not subject to any
administrative or court order requiring remediation at any of
our properties.

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Where You Can Find Additional
Information

We file our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports with the SEC.
You may obtain copies of these documents by visiting the
SECs Public Reference Room at 450 Fifth
Street, NW, Washington, DC 20549, by calling the SEC at
1-800-SEC-0330 or by accessing the SECs website at
http://www.sec.gov. In addition, as soon as reasonably
practicable after such materials are filed with, or furnished
to, the SEC, we make copies of these documents (except for
exhibits) available to the public free of charge through our web
site at www.afce.com or by contacting our Secretary at our
principal offices, which are located at Six Concourse Parkway,
Suite 1700, Atlanta, Georgia 30328-5352, telephone number
(770) 391-9500.

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|        |           
|------- | ----------
|Item 2. | PROPERTIES

Facilities

We either own, lease or sublease the land and
buildings for our company-operated QSRs. In addition, we own,
lease or sublease land and buildings, which we lease or sublease
to our franchisees and third parties. While we expect to
continue to lease many of our sites in the future, we also may
purchase the land or buildings for QSRs to the extent acceptable
terms are available.

The following table sets forth the locations by
state of our domestic company-operated restaurants, bakeries and
cafes as of December 29, 2002:

|                     |       |                |    |                 |  |       |    |     |  |  |     |     | 
|-------------------- | ----- | -------------- | -- | --------------- |  | ----- | -- | --- |  |  | --- | --- | 
|                     |       | Land and       |    | Land and/or     |  |      
|                     |       | Building Owned |    | Building Leased |  | Total
|                     |       |                |    |                 |  |      
|Texas                |       |                | 82 |                 |  |       | 77 |     |  |  | 159 |    
|Georgia              |       |                | 36 |                 |  |       | 49 |     |  |  | 85  |    
|Louisiana            |       |                | 3  |                 |  |       | 40 |     |  |  | 43  |    
|California           |       |                | 28 |                 |  |       | 12 |     |  |  | 40  |    
|Washington           |       |                |   |                 |  |       | 28 |     |  |  | 28  |    
|Arizona              |       |                | 19 |                 |  |       | 6  |     |  |  | 25  |    
|Alabama              |       |                | 24 |                 |  |       |   |     |  |  | 24  |    
|Tennessee            |       |                | 11 |                 |  |       | 3  |     |  |  | 14  |    
|Illinois             |       |                | 2  |                 |  |       | 9  |     |  |  | 11  |    
|Mississippi          |       |                | 10 |                 |  |       | 1  |     |  |  | 11  |    
|North Carolina       |       |                |   |                 |  |       | 10 |     |  |  | 10  |    
|Pennsylvania         |       |                | 9  |                 |  |       |   |     |  |  | 9   |    
|Colorado             |       |                | 7  |                 |  |       | 1  |     |  |  | 8   |    
|Massachusetts        |       |                | 4  |                 |  |       | 4  |     |  |  | 8   |    
|New Mexico           |       |                | 5  |                 |  |       | 2  |     |  |  | 7   |    
|Oregon               |       |                |   |                 |  |       | 7  |     |  |  | 7   |    
|Arkansas             |       |                | 5  |                 |  |       | 1  |     |  |  | 6   |    
|Maryland             |       |                | 4  |                 |  |       | 2  |     |  |  | 6   |    
|Missouri             |       |                | 6  |                 |  |       |   |     |  |  | 6   |    
|Florida              |       |                | 4  |                 |  |       |   |     |  |  | 4   |    
|New Jersey           |       |                | 4  |                 |  |       |   |     |  |  | 4   |    
|Kansas               |       |                | 3  |                 |  |       |   |     |  |  | 3   |    
|South Carolina       |       |                |   |                 |  |       | 3  |     |  |  | 3   |    
|Virginia             |       |                | 2  |                 |  |       | 1  |     |  |  | 3   |    
|Delaware             |       |                | 2  |                 |  |       |   |     |  |  | 2   |    
|District of Columbia |       |                | 2  |                 |  |       |   |     |  |  | 2   |    
|New Hampshire        |       |                | 2  |                 |  |       |   |     |  |  | 2   |    
|Indiana              |       |                |   |                 |  |       | 1  |     |  |  | 1   |    
|Iowa                 |       |                | 1  |                 |  |       |   |     |  |  | 1   |    
|Maine                |       |                | 1  |                 |  |       |   |     |  |  | 1   |    
|Nevada               |       |                | 1  |                 |  |       |   |     |  |  | 1   |    
|New York             |       |                | 1  |                 |  |       |   |     |  |  | 1   |    
|Ohio                 |       |                | 1  |                 |  |       |   |     |  |  | 1   |    
|                     |       |                |    |                 |  |       |    |     |  |  |     |    
|                     | Total |                |    | 279             |  |       |    | 257 |  |  |     | 536 | 
|                     |       |                |    |                 |  |       |    |     |  |  |     |    

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We typically lease our restaurants under
triple net leases that require us to pay minimum
rent, real estate taxes, maintenance costs and insurance
premiums and, in some cases, percentage rent based on sales in
excess of specified amounts. Bakeries and cafes are typically
leased under standard retail lease terms for malls, community
shopping centers and office buildings. Generally, our leases
have initial terms ranging from five to 20 years, with
options to renew for one or more additional periods, although
the terms of our leases vary depending on the facility.

Our typical leases or subleases to Popeyes or
Churchs franchisees are triple net to the franchisee,
provide for minimum rent, based upon prevailing market rental
rates, as well as percentage rent based on sales in excess of
specified amounts, and have a term that usually coincides with
the term of the underlying base lease for the location. These
leases are typically cross-defaulted with the corresponding
franchise agreement for that site.

Our corporate headquarters is located in
approximately 75,000 square feet of leased office space in
Atlanta, Georgia. This lease is subject to extensions through
2018. We lease approximately 30,000 square feet in another
facility located in Atlanta, Georgia that is the headquarters
for our Popeyes brand. This lease is subject to extensions
through 2015. We also lease approximately 25,000 square feet of
office space in a third facility located in Atlanta, Georgia
that is the headquarters for our Churchs brand. This lease
is subject to extensions through 2016. Cinnabon is currently
located in our Atlanta corporate headquarters location.

Seattle Coffee leases approximately 27,000 square
feet of office space in Seattle, Washington that is subject to
extension through 2014 and has three distribution facilities
that service its wholesale coffee operations. One distribution
center is located in the Seattle, Washington area and the other
two facilities are located in Chicago, Illinois and Portland,
Oregon. Seattle Coffee leases approximately 30,000 square feet
for its roasting facility on Vashon Island, near Seattle,
Washington. This lease is subject to extensions through 2018.
The lease for Seattle Coffees prior headquarters, 19,000
square feet of office space in Seattle, Washington, was
terminated in the second quarter of 2003. In the July 14,
2003 sale of Seattle Coffee to Starbucks, Seattle Coffee (as a
unit of Starbucks) remained the tenant under all of its active
leases.

Our accounting and computer facilities are
located in San Antonio, Texas and are housed in three buildings
that are located on approximately 16 acres of land that we own.
We currently lease our accounting facilities to
Deloitte & Touche, LLP, our accounting service
outsource provider. We believe that our existing headquarters
and other leased and owned facilities provide sufficient space
to support our corporate and operational needs.

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Item 3.     LEGAL
PROCEEDINGS

Matters Relating to the Restatement

We are involved in several matters relating to
our announcement on March 24, 2003 indicating we would
restate our financial statements for fiscal year 2001 and the
first three quarters of 2002 and our announcement on
April 22, 2003 indicating that we would also restate our
financial statements for fiscal year 2000. See Notes 23 and 25
to the Consolidated Financial Statements for more information
concerning the restatement of our financial statements.

On March 25, 2003, plaintiffs filed the
first of eight securities class action lawsuits in the United
States District Court for the Northern District of Georgia
against AFC and several of our present and former officers.
These actions all purport to be brought on behalf of a class of
purchasers of our common stock during the period from
March 2, 2001 through and including March 24, 2003
(the Class Period). The complaints all allege
claims under the federal securities laws, specifically
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. The complaints
generally allege that the defendants knowingly or recklessly
made false or misleading statements during the Class Period
concerning our financial condition and that our financial
statements did not present our true financial condition and were
not presented in accordance with generally accepted accounting
principles. The complaints seek certification as a class action,
unspecified compensatory damages, attorneys fees and
costs, and other relief.

By order dated May 21, 2003, the district
court consolidated the eight lawsuits into one consolidated
action. We expect that the plaintiffs will file a consolidated
amended complaint in early 2004, to which we will respond in
lieu of responding to the individual complaints.

On June 5, 2003, a shareholder claiming to
be acting on behalf of AFC filed a shareholder derivative suit
in the United States District Court for the Northern District of
Georgia against certain current and former members of our board
of directors and our largest shareholder. On July 24, 2003,
a different shareholder filed a substantially identical lawsuit
in the same court against the same defendants. By order dated
September 23, 2003, the District Court consolidated the two
lawsuits into one consolidated action. On November 24,
2003, the plaintiffs filed a consolidated amended complaint that
added as defendants three additional current or former officers
of AFC and two other large shareholders of AFC. The consolidated
complaint alleges, among other things, that the director
defendants breached their fiduciary duties by permitting AFC to
issue financial statements that were materially in error. The
lawsuit seeks, on behalf of AFC, unspecified compensatory
damages, disgorgement or forfeiture of certain bonuses and
options earned by certain defendants, disgorgement of profits
earned through alleged insider selling by certain defendants,
recovery of attorneys fees and costs, and other relief.

On August 7, 2003, a shareholder claiming to
be acting on behalf of AFC filed a shareholder derivative suit
in Gwinnett County Superior Court, State of Georgia, against
certain current and former members of our board of directors.
The complaint alleges that the defendants breached their
fiduciary duties by permitting AFC to issue financial statements
that were materially in error and by failing to maintain
adequate internal accounting controls. The lawsuit seeks, on
behalf of AFC, unspecified compensatory damages, attorneys
fees, and other relief.

On May 15, 2003, a plaintiff filed a
securities class action lawsuit in Fulton County Superior Court,
State of Georgia, against AFC and certain current and former
members of our board of directors on behalf of a class of
purchasers of our common stock in or traceable to
AFCs December 2001 $161 million public offering of
common stock. The lawsuit asserts claims under Sections 11
and 15 of the Securities Act of 1933 (1933 Act). The
complaint alleges that the registration statement filed in
connection with the offering was false or misleading because it
included financial statements issued by the Company that were
materially in error. The complaint seeks certification as a
class action, compensatory damages, attorneys fees and
costs, and other relief. The plaintiff claims that as a result
of AFCs announcement that we are restating our financial
statements for fiscal year 2001 (and at the time of the
complaint, were examining restating our financial statements for
fiscal year 2000), AFC will be absolutely liable under the

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1933 Act for all recoverable damages sustained by
the putative class. On July 20, 2003, the defendants
removed the action to the United States District Court for the
Northern District of Georgia. The plaintiff filed a motion to
remand the case to state court. The defendants opposed the
motion to remand. On November 25, 2003, the federal
district court entered an order granting the motion to remand,
certifying the order for appellate review and staying the remand
pending the completion of appellate proceedings. On
December 10, 2003, the defendants filed a petition in the
United States Court of Appeals for the Eleventh Circuit for
permission to appeal from the district courts order. The
parties have agreed that the defendants will not be required to
respond to the complaint until after the issue of remand is
decided.


On April 30, 2003, we received an informal,
nonpublic inquiry from the SEC requesting voluntary production
of documents and other information. The requests for documents
and information relate primarily to our announcement on
March 24, 2003 indicating we would restate our financial
statements for fiscal year 2001 and the first three quarters of
2002. The SEC is also investigating whether the disclosure of
certain financial information in November 2002 was in compliance
with SEC Regulation FD. We intend to cooperate with the SEC
in these inquiries.

AFC has purchased directors and officers
liability (D&O) insurance that may provide
coverage for some or all of these matters. We have given notice
to our D&O insurers of the claims described above, and the
insurers have responded by requesting additional information and
by reserving their rights under the policies, including the
rights to deny coverage under various policy exclusions or to
rescind the policies in question as a result of our announced
restatement of our financial statements. There is risk that the
D&O insurers will rescind the policies; that some or all of
the claims will not be covered by such policies; or that, even
if covered, AFCs ultimate liability will exceed the
available insurance.

The lawsuits against AFC described above present
material and significant risk to us. Although we believe that we
have meritorious defenses to the claims of liability or for
damages in these actions, we are unable at this time to predict
the outcome of these actions or reasonably estimate a range of
damages. The amount of a settlement of, or judgment on, one or
more of these claims or other potential claims relating to the
same events could substantially exceed the limits of our D&O
insurance. The ultimate resolution of these matters could have a
material adverse impact on our financial results, financial
condition and liquidity.

Other Matters

We are a defendant in various legal proceedings
arising in the ordinary course of our business, including claims
resulting from slip and fall accidents,
employment-related claims and claims from guests or employees
alleging illness, injury or other food quality, health or
operational concerns. We have established reserves in our
Consolidated Financial Statements to provide for the defense and
settlement of such matters and we believe their ultimate
resolution will not have a material adverse effect on our
financial condition or our results of operations.




Item 4.     SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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PART II.




Item 5.     MARKET
FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Our common stock currently trades on the National
Quotation Service Bureau (commonly known as the Pink
Sheets) under the symbol AFCE. From
March 2, 2001 (the date of our initial public offering) to
August 18, 2003, our common stock traded on the Nasdaq
National Market. Prior to March 2, 2001, there was no
public market for our common stock. The following table sets
forth, for the periods indicated, the high and low sales prices
per share of our common stock as reported on the Nasdaq National
Market.

|               |  |      |       |      |  |      |       |     |  |   |       |  |  |   |       | 
|-------------- |  | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|               |  |      |       |     
|               |  | 2002 |       | 2001
|               |  |      |       |     
|               |  | High |       | Low  |  | High |       | Low
|               |  |      |       |      |  |      |       |    
|First Quarter  |  | $    | 34.55 |      |  | $    | 26.00 |     |  | $ | 23.50 |  |  | $ | 16.12 | 
|Second Quarter |  | $    | 34.81 |      |  | $    | 26.04 |     |  | $ | 25.00 |  |  | $ | 18.90 | 
|Third Quarter  |  | $    | 27.16 |      |  | $    | 18.27 |     |  | $ | 23.75 |  |  | $ | 18.93 | 
|Fourth Quarter |  | $    | 22.23 |      |  | $    | 16.42 |     |  | $ | 29.42 |  |  | $ | 22.00 | 

On April 16, 2003, the Nasdaq National
Market notified us by letter that we had failed to file our 2002
Form 10-K, which was required to be filed pursuant to
Nasdaq Marketplace Rule 4310(c)(14). In connection with
this notification, a fifth character, the letter E, was
temporarily added to our stock symbol. On May 29, 2003, the
Nasdaq National Market notified us that we had failed to file
our Form 10-Q for the quarterly period ended April 20,
2003, also required by Rule 4310(c)(14). We were unable to
make these filings on a timely basis due to the extended time
needed to complete the audit work on our 2002, 2001 and 2000
financial statements and the associated restatement described in
Notes 23 and 25 to the Consolidated Financial Statements.

On June 19, 2003, we announced that the
Nasdaq Listing Qualifications Panel had determined that they
would continue listing our common stock on the Nasdaq National
Market, subject to certain specified conditions, including the
filing of this Annual Report on Form 10-K by July 16,
2003 and the filing of our 2003 quarterly reports on
Form 10-Q by certain specified dates. On July 15,
2003, we informed the Panel that we would not be able to meet
the conditions, and we requested that the Panel provide us an
additional extension. On August 14, 2003, we announced that
the Nasdaq Listing Qualifications Panel had notified us that our
common stock would be delisted from the Nasdaq National Market
as of the opening of business on Monday, August 18, 2003,
because we had not yet made the required SEC filings. On that
date our common stock began trading on the Pink Sheets. Because
we are not current in our periodic SEC reporting requirements,
we are presently ineligible to trade on the OTC Bulletin
Board. Securities that trade on the Pink Sheets, including our
common stock, may be subject to higher transaction costs for
trades and have reduced liquidity compared to securities that
trade on the Nasdaq National Market and other organized markets
and exchanges.

Shareholders of Record

As of November 30, 2003, we had
71 shareholders of record of our common stock.

Dividend Policy

We have never declared or paid cash dividends on
our common stock and, in the foreseeable future, we do not
anticipate paying dividends on our common stock. Declaration of
dividends on our common stock will depend upon, among other
things, levels of indebtedness, future earnings, our operating
and financial condition, our capital requirements and general
business conditions. Our 2002 Credit Facility, as amended,
restricts the extent to which we, or any of our subsidiaries,
may declare or pay a cash dividend.

16



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##### Table of Contents






Item 6.     SELECTED
FINANCIAL DATA

The data in the following table was derived from
our Consolidated Financial Statements for 2002, 2001 and 2000
and from unaudited consolidated financial information for 1999
and 1998. You should read such data in conjunction with our
Consolidated Financial Statements for 2002, 2001 and 2000 and
the notes thereto and Managements Discussion and Analysis
of Financial Condition and Results of Operations. The data for
2001, 2000, 1999 and 1998 has been restated from amounts
previously reported. A discussion of the restatement in relation
to 2001 and 2000 is provided in Note 23 to the Consolidated
Financial Statements. A discussion of the restatement in
relation to 1999 and 1998 is provided in Note 1 to this
table. For periods prior to 2002, certain items in the financial
statements have been reclassified to conform to the current
presentation. These reclassifications had no effect on our
reported results of operations.

|                                                                      |                                       |                                              |       |             |       |             |       |             |       |             |       |       |       |   |       |       |       |   |       |       |       | 
|--------------------------------------------------------------------- | ------------------------------------- | -------------------------------------------- | ----- | ----------- | ----- | ----------- | ----- | ----------- | ----- | ----------- | ----- | ----- | ----- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                                                                      |                                       |                                              |       | 2001        |       | 2000        |       | 1999(1)     |       | 1998(1)    
|                                                                      |                                       | 2002                                         |       | As Restated |       | As Restated |       | As Restated |       | As Restated
|                                                                      |                                       |                                              |       |             |       |             |       |             |       |            
|                                                                      |                                       |                                             
|                                                                      |                                       | (Dollars in millions, except per share data)
|Summary of operations:(2)                                             |                                       |                                              |       |             |       |             |       |             |       |             |       |       |       |   |       |       |       |   |       |      
|Revenues(3)                                                           |                                       |                                              |       |             |       |             |       |             |       |             |       |       |       |   |       |       |       |   |       |      
|                                                                      | Sales by company-operated restaurants |                                              | $     | 413.3       |       |             | $     | 507.0       |       |             | $     | 567.4 |       |   | $     | 560.4 |       |   | $     | 487.4 |      
|                                                                      | Franchise revenues                    |                                              |       | 111.3       |       |             |       | 101.1       |       |             |       | 88.7  |       |   |       | 77.5  |       |   |       | 64.2  |      
|                                                                      | Wholesale revenues                    |                                              |       | 69.5        |       |             |       | 61.1        |       |             |       | 55.9  |       |   |       | 50.7  |       |   |       | 36.4  |      
|                                                                      | Other revenues                        |                                              |       | 25.5        |       |             |       | 18.0        |       |             |       | 11.2  |       |   |       | 8.6   |       |   |       | 9.2   |      
|                                                                      |                                       |                                              |       |             |       |             |       |             |       |             |       |       |       |   |       |       |       |   |       |      
|                                                                      |                                       | Total revenues                               |       | $           | 619.6 |             |       | $           | 687.2 |             |       | $     | 723.2 |   |       | $     | 697.2 |   |       | $     | 597.2 | 
|                                                                     
|Operating profit(4)                                                   |                                       | $                                            | 38.7  |             |       | $           | 53.9  |             |       | $           | 67.3  |       |       | $ | 54.4  |       |       | $ | 22.2  |      
|Income (loss) from continuing operations before
    accounting change |                                       |                                              | 0.1   |             |       |             | 15.6  |             |       |             | 18.3  |       |       |   | 12.0  |       |       |   | (5.1  | )    
|Net (loss) income(5)                                                  |                                       |                                              | (11.7 | )           |       |             | 15.6  |             |       |             | 18.3  |       |       |   | 9.8   |       |       |   | (10.4 | )    
|                                                                     
|Basic earnings per common
    share:(6)                               |                                       |                                              |       |             |       |             |       |             |       |             |       |       |       |   |       |       |       |   |       |      
|Income (loss) from continuing operations before
    accounting change |                                       | $                                            |      |             |       | $           | 0.53  |             |       | $           | 0.70  |       |       | $ | 0.46  |       |       | $ | (0.21 | )    
|Net (loss) income                                                     |                                       |                                              | (0.39 | )           |       |             | 0.53  |             |       |             | 0.70  |       |       |   | 0.37  |       |       |   | (0.43 | )    
|                                                                     
|Diluted earnings per common
    share:(6)                             |                                       |                                              |       |             |       |             |       |             |       |             |       |       |       |   |       |       |       |   |       |      
|Income (loss) from continuing operations before
    accounting change |                                       | $                                            |      |             |       | $           | 0.50  |             |       | $           | 0.64  |       |       | $ | 0.42  |       |       | $ | (0.21 | )    
|Net (loss) income                                                     |                                       |                                              | (0.37 | )           |       |             | 0.50  |             |       |             | 0.64  |       |       |   | 0.34  |       |       |   | (0.42 | )    
|                                                                     
|Year-end balance sheet data:                                          |                                       |                                              |       |             |       |             |       |             |       |             |       |       |       |   |       |       |       |   |       |      
|Total assets                                                          |                                       | $                                            | 487.3 |             |       | $           | 525.3 |             |       | $           | 547.8 |       |       | $ | 587.4 |       |       | $ | 538.7 |      
|Total debt(7)                                                         |                                       |                                              | 226.6 |             |       |             | 209.5 |             |       |             | 313.1 |       |       |   | 348.1 |       |       |   | 360.7 |      
|Total shareholders equity(8)                                         |                                       |                                              | 109.8 |             |       |             | 187.3 |             |       |             | 115.1 |       |       |   | 95.4  |       |       |   | 84.9  |      
|                                                                     
|Cash flow data:                                                       |                                       |                                              |       |             |       |             |       |             |       |             |       |       |       |   |       |       |       |   |       |      
|Cash flows provided by operating activities                           |                                       | $                                            | 93.8  |             |       | $           | 57.4  |             |       | $           | 59.9  |       |       | $ | 51.7  |       |       | $ | 44.9  |      
|Proceeds from dispositions of property and
    equipment              |                                       |                                              | 35.4  |             |       |             | 39.9  |             |       |             | 28.9  |       |       |   | 6.3   |       |       |   | 1.3   |      
|Capital expenditures                                                  |                                       |                                              | (49.7 | )           |       |             | (58.0 | )           |       |             | (50.0 | )     |       |   | (53.3 | )     |       |   | (38.9 | )    

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The effect of the restatement on 1999 was to
    decrease net income from amounts previously reported by
    $2.3 million and to decrease basic and diluted earnings per
    common share by $0.09 and $0.08, respectively. The effect of the
    restatement on 1998 was to decrease net income from amounts
    previously reported by $1.7 million and to decrease both
    basic and diluted earnings per common share by $0.08. The
    principal corrections concerned the accounting for escalating
    rents, provisions for the allowance for doubtful accounts and
    the adjustment of various accruals.



| |                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The effect of the restatement increased the
    accumulated net losses at the beginning of 1998 by
    $1.4 million. The only issue impacting that balance was an
    adjustment, net of income taxes, to properly account for
    escalating rents.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | On July 14, 2003, we sold our Seattle Coffee
    subsidiary to Starbucks for $72.0 million. Net proceeds of
    the sale, after transaction costs and other adjustments, are
    expected to be approximately $63.0 million, which is
    subject to adjustment based upon the determination of certain
    financial results of Seattle Coffee for pre-closing periods of
    operations. In the transaction, we sold substantially all of the
    continental U.S. and Canadian operations of Seattle Coffee and
    its wholesale coffee business. Following the transaction, we
    continue to franchise the Seattles Best Coffee brand in
    retail locations in Hawaii, in certain international markets
    outside North America and on certain U.S. military bases.
|   
|(3) | Factors that impact the comparability of revenues
    for the years presented include:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Our fiscal year ends on the last Sunday in
    December. Fiscal year 2000 included 53 weeks. All other
    years shown included 52 weeks.                                                                                                                                                                                                                                                                                                                         
|
| | (b) | In 2000, we began a program to strategically sell
    company-operated QSRs to franchisees which reduce sales from
    company-operated restaurants as well as related restaurant
    costs. These transactions also result in increased franchise
    revenues. By brand, the number of unit conversions
    and the associated gains and losses on such sales in our
    consolidated financial statements for the fiscal years presented
    were as follows.

|                               |                        |                       |      |      |  |      |      |     |  |   |     |    | 
|------------------------------ | ---------------------- | --------------------- | ---- | ---- |  | ---- | ---- | --- |  | - | --- | -- | 
|                               |                        | 2002                  |      | 2001 |  | 2000
|                               |                        |                       |      |      |  |     
|                               |                        |                      
|                               |                        | (Dollars in millions)
|Popeyes                        |                        |                       |     |      |  |      | 27   |     |  |   | 36  |   
|Churchs                       |                        |                       | 111  |      |  |      | 70   |     |  |   | 25  |   
|Cinnabon                       |                        |                       | 63   |      |  |      | 36   |     |  |   | 10  |   
|Seattle Coffee brands          |                        |                       | 1    |      |  |      |     |     |  |   |    |   
|                               |                        |                       |      |      |  |      |      |     |  |   |     |   
|                               | Total unit conversions |                       |      | 175  |  |      |      | 133 |  |   |     | 71 | 
|                               |                        |                       |      |      |  |      |      |     |  |   |     |   
|                              
|(Losses) gains recognized, net |                        | $                     | (4.0 | )    |  | $    | (1.3 | )   |  | $ | 6.4 |   
|Gains deferred                 |                        |                       | 10.3 |      |  |      | 6.4  |     |  |   | 2.9 |   



| |                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, during 2002, 2001 and 2000, we
    recognized approximately $8.0 million, $4.9 million
    and $1.8 million, respectively, in fees associated with
    these unit conversions. These fees are a component of
    other revenues in our Consolidated Financial
    Statements.



| |     |                                                                                                                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------
| | (c) | Increases in the number of franchised units as
    detailed in the Summary of System-Wide Data included in this
    Item 6.



|    |                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | In addition to the matters discussed in
    Note 2, factors that impact the comparability of operating
    profit for the years presented include:



| |     |                                                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | During 2002, we recorded charges for impairment
    and other write-downs of non-current assets of
    $44.6 million, versus $13.5 million in 2001,
    $7.5 million in 2000, $9.4 million in 1999, and
    $14.8 million in 1998.
|
| | (b) | During the first quarter of 2002, we adopted SFAS
    No. 142, Goodwill and Other Intangible Assets, and,
    at that time, discontinued our prior practice of amortizing
    goodwill and other                                  

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##### Table of Contents



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | indefinite-lived intangible assets. These assets
    are now being accounted for by the impairment-only approach.
    This change reduced amortization expense for 2002 by
    approximately $5.4 million.                                                                                                                                                                                                                                              
|
| | (c) | During 2001 and 2000, we recorded charges to
    write-down inventory balances in our coffee segment of
    $1.8 million and $0.7 million, respectively.                                                                                                                                                                                                                                                                                                
|
| | (d) | During 2001, general and administrative expenses
    include $2.9 million relating to the retirement of a former
    officer. During 2000, general and administrative expenses were
    reduced by the reversal of a $6.0 million environmental
    reserve. In 2000, the reversal of the environmental reserve was
    partially offset by $2.8 million of costs at Seattle Coffee
    related to personnel reductions and concept development efforts.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Net income includes the cumulative effect of
    adopting new accounting standards and the effect of discontinued
    operations. In 2002, in connection with our adoption of SFAS
    No. 142, Goodwill and Other Intangible Assets, we
    recorded a transitional goodwill impairment charge. The
    cumulative effect from this change in accounting principle
    reduced net income in 2002 by $11.8 million. In 1999 and
    1998, we had net losses associated with discontinued operations
    of $1.9 million and $5.3 million, respectively.
|   
|(6) | Weighted average common shares for the
    computation of basic earnings per common share were
    30.0 million, 29.5 million, 26.3 million,
    26.2 million and 24.4 million for 2002, 2001, 2000,
    1999 and 1998, respectively. Weighted average common shares for
    the computation of diluted earnings per common share were
    31.5 million, 31.3 million, 28.7 million,
    28.4 million and 24.4 million for 2002, 2001, 2000,
    1999 and 1998, respectively.                                                                           
|   
|(7) | Total debt includes the long-term and the current
    portions of debt facilities, capital lease obligations, lines of
    credits and other borrowings. See Note 10 to the Consolidated
    Financial Statements as it concerns 2002 and 2001 year-end
    amounts.                                                                                                                                                                                                                                                                                    
|   
|(8) | During 2001, we completed an initial public
    offering of 3.1 million shares of our common stock and
    received approximately $46.0 million of proceeds. During
    2002, we repurchased 3.7 million shares of our common stock
    for $77.9 million.                                                                                                                                                                                                                                                                                              

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##### Table of Contents



Summary of System-Wide Data

The following table presents combined financial
and operating data for the QSRs we operate or franchise. The
data presented is unaudited. Information for franchised units is
reported to us by our franchisees. We present this data because
it includes important operational metrics relevant to the QSR
industry. This data can assist readers in their interpretation
of operational trends.

|                                                      |                        |       |       |         |     |         |       |         |     |      |       |        |     |  |       |        |     |  |       |         |     | 
|----------------------------------------------------- | ---------------------- | ----- | ----- | ------- | --- | ------- | ----- | ------- | --- | ---- | ----- | ------ | --- |  | ----- | ------ | --- |  | ----- | ------- | --- | 
|                                                      |                        | 2002  |       | 2001    |     | 2000(1) |       | 1999    |     | 1998
|                                                      |                        |       |       |         |     |         |       |         |     |     
|System-wide same-store sales growth
    (decline)(2): |                        |       |       |         |     |         |       |         |     |      |       |        |     |  |       |       
|Domestic:                                             |                        |       |       |         |     |         |       |         |     |      |       |        |     |  |       |        |     |  |       |        
|                                                      | Popeyes                |       |       | 0.7 %   |     |         |       | 4.2 %   |     |      |       | 3.4 %  |     |  |       | 4.4 %  |     |  |       | 5.2 %   |    
|                                                      | Churchs               |       |       | (1.6)%  |     |         |       | 2.3 %   |     |      |       | 0.8 %  |     |  |       | 1.1 %  |     |  |       | 4.6 %   |    
|                                                      | Cinnabon retail        |       |       | (5.7)%  |     |         |       | (0.7)%  |     |      |       | 4.7 %  |     |  |       | 2.4 %  |     |  |       |        |    
|                                                      | Seattle Coffee retail  |       |       | (1.8)%  |     |         |       | (2.0)%  |     |      |       | 0.9 %  |     |  |       | 3.3 %  |     |  |       |        |    
|International:                                        |                        |       |       |         |     |         |       |         |     |      |       |        |     |  |       |        |     |  |       |        
|                                                      | Popeyes                |       |       | (5.4)%  |     |         |       | (6.9)%  |     |      |       | (0.1)% |     |  |       | (4.8)% |     |  |       | (13.3)% |    
|                                                      | Churchs               |       |       | (1.4)%  |     |         |       | 0.0 %   |     |      |       | (1.5)% |     |  |       | (2.7)% |     |  |       | (1.5)%  |    
|                                                      | Cinnabon retail        |       |       | (23.3)% |     |         |       | (21.6)% |     |      |       | 6.3 %  |     |  |       | 11.5 % |     |  |       |        |    
|                                                      | Seattle Coffee retail  |       |       | (7.9)%  |     |         |       | 3.1 %   |     |      |       |       |     |  |       |       |     |  |       |        |    
|System-wide unit
    openings(3):                     |                        |       |       |         |     |         |       |         |     |      |       |        |     |  |       |        |     |  |       |        
|                                                      | Popeyes                |       |       | 169     |     |         |       | 177     |     |      |       | 143    |     |  |       | 151    |     |  |       | 198     |    
|                                                      | Churchs               |       |       | 110     |     |         |       | 79      |     |      |       | 98     |     |  |       | 133    |     |  |       | 87      |    
|                                                      | Cinnabon retail        |       |       | 102     |     |         |       | 121     |     |      |       | 81     |     |  |       | 46     |     |  |       | 6       |    
|                                                      | Seattle Coffee retail  |       |       | 70      |     |         |       | 52      |     |      |       | 39     |     |  |       | 27     |     |  |       | 18      |    
|                                                      |                        |       |       |         |     |         |       |         |     |      |       |        |     |  |       |        |     |  |       |        
|                                                      |                        | Total |       |         | 451 |         |       |         | 429 |      |       |        | 361 |  |       |        | 357 |  |       |         | 309 | 
|                                                      |                        |       |       |         |     |         |       |         |     |      |       |        |     |  |       |        |     |  |       |        
|System-wide units(end of period):                     |                        |       |       |         |     |         |       |         |     |      |       |        |     |  |       |        |     |  |       |        
|Total system-wide                                     |                        |       | 4,071 |         |     |         | 3,857 |         |     |      | 3,618 |        |     |  | 3,374 |        |     |  | 3,131 |        
|                                                      | Total company-operated |       |       | 539     |     |         |       | 722     |     |      |       | 856    |     |  |       | 940    |     |  |       | 933     |    
|                                                      | Total franchised       |       |       | 3,532   |     |         |       | 3,135   |     |      |       | 2,762  |     |  |       | 2,434  |     |  |       | 2,198   |    
|Popeyes                                               |                        |       | 1,712 |         |     |         | 1,620 |         |     |      | 1,501 |        |     |  | 1,396 |        |     |  | 1,292 |        
|                                                      | Company-operated       |       |       | 96      |     |         |       | 96      |     |      |       | 130    |     |  |       | 175    |     |  |       | 171     |    
|                                                      | Franchised             |       |       | 1,616   |     |         |       | 1,524   |     |      |       | 1,371  |     |  |       | 1,221  |     |  |       | 1,121   |    
|Churchs                                              |                        |       | 1,509 |         |     |         | 1,517 |         |     |      | 1,534 |        |     |  | 1,492 |        |     |  | 1,399 |        
|                                                      | Company-operated       |       |       | 284     |     |         |       | 397     |     |      |       | 468    |     |  |       | 494    |     |  |       | 491     |    
|                                                      | Franchised             |       |       | 1,225   |     |         |       | 1,120   |     |      |       | 1,066  |     |  |       | 998    |     |  |       | 908     |    
|Cinnabon retail                                       |                        |       | 612   |         |     |         | 544   |         |     |      | 451   |        |     |  | 388   |        |     |  | 369   |        
|                                                      | Company-operated       |       |       | 84      |     |         |       | 152     |     |      |       | 187    |     |  |       | 195    |     |  |       | 212     |    
|                                                      | Franchised             |       |       | 528     |     |         |       | 392     |     |      |       | 264    |     |  |       | 193    |     |  |       | 157     |    
|Seattle Coffee retail                                 |                        |       | 238   |         |     |         | 176   |         |     |      | 132   |        |     |  | 98    |        |     |  | 71    |        
|                                                      | Company-operated       |       |       | 75      |     |         |       | 77      |     |      |       | 71     |     |  |       | 76     |     |  |       | 59      |    
|                                                      | Franchised             |       |       | 163     |     |         |       | 99      |     |      |       | 61     |     |  |       | 22     |     |  |       | 12      |    
|Total commitments outstanding(end of year)(4)         |                        |       | 2,622 |         |     |         | 2,390 |         |     |      | 2,289 |        |     |  | 1,933 |        |     |  | 1,608 |        

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---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our fiscal year ends on the last Sunday in
    December. Fiscal year 2000 included 53 weeks. All other
    years shown included 52 weeks.                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(2) | QSRs are included in the computation of
    same-store sales after they have been open 15 months for
    2002, 2001 and 2000 and 12 months for 1999 and 1998.
    Prior-year sales figures used to calculate same-store sales
    include sales from our Cinnabon and Seattle Coffee brands prior
    to our acquisition of these two businesses in 1998. Same-store
    sales for 2000 is calculated by comparing the 53 weeks of
    sales for 2000 to the prior 53 weeks, which includes the
    52 weeks from 1999 plus the first week of 2000.
|   
|(3) | System-wide unit openings include the openings of
    both company-operated QSRs and franchised QSRs, which were as
    follows:                                                                                                                                                                                                                                                                                                                                                                                                                   

|                      |  |      |     |      |  |      |     |      |  |      |     |  |  |  |     |  |  |  |     | 
|--------------------- |  | ---- | --- | ---- |  | ---- | --- | ---- |  | ---- | --- |  |  |  | --- |  |  |  | --- | 
|Unit Openings         |  | 2002 |     | 2001 |  | 2000 |     | 1999 |  | 1998
|                      |  |      |     |      |  |      |     |      |  |     
|Company-operated QSRs |  |      | 8   |      |  |      | 26  |      |  |      | 11  |  |  |  | 54  |  |  |  | 96  | 
|Franchised QSRs       |  |      | 443 |      |  |      | 403 |      |  |      | 350 |  |  |  | 303 |  |  |  | 213 | 
|                      |  |      |     |      |  |      |     |      |  |      |     |  |  |  |     |  |  |  |     | 
|Total                 |  |      | 451 |      |  |      | 429 |      |  |      | 361 |  |  |  | 357 |  |  |  | 309 | 
|                      |  |      |     |      |  |      |     |      |  |      |     |  |  |  |     |  |  |  |     | 



|    |                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Commitments outstanding at the end of each year
    represent obligations to open franchised QSRs under executed
    development agreements. Commitments, by brand, were as follows:

|                      |  |      |       |      |  |      |       |      |  |      |       |  |  |  |       |  |  |  |       | 
|--------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- |  |  |  | ----- | 
|Franchise Commitments |  | 2002 |       | 2001 |  | 2000 |       | 1999 |  | 1998
|                      |  |      |       |      |  |      |       |      |  |     
|Popeyes               |  |      | 1,198 |      |  |      | 903   |      |  |      | 896   |  |  |  | 713   |  |  |  | 656   | 
|Churchs              |  |      | 677   |      |  |      | 671   |      |  |      | 743   |  |  |  | 561   |  |  |  | 750   | 
|Cinnabon              |  |      | 476   |      |  |      | 522   |      |  |      | 426   |  |  |  | 387   |  |  |  | 65    | 
|Seattle Coffee brands |  |      | 271   |      |  |      | 294   |      |  |      | 224   |  |  |  | 272   |  |  |  | 137   | 
|                      |  |      |       |      |  |      |       |      |  |      |       |  |  |  |       |  |  |  |       | 
|Total                 |  |      | 2,622 |      |  |      | 2,390 |      |  |      | 2,289 |  |  |  | 1,933 |  |  |  | 1,608 | 
|                      |  |      |       |      |  |      |       |      |  |      |       |  |  |  |       |  |  |  |       | 



| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Of the 271 Seattle Coffee commitments
    outstanding at December 29, 2002, 199 relate to the
    international portion of Seattle Coffees business that we
    retained after the July 14, 2003 sale of substantially all
    of the continental U.S. and Canadian operations of Seattle
    Coffee to Starbucks.

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Item 7.     MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

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

Our discussion contains forward-looking
statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations
and intentions. Actual results and the timing of events could
differ materially from those anticipated in these
forward-looking statements as a result of a number of factors,
including those factors set forth in this section under the
heading Risk Factors That May Affect Results of Operations
and Financial Condition and other factors presented
throughout this filing.

The financial data in this Annual Report on
Form 10-K for the first three quarters of 2002 and for
fiscal years 2001, 2000, 1999 and 1998 has been restated from
amounts previously reported for the correction of accounting
errors. A discussion of the restatement in relation to fiscal
years 2001 and 2000 and to the affected quarters of 2002, 2001
and 2000 is provided in Notes 23 and 25 to the Consolidated
Financial Statements. A discussion of the restatement in
relation to 1999 and 1998 is provided in Note 1 to the Selected
Financial Data. All information presented in this
Managements Discussion and Analysis of Financial Condition
and Results of Operations reflects the restatement.

Nature of Business

AFC develops, operates and franchises quick
service restaurants, bakeries and cafes in three distinct
business segments: chicken, bakery and coffee. Our chicken
segment operates under the trade names Popeyes® Chicken
& Biscuits (Popeyes) and Churchs
Chicken (Churchs); our bakery segment
operates under the trade name Cinnabon®
(Cinnabon); and our coffee segment currently
franchises cafes under the trade name Seattles Best
Coffee®. Prior to July 14, 2003, our coffee segment
also operated under the trade name Torrefazione Italia®
Coffee. Financial information for these segments can be found at
Note 22 to the Consolidated Financial Statements.

We also sell wholesale bakery items under our
Cinnabon brand. Prior to July 14, 2003, we sold our premium
specialty coffees through wholesale and retail distribution
channels under our Seattles Best Coffee and Torrefazione
Italia Coffee brands.

As of December 29, 2002, we operated and
franchised 4,071 QSRs in 44 states, the District of
Columbia, Puerto Rico and 33 foreign countries. As of
December 29, 2002, our total QSRs, by brand, were as
follows:

|                           |       |          |     |               |  |          |       |            |  |       |   |   |  |  |     |     |  |  |       |       | 
|-------------------------- | ----- | -------- | --- | ------------- |  | -------- | ----- | ---------- |  | ----- | - | - |  |  | --- | --- |  |  | ----- | ----- | 
|                           |       |          |     |               |  |         
|                           |       | Domestic |     | International |  |         
|                           |       |          |     |               |  |         
|                           |       | Company- |     |               |  | Company- |       |            |  |      
|                           |       | Operated |     | Franchised    |  | Operated |       | Franchised |  | Total
|                           |       |          |     |               |  |          |       |            |  |      
|Popeyes                    |       |          | 96  |               |  |          | 1,298 |            |  |       |  |   |  |  | 318 |     |  |  | 1,712 |      
|Churchs                   |       |          | 284 |               |  |          | 963   |            |  |       |  |   |  |  | 262 |     |  |  | 1,509 |      
|Cinnabon                   |       |          | 84  |               |  |          | 369   |            |  |       |  |   |  |  | 159 |     |  |  | 612   |      
|Seattles Best Coffee      |       |          | 54  |               |  |          | 79    |            |  |       |  |   |  |  | 84  |     |  |  | 217   |      
|Torrefazione Italia Coffee |       |          | 18  |               |  |          |      |            |  |       | 3 |   |  |  |    |     |  |  | 21    |      
|                           |       |          |     |               |  |          |       |            |  |       |   |   |  |  |     |     |  |  |       |      
|                           | Total |          |     | 536           |  |          |       | 2,709      |  |       |   | 3 |  |  |     | 823 |  |  |       | 4,071 | 
|                           |       |          |     |               |  |          |       |            |  |       |   |   |  |  |     |     |  |  |       |      

Management Overview

Restatement of Prior Years Financial
Information.We have restated our
financial statements for the first three quarters of 2002 and
for fiscal years 2001 and 2000 and restated certain financial
information for 1999 and 1998 for the correction of accounting
errors. All information presented in this Managements
Discussion and Analysis of Financial Condition and Results of
Operations reflects the restatement. Notes

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23 and 25 to our Consolidated Financial
Statements set forth a discussion of the restatement, including
specific items that were restated and the effects of the
restatement on fiscal years 2001 and 2000 and the affected
quarters of 2002, 2001 and 2000. Note 1 to the Selected
Financial Data provides a discussion of the restatement in
relation to 1999 and 1998.


The aggregate effect of the restatement increased
previously reported net income for the first three quarters of
2002 by $3.1 million and decreased previously reported net
income for fiscal years 2001 and 2000 by $21.3 million and
$9.2 million, respectively.

We initially announced our intention to restate
certain financial statements on March 24, 2003. The time
required to complete the restatement and the audits of the
affected financial statements delayed the filing of this Annual
Report on Form 10-K, as well as our 2003 Quarterly Reports
on Form 10-Q.

Background on the Restatement.In the third quarter of 2002, we
recorded an adjustment at our Seattle Coffee subsidiary to
write-down inventory to net realizable value. The write-down was
due to the correction of errors made in prior periods relating
to inventory costing. In the closing process for fiscal 2002, we
identified other potential adjustments to be made to our prior
years financial statements. Based on these developments,
we conducted a detailed review of our accounting and reporting
policies. As a result of that review, which was performed in
consultation with our independent auditors KPMG LLP, we
determined to restate our financial statements for the first
three quarters of 2002 and for fiscal years 2001 and 2000, and
restated certain financial information for 1999 and 1998.

Certain of the adjustments reflected in the
restatement resulted from previously applied accounting policies
that we have determined were in error. We selected and employed
those original accounting policies in consultation with, and
relying on the professional advice of, Arthur Andersen LLP,
which served as our independent auditors from 1992 until April
2002. In April 2002, we engaged KPMG LLP as our independent
auditors following the decision of our Board of Directors to no
longer engage Arthur Andersen LLP. The correction of those
errors reflected in our restatement were made in consultation
with KPMG LLP during the detailed review of our accounting and
reporting policies described above.

Our management and our Audit Committee took a
leadership role in assessing these issues and in taking
corrective action. Management and the Audit Committee took these
actions in consultation with our independent auditors. In
addition, independent legal counsel to the Audit Committee and a
forensic accounting firm performed an independent investigation
into several accounting issues that arose in connection with the
restatement. That investigation concluded that while there were
material weaknesses in our control environment, there was not
evidence that our management intentionally used improper
accounting practices to manipulate earnings or that there was
any fraud or intentional misconduct on the part of AFC, our
officers or our employees. Item 9A of this Annual Report on
Form 10-K provides a description of actions we have taken
to improve our internal controls and procedures based on our
review of our accounting and reporting policies, the independent
review conducted by the Audit Committee and its advisors and
advice from our independent auditors.

2002 Operating
Results.For the full year of
2002, we incurred a net loss of $11.7 million. That loss
was driven by approximately $45.1 million of goodwill and
other impairment charges associated with our coffee segment
($33.3 million included in impairment charges and
other, net in our Consolidated Financial Statements and
$11.8 million associated with the adoption of a new
accounting standard). Those charges came after several years of
operating losses in that segment.

Despite our net loss in 2002, there are certain
favorable results to report. In our core business segment, our
chicken segment, 2002 was a record year generating
$108.1 million of operating profit, which constituted an
18.5% improvement compared with 2001. On a consolidated basis,
2002 was also a record year as it relates to cash flows from
operating activities. Our consolidated operations generated
$93.8 million of cash, an amount 50% greater than any year
in our history.

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| |                                                            
| | -----------------------------------------------------------
| | Consolidated Results of Operations: 2002,
    2001 and 2000

Our consolidated statements of operations include
the following items and events that affect comparability with
other periods:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Fiscal years 2002 and 2001 include 52 weeks.
    Fiscal year 2000 includes 53 weeks.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | As part of our ongoing effort to grow our
    business through franchising, we continue to sell
    company-operated QSRs to franchisees. While these transactions
    have no effect on system-wide sales, they reduce sales from
    company-operated restaurants, as well as related restaurant
    costs. At the same time, these transactions increase franchise
    revenues. By brand, the number of unit conversions
    and the associated gains and losses on such sales for 2002, 2001
    and 2000 were as follows:

|                               |                        |                       |      |      |  |      |      |     |  |   |     |    | 
|------------------------------ | ---------------------- | --------------------- | ---- | ---- |  | ---- | ---- | --- |  | - | --- | -- | 
|                               |                        | 2002                  |      | 2001 |  | 2000
|                               |                        |                       |      |      |  |     
|                               |                        |                      
|                               |                        | (Dollars in millions)
|Popeyes                        |                        |                       |     |      |  |      | 27   |     |  |   | 36  |   
|Churchs                       |                        |                       | 111  |      |  |      | 70   |     |  |   | 25  |   
|Cinnabon                       |                        |                       | 63   |      |  |      | 36   |     |  |   | 10  |   
|Seattle Coffee brands          |                        |                       | 1    |      |  |      |     |     |  |   |    |   
|                               |                        |                       |      |      |  |      |      |     |  |   |     |   
|                               | Total unit conversions |                       |      | 175  |  |      |      | 133 |  |   |     | 71 | 
|                               |                        |                       |      |      |  |      |      |     |  |   |     |   
|                              
|(Losses) gains recognized, net |                        | $                     | (4.0 | )    |  | $    | (1.3 | )   |  | $ | 6.4 |   
|Gains deferred                 |                        |                       | 10.3 |      |  |      | 6.4  |     |  |   | 2.9 |   



| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, during 2002, 2001 and 2000, we
    recognized approximately $8.0 million, $4.9 million
    and $1.8 million, respectively, in fees associated with
    these unit conversions.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During 2002, we recorded charges for the
    impairment and other write-downs of non-current assets of
    $44.6 million, versus $13.5 million in 2001 and
    $7.5 million in 2000.                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | During the first quarter of 2002, we adopted SFAS
    No. 142, Goodwill and Other Intangible Assets, and,
    at that time, discontinued our prior practice of amortizing
    goodwill and other indefinite-lived intangible assets. These
    assets are now being accounted for by the impairment-only
    approach. In 2002, this change reduced amortization expense by
    approximately $5.4 million. At the same time, upon adopting
    SFAS No. 142, we recorded a transitional charge of
    $11.8 million to reduce the carrying value of goodwill
    associated with our coffee segment.
|
| |  | During 2001 and 2000, we recorded charges to
    write-down inventory balances in our coffee segment of
    $1.8 million and $0.7 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | During 2001, we accrued expenses relating to the
    retirement of a former officer. This increased 2001 general and
    administrative expenses by $2.9 million.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | In 2000, general and administrative expenses were
    reduced by the reversal of a $6.0 million environmental
    reserve. In 2000, we accrued $2.8 million of costs in our
    coffee segment related to personnel reductions and concept
    development efforts.                                                                                                                                                                                                                                                                                                                                  
|
| |  | Included in interest expense are premiums and
    discounts associated with the repurchase of our Senior
    Subordinated Notes and the amortization and write-off of debt
    issuance costs, which aggregate to $10.7 million,
    $3.2 million and $2.0 million in 2002, 2001 and 2000,
    respectively.                                                                                                                                                                                                                                                                                         
|
| |  | For periods prior to 2002, certain items in the
    financial statements have been reclassified to conform to the
    current presentation. These reclassifications had no effect on
    our reported results of operations.                                                                                                                                                                                                                                                                                                                                                                         

In reviewing our operating results and the
relationships between various components of revenue and expense,
we believe the following table can be helpful to readers. It
presents selected revenues and

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expenses as a percentage of total revenues (or,
in certain circumstances, as a percentage of a corresponding
revenue line item).


|                                                     |                                                             |                   |     |      |      |      |     |     |      |  |     |     |      | 
|---------------------------------------------------- | ----------------------------------------------------------- | ----------------- | --- | ---- | ---- | ---- | --- | --- | ---- |  | --- | --- | ---- | 
|                                                     |                                                             | 2002              |     | 2001 |      | 2000
|                                                     |                                                             |                   |     |      |      |     
|Revenues                                             |                                                             |                   |     |      |      |      |     |     |      |  |     |    
|Sales by company-operated restaurants                |                                                             |                   | 67% |      |      |      | 74% |     |      |  | 78% |    
|Franchise revenues                                   |                                                             |                   | 18% |      |      |      | 15% |     |      |  | 12% |    
|Wholesale revenues                                   |                                                             |                   | 11% |      |      |      | 9%  |     |      |  | 8%  |    
|Other revenues                                       |                                                             |                   | 4%  |      |      |      | 2%  |     |      |  | 2%  |    
|                                                     |                                                             |                   |     |      |      |      |     |     |      |  |     |    
|                                                     |                                                             | Total revenues(1) |     |      | 100% |      |     |     | 100% |  |     |     | 100% | 
|                                                     |                                                             |                   |     |      |      |      |     |     |      |  |     |    
|                                                    
|Expenses                                             |                                                             |                   |     |      |      |      |     |     |      |  |     |    
|                                                     | Restaurant employee, occupancy and other
    expenses(2)    |                   |     | 53%  |      |      |     | 51% |      |  |     | 53% |     
|                                                     | Restaurant food, beverages and packaging(2)                 |                   |     | 28%  |      |      |     | 29% |      |  |     | 28% |     
|                                                     | General and administrative expenses                         |                   |     | 18%  |      |      |     | 17% |      |  |     | 14% |     
|                                                     | Wholesale cost of sales and operating expenses(3)           |                   |     | 81%  |      |      |     | 89% |      |  |     | 83% |     
|                                                     | Depreciation and amortization                               |                   |     | 5%   |      |      |     | 6%  |      |  |     | 6%  |     
|                                                     | Impairment charges and other, net                           |                   |     | 8%   |      |      |     | 2%  |      |  |     | 1%  |     
|                                                     |                                                             |                   |     |      |      |      |     |     |      |  |     |    
|                                                     |                                                             | Total expenses    |     |      | 94%  |      |     |     | 92%  |  |     |     | 91%  | 
|                                                     |                                                             |                   |     |      |      |      |     |     |      |  |     |    
|                                                    
|Operating profit                                     |                                                             |                   | 6%  |      |      |      | 8%  |     |      |  | 9%  |    
|                                                     | Interest expense, net                                       |                   |     | 4%   |      |      |     | 4%  |      |  |     | 5%  |     
|                                                     |                                                             |                   |     |      |      |      |     |     |      |  |     |    
|                                                    
|Income before income taxes and accounting
    change |                                                             |                   | 2%  |      |      |      | 4%  |     |      |  | 4%  |    
|                                                     | Income tax expense                                          |                   |     | 2%   |      |      |     | 2%  |      |  |     | 2%  |     
|                                                     |                                                             |                   |     |      |      |      |     |     |      |  |     |    
|                                                    
|Income before accounting
    change                  |                                                             |                   |    |      |      |      | 2%  |     |      |  | 2%  |    
|                                                     | Loss from the cumulative effect of an accounting
    change |                   |     | (2   | )%   |      |     |    |      |  |     |    |     
|                                                     |                                                             |                   |     |      |      |      |     |     |      |  |     |    
|                                                    
|Net (loss) income                                    |                                                             |                   | (2  | )%   |      |      | 2%  |     |      |  | 2%  |    
|                                                     |                                                             |                   |     |      |      |      |     |     |      |  |     |    



---



|    |                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The changing mix of revenues between sales by
    company-operated restaurants and franchise revenues is a
    function of our ongoing efforts to grow the franchising side of
    our business, including the sale of company-operated QSRs to new
    or existing franchisees.
|   
|(2) | Expressed as a percentage of sales by
    company-operated restaurants.                                                                                                                                                                                                         
|   
|(3) | Expressed as a percentage of wholesale revenues.                                                                                                                                                                                                                                

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Comparisons of Fiscal Years 2002 and
2001

Sales by Company-Operated
Restaurants

|        |       |                       |       |       |  |            |       |         |  |   |       |       |   |  |       |       |   
|------- | ----- | --------------------- | ----- | ----- |  | ---------- | ----- | ------- |  | - | ----- | ----- | - |  | ----- | ----- | --
|        |       |                       |       |       |  |            |       | As a   
|        |       | 2002                  |       | 2001  |  | (Decrease) |       | Percent
|        |       |                       |       |       |  |            |       |        
|        |       |                      
|        |       | (Dollars in millions)
|Chicken |       | $                     | 339.0 |       |  | $          | 410.9 |         |  | $ | (71.9 | )     |   |  | (17.5 | )%   
|Bakery  |       |                       | 46.9  |       |  |            | 68.4  |         |  |   | (21.5 | )     |   |  | (31.4 | )    
|Coffee  |       |                       | 27.4  |       |  |            | 27.7  |         |  |   | (0.3  | )     |   |  | (1.1  | )    
|        |       |                       |       |       |  |            |       |         |  |   |       |       |   |  |       |      
|        | Total |                       | $     | 413.3 |  |            | $     | 507.0   |  |   | $     | (93.7 | ) |  |       | (18.5 | )%
|        |       |                       |       |       |  |            |       |         |  |   |       |       |   |  |       |      

Chicken.Of
the $71.9 million decrease in sales by company-operated
restaurants, approximately $69.9 million of it was due to a
net reduction of 113 company-operated Churchs restaurants
during 2002. In 2002, we sold 111 restaurants to franchisees,
closed four restaurants, and opened two new restaurants.
Approximately $2.4 million of the decrease was attributable
to a net decrease in same-store sales for 2002 compared to 2001
(a 1.3% decline in same-store sales at Churchs
company-operated restaurants offset by a 1.0% increase in
same-store sales at Popeyes company-operated restaurants). The
remaining fluctuation was due to various influences including
the actual number and timing of restaurant conversions, openings
and closings.

Bakery.Of
the $21.5 million decrease in sales by company-operated
bakeries, approximately $16.7 million was due to a net
reduction of 67 company-operated bakeries during 2002. In
2002, we sold 63 bakeries to franchisees, closed ten bakeries,
and opened six new bakeries. Approximately $2.0 million of
the decrease was due to a 2.6% decline in same-store sales in
2002 compared to 2001. The remaining fluctuation was due to
various influences including the actual number and timing of
bakery conversions, openings and closings.

Coffee.Of
the $0.3 million decrease in sales by company-operated
cafes, approximately $1.5 million was due to a 5.9%
decrease in same-store sales in 2002 compared to 2001, which was
partially offset by approximately $1.2 million of sales at
five stores opened in the fourth quarter of 2001 that were not
included in the calculation of same-store sales.

Franchise Revenues

|        |       |                       |      |       |  |          |      |         |  |   |     |      |  |  |      |      |  
|------- | ----- | --------------------- | ---- | ----- |  | -------- | ---- | ------- |  | - | --- | ---- |  |  | ---- | ---- | -
|        |       |                       |      |       |  |          |      | As a   
|        |       | 2002                  |      | 2001  |  | Increase |      | Percent
|        |       |                       |      |       |  |          |      |        
|        |       |                      
|        |       | (Dollars in millions)
|Chicken |       | $                     | 97.9 |       |  | $        | 90.1 |         |  | $ | 7.8 |      |  |  | 8.7  | %   
|Bakery  |       |                       | 9.9  |       |  |          | 9.0  |         |  |   | 0.9 |      |  |  | 10.0 |     
|Coffee  |       |                       | 3.5  |       |  |          | 2.0  |         |  |   | 1.5 |      |  |  | 75.0 |     
|        |       |                       |      |       |  |          |      |         |  |   |     |      |  |  |      |     
|        | Total |                       | $    | 111.3 |  |          | $    | 101.1   |  |   | $   | 10.2 |  |  |      | 10.1 | %
|        |       |                       |      |       |  |          |      |         |  |   |     |      |  |  |      |     

Within each of our business segments,
franchise revenues has three basic components:
(1) ongoing royalty payments that are determined based on a
percentage of franchisee sales; (2) franchise fees
associated with new unit openings; and (3) development fees
associated with the opening of new units in a given market.
Royalty revenues are the largest component of franchise revenues
constituting more than 80% of franchise revenues in our chicken
segment and approximately 60% of franchise revenues in our
bakery and coffee segments.

Chicken.Of
the $7.8 million increase in franchise revenues,
approximately $8.2 million was due to an increase in
royalties resulting from new unit growth and conversions within
our network of franchisees, which was partially offset by an
approximately $0.4 million decrease in royalties
attributable to a decrease in same-store sales for 2002 compared
to 2001. The remaining fluctuation was due to the collection of
franchise and development fees from new franchised unit openings
and the recognition of deferred development fees from the
termination of defaulted development agreements.

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During 2002, the chicken segment had 279 new
franchised restaurant openings, 111 new franchised restaurants
from the sale of company-operated restaurants to franchisees,
and 193 permanent or temporary restaurant closings for
reimaging. With respect to the restaurant closings, the largest
component of closings related to Churchs international
franchisees in Taiwan, Indonesia and Venezuela. As of
December 29, 2002, we had 2,841 franchised restaurants,
compared to 2,644 as of December 30, 2001.

Bakery.Of
the $0.9 million increase in franchise revenues,
approximately $1.3 million was due to an increase in
royalties resulting from new bakery conversions and growth,
which was partially offset by approximately $0.5 million
due to a decrease in royalties attributable to declines in
same-store sales for 2002 compared to 2001. As of
December 29, 2002, we had 528 franchised bakeries open,
compared to 392 as of December 30, 2001.

Coffee.Of
the $1.5 million increase in franchise revenues,
approximately $0.8 million was due to an increase in
royalties resulting from new cafe growth. Approximately
$0.8 million of the increase was due to higher franchise
fees from new cafe openings in 2002 and the recognition of
deferred development fees from the termination of two defaulted
development agreements. As of December 29, 2002, we had 163
franchised cafes open, compared to 99 as of December 30,
2001.

Wholesale Revenues

|       |       |                       |      |      |  |          |      |         |  |   |     |     |  |  |     |      |  
|------ | ----- | --------------------- | ---- | ---- |  | -------- | ---- | ------- |  | - | --- | --- |  |  | --- | ---- | -
|       |       |                       |      |      |  |          |      | As a   
|       |       | 2002                  |      | 2001 |  | Increase |      | Percent
|       |       |                       |      |      |  |          |      |        
|       |       |                      
|       |       | (Dollars in millions)
|Bakery |       | $                     | 3.6  |      |  | $        |     |         |  | $ | 3.6 |     |  |  | N/A |     
|Coffee |       |                       | 65.9 |      |  |          | 61.1 |         |  |   | 4.8 |     |  |  | 7.9 | %   
|       |       |                       |      |      |  |          |      |         |  |   |     |     |  |  |     |     
|       | Total |                       | $    | 69.5 |  |          | $    | 61.1    |  |   | $   | 8.4 |  |  |     | 13.7 | %
|       |       |                       |      |      |  |          |      |         |  |   |     |     |  |  |     |     

Bakery.Wholesale bakery sales of
$3.6 million in 2002 relate to the sale of pre-packaged
cinnamon rolls to a major retailer. This was a new business
activity for our bakery segment in 2002. During 2003, we
discontinued sales of pre-packaged Cinnamon rolls to the major
retailer and we commenced the licensing of Cinnabon flavors and
trade name to selected food companies.

Coffee.The
$4.8 million increase in wholesale revenues was primarily
due to growth in the number of points of distribution from our
wholesale accounts, despite a decrease in overall wholesale
accounts. As of December 29, 2002, we had approximately
3,775 wholesale accounts with approximately 11,000 points of
distribution. As of December 30, 2001, we had approximately
4,200 wholesale accounts with approximately 7,200 points of
distribution.

Other Revenues

|                        |       |                       |      |      |  |            |      |         |  |   |      |     |  |  |       |      |  
|----------------------- | ----- | --------------------- | ---- | ---- |  | ---------- | ---- | ------- |  | - | ---- | --- |  |  | ----- | ---- | -
|                        |       |                       |      |      |  | Increase   |      | As a   
|                        |       | 2002                  |      | 2001 |  | (Decrease) |      | Percent
|                        |       |                       |      |      |  |            |      |        
|                        |       |                      
|                        |       | (Dollars in millions)
|Rental income           |       | $                     | 17.3 |      |  | $          | 12.4 |         |  | $ | 4.9  |     |  |  | 39.5  | %   
|Conversion related fees |       |                       | 8.0  |      |  |            | 4.9  |         |  |   | 3.1  |     |  |  | 63.3  |     
|Other                   |       |                       | 0.2  |      |  |            | 0.7  |         |  |   | (0.5 | )   |  |  | (71.4 | )   
|                        |       |                       |      |      |  |            |      |         |  |   |      |     |  |  |       |     
|                        | Total |                       | $    | 25.5 |  |            | $    | 18.0    |  |   | $    | 7.5 |  |  |       | 41.7 | %
|                        |       |                       |      |      |  |            |      |         |  |   |      |     |  |  |       |     

Substantially all of the $4.9 million
increase in rental income was due to the increase in units
leased to franchisees during 2002 and 2001 that were a result of
unit conversions. The $3.1 million increase in conversion
related fees (franchise and conversion fees collected from
conversions) was due to the increased number of unit conversions
in 2002 compared to 2001. We sold 175 company-operated QSRs to
franchisees in 2002 compared to 133 in 2001.

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Restaurant Employee, Occupancy and Other
Expenses

Restaurant employee, occupancy and other expenses
were $218.3 million in 2002, a $41.8 million decrease
from 2001. This decrease was attributable to the reduction in
the number of company-operated restaurants from 2001 to 2002
(which was principally due to the conversion of company-operated
QSRs to franchised QSRs). Restaurant employee, occupancy and
other expenses were approximately 53% of sales from
company-operated restaurants in 2002, compared to approximately
51% in 2001.

Restaurant Food, Beverages and
Packaging

Restaurant food, beverages and packaging expenses
were $116.9 million in 2002, a $30.2 million decrease
from 2001. This decrease was attributable to the reduction in
sales from company-operated restaurants from 2001 to 2002 (which
was principally due to the conversion of company-operated QSRs
to franchised QSRs). Restaurant food, beverage and packaging
expenses were approximately 28% of sales from company-operated
restaurants in 2002, compared to approximately 29% in 2001.

General and Administrative Expenses

General and administrative expenses were
$110.4 million in 2002, a $5.6 million decrease from
2001. The decrease was due to a reduction in general and
administrative expenses within our chicken segment. As the
number of company-operated QSRs declined (due to the conversion
of company-operated QSRs to franchised QSRs), we decreased our
divisional overhead supporting those units. Additionally, our
coffee segment expenses were lower in 2002 due to personnel
restructuring that occurred in the fourth quarter of 2001.
General and administrative expenses were approximately 18% of
total revenues in 2002, compared to approximately 17% in 2001.

Wholesale Cost of Sales and Operating
Expenses

Wholesale cost of sales and operating expenses
were $56.1 million in 2002, a $1.8 million decrease
from 2001. Wholesale cost of sales and operating expenses
constituted 81% of wholesale revenues in 2002 compared with 89%
of wholesale revenues in 2001. The reduction of wholesale cost
of sales and operating expenses from 2001 to 2002 is primarily
due to lower marketing costs in 2002 and a $1.8 million
writedown of inventory in our coffee segment in 2001 partially
offset by increased cost of sales in 2002 related to increased
wholesale revenues.

Depreciation and Amortization

Depreciation and amortization was
$29.6 million in 2002, a $10.7 million decrease from
2001. The decrease was primarily due to the adoption of
SFAS 142 in the first quarter of 2002, which eliminated
amortization of goodwill and other intangible assets with
indefinite useful lives. During 2001, amortization expense
associated with such assets was approximately $9.0 million.
Depreciation and amortization as a percentage of total revenues
was approximately 5% in 2002, compared to 6% in 2001.

Impairment Charges and Other

Impairment charges and other includes
(1) impairment charges associated with goodwill balances,
other intangible assets and other long-lived assets,
(2) costs associated with unit closures and refurbishments,
and (3) gains and losses on the sale of assets. These
aggregated to $49.6 million in 2002, a $34.1 million
increase from 2001. The increase was primarily due to
$33.3 million of impairment charges relating to goodwill
and long-lived assets in our coffee segment recorded in 2002
versus $3.1 million in 2001. In 2002, we also recorded
charges for impairment of long-lived assets of $6.0 million
relating to our chicken segment versus $7.5 million in 2001
and $5.3 million relating to our bakery segment versus
$2.2 million in 2001.

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Operating Profit

|          |       |                       |       |      |  |            |       |         |  |   |       |       |   |  |        |       |   
|--------- | ----- | --------------------- | ----- | ---- |  | ---------- | ----- | ------- |  | - | ----- | ----- | - |  | ------ | ----- | --
|          |       |                       |       |      |  | Increase   |       | As a   
|          |       | 2002                  |       | 2001 |  | (Decrease) |       | Percent
|          |       |                       |       |      |  |            |       |        
|          |       |                      
|          |       | (Dollars in millions)
|Chicken   |       | $                     | 108.1 |      |  | $          | 91.2  |         |  | $ | 16.9  |       |   |  | 18.5   | %    
|Bakery    |       |                       | (12.1 | )    |  |            | (3.4  | )       |  |   | (8.7  | )     |   |  | (255.9 | )    
|Coffee    |       |                       | (32.5 | )    |  |            | (12.2 | )       |  |   | (20.3 | )     |   |  | (166.4 | )    
|Corporate |       |                       | (24.8 | )    |  |            | (21.7 | )       |  |   | (3.1  | )     |   |  | (14.3  | )    
|          |       |                       |       |      |  |            |       |         |  |   |       |       |   |  |        |      
|          | Total |                       | $     | 38.7 |  |            | $     | 53.9    |  |   | $     | (15.2 | ) |  |        | (28.2 | )%
|          |       |                       |       |      |  |            |       |         |  |   |       |       |   |  |        |      

On a consolidated basis, operating profit
decreased by $15.2 million in 2002 when compared to 2001.
Fluctuations in the various components of revenue and expense
giving rise to this change are discussed above. The following is
a general discussion of the fluctuations in operating profit by
business segment.

Our chicken segment had $108.1 million of
operating profit in 2002, a $16.9 million increase when
compared to 2001. The increase was due to an increase in
franchise royalties and other fees associated with growth in the
number of franchised units in our chicken segment.

The $8.7 million decline in operating profit
associated with our bakery segment was principally a result of a
significant decline in per-bakery operating margins, declining
same-store sales and $3.1 million of higher impairment
charges in that segment in 2002 compared with 2001.

The $20.3 million decline in operating
profit associated with our coffee segment was principally due to
asset impairments of $33.3 million associated with our
coffee segment. As discussed elsewhere in this Annual Report on
Form 10-K, we sold a substantial portion of our coffee
operations to Starbucks in the third quarter of 2003.

The $3.1 million decline in operating profit
associated with our corporate operations was principally due to
higher professional and accounting fees.

Interest Expense, Net

Interest expense, net was $22.6 million in
2002, a $2.0 million decrease from 2001. Interest expense,
net includes interest expense of $24.2 million and
$26.1 million in 2002 and 2001, respectively, net of
interest income. Interest expense for 2002 included
$6.5 million related to the premium paid to retire all our
outstanding Senior Subordinated Notes, $3.1 million in
write-offs of associated debt issuance costs and
$1.1 million of amortization expense associated with our
debt issuance costs. Interest expense for 2001 included
$1.2 million related to a premium paid to retire a portion
of our Senior Subordinated Notes, $0.5 million in
write-offs of associated debt issuance costs and
$1.6 million in amortization expense associated with our
debt issuance costs. Excluding the impact of these amounts, the
decrease in interest expense from 2001 to 2002 was
$9.3 million, which was primarily due to lower debt
balances and lower interest rates in 2002.

Income Taxes

In 2002, our effective tax rate was 372.6% of
pre-tax income. Our effective tax rate was 46.8% in 2001. Our
effective tax rate increased from 2001 to 2002 due primarily to
the write-off of $39.1 million of goodwill in 2002 which
was a non-deductible expense for income tax purposes.

Loss from the Cumulative Effect of an
Accounting Change

In connection with our adoption of SFAS 142,
Goodwill and Other Intangible Assets, we recorded an
$11.8 million transitional charge in the first quarter of
2002 to write-down goodwill in our coffee segment.

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Comparisons of Fiscal Years 2001 (52 Weeks)
and 2000 (53 Weeks)

Sales by Company-Operated
Restaurants

|        |       |                       |       |       |  |            |       |         |  |   |       |       |   |  |       |       |   
|------- | ----- | --------------------- | ----- | ----- |  | ---------- | ----- | ------- |  | - | ----- | ----- | - |  | ----- | ----- | --
|        |       |                       |       |       |  |            |       | As a   
|        |       | 2001                  |       | 2000  |  | (Decrease) |       | Percent
|        |       |                       |       |       |  |            |       |        
|        |       |                      
|        |       | (Dollars in millions)
|Chicken |       | $                     | 410.9 |       |  | $          | 463.0 |         |  | $ | (52.1 | )     |   |  | (11.3 | )%   
|Bakery  |       |                       | 68.4  |       |  |            | 75.9  |         |  |   | (7.5  | )     |   |  | (9.9  | )    
|Coffee  |       |                       | 27.7  |       |  |            | 28.5  |         |  |   | (0.8  | )     |   |  | (2.8  | )    
|        |       |                       |       |       |  |            |       |         |  |   |       |       |   |  |       |      
|        | Total |                       | $     | 507.0 |  |            | $     | 567.4   |  |   | $     | (60.4 | ) |  |       | (10.6 | )%
|        |       |                       |       |       |  |            |       |         |  |   |       |       |   |  |       |      

Chicken.Of
the $52.1 million decrease in sales by company-operated
restaurants, approximately $6.4 million was due to fiscal
year 2000 having an extra week. Approximately $53.0 million
of the decrease was due to a net reduction of 105
company-operated restaurants during 2001. In 2001, we sold 97 of
these restaurants to franchisees, closed an additional 13
restaurants and opened five new restaurants. These decreases
were partially offset by approximately $12.8 million
attributable to an increase in same-store sales in 2001 compared
to 2000 (same-store sales at company-operated Churchs and
Popeyes units increased in 2001 by 2.8% and 4.8%, respectively).
The remaining fluctuation was due to various influences
including the actual number and timing of restaurant
conversions, openings and closings in 2000.

Bakery.Of
the $7.5 million decrease in sales by company-operated
bakeries, approximately $1.9 million was due to fiscal year
2000 having an extra week. Approximately $6.4 million of
the decrease was due to a net reduction of 35 company-operated
bakeries during 2001. In 2001, we sold 36 bakeries to
franchisees, closed an additional ten bakeries and opened
11 new bakeries. These decreases were partially offset by
approximately $0.7 million attributable to a 1.1% increase
in same-store sales during 2001.

Coffee.Of
the $0.8 million decrease in sales by company-operated
cafes, approximately $0.3 million was due to fiscal year
2000 having an extra week. Approximately $0.5 million of
the decrease was attributable to a 2.0% reduction in same-store
sales.

Franchise Revenues

|        |       |                       |      |       |  |          |      |         |  |   |     |      |  |  |      |      |  
|------- | ----- | --------------------- | ---- | ----- |  | -------- | ---- | ------- |  | - | --- | ---- |  |  | ---- | ---- | -
|        |       |                       |      |       |  |          |      | As a   
|        |       | 2001                  |      | 2000  |  | Increase |      | Percent
|        |       |                       |      |       |  |          |      |        
|        |       |                      
|        |       | (Dollars in millions)
|Chicken |       | $                     | 90.1 |       |  | $        | 80.6 |         |  | $ | 9.5 |      |  |  | 11.8 | %   
|Bakery  |       |                       | 9.0  |       |  |          | 6.7  |         |  |   | 2.3 |      |  |  | 34.3 |     
|Coffee  |       |                       | 2.0  |       |  |          | 1.4  |         |  |   | 0.6 |      |  |  | 42.9 |     
|        |       |                       |      |       |  |          |      |         |  |   |     |      |  |  |      |     
|        | Total |                       | $    | 101.1 |  |          | $    | 88.7    |  |   | $   | 12.4 |  |  |      | 14.0 | %
|        |       |                       |      |       |  |          |      |         |  |   |     |      |  |  |      |     

Chicken.Of
the $9.5 million increase in franchise revenues,
approximately $8.1 million of the increase was due to an
increase in royalties resulting from new unit growth and
conversions. Approximately $1.4 million of the increase in
franchise revenues was due to an increase in royalties
attributable to a net increase in same-store sales for 2001
compared to 2000 (a 3.5% increase among domestic franchisees and
a 3.2% decrease among international franchisees). Additional
increases were due to the collection of franchise and
development fees from the opening of franchised restaurants and
the recognition of deferred development fees from the
termination of defaulted development agreements. These increases
were partially offset by approximately $2.7 million
attributable to fiscal year 2000 having an extra week.

As of December 30, 2001, we had 2,644
franchised chicken restaurants open, compared to 2,437 as of
December 31, 2000.

Bakery.Of
the $2.3 million increase in franchise revenues,
approximately $1.3 million was due to an increase in
royalties resulting from new unit growth and conversions. The
remaining increase was due to the collection of franchise and
development fees from the opening of franchised bakeries and the

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recognition of deferred development fees from the
termination of defaulted development agreements. As of
December 30, 2001, we had 392 franchised bakeries open,
compared to 264 as of December 31, 2000.


Coffee.Of
the $0.6 million increase in franchise revenues,
approximately $0.5 million was due to an increase in
royalties resulting from new unit growth. Approximately
$0.1 million of the increase was due to higher franchise
fees from new franchise openings in 2001. As of
December 30, 2001, we had 99 franchised cafes open,
compared to 61 as of December 31, 2000.

Wholesale Revenues

In 2001 and 2000, we only had wholesale revenue
in our coffee segment.

Wholesale coffee sales were $61.1 million in
2001, a $5.2 million increase from 2000. The increase was
due primarily to growth in the number of points of distribution
from our wholesale accounts, despite a decrease in overall
wholesale accounts. As of December 30, 2001, we had
approximately 4,200 wholesale accounts with approximately
7,200 points of distribution. As of December 31, 2000,
we had approximately 4,300 wholesale accounts with approximately
6,300 points of distribution.

Other Revenues

|                        |       |                       |      |      |  |          |     |              |  |   |     |     |  |  |       |      |  
|----------------------- | ----- | --------------------- | ---- | ---- |  | -------- | --- | ------------ |  | - | --- | --- |  |  | ----- | ---- | -
|                        |       | 2001                  |      | 2000 |  | Increase |     | As a Percent
|                        |       |                       |      |      |  |          |     |             
|                        |       |                      
|                        |       | (Dollars in millions)
|Rental income           |       | $                     | 12.4 |      |  | $        | 9.2 |              |  | $ | 3.2 |     |  |  | 34.8  | %   
|Conversion related fees |       |                       | 4.9  |      |  |          | 1.8 |              |  |   | 3.1 |     |  |  | 172.2 |     
|Other                   |       |                       | 0.7  |      |  |          | 0.2 |              |  |   | 0.5 |     |  |  | 250.0 |     
|                        |       |                       |      |      |  |          |     |              |  |   |     |     |  |  |       |     
|                        | Total |                       | $    | 18.0 |  |          | $   | 11.2         |  |   | $   | 6.8 |  |  |       | 60.7 | %
|                        |       |                       |      |      |  |          |     |              |  |   |     |     |  |  |       |     

Substantially all of the $3.2 million
increase in rental income was due to the increase in units
leased to franchisees during 2001 and 2000 that were a result of
unit conversions. The $3.1 million increase in conversion
related fees was due to the increased number of unit conversions
in 2001 compared to 2000. We sold 133 company-operated QSRs to
franchisees in 2001 compared to 71 in 2000.

Restaurant Employee, Occupancy and Other
Expenses

Restaurant employee, occupancy and other expenses
were $260.1 million in 2001, a $39.0 million decrease
from 2000. This decrease is directly attributable to the
reduction in the number of company-operated restaurants (which
was principally due to the conversion of company-operated QSRs
to franchised QSRs). Restaurant employee, occupancy and other
expenses were approximately 51% of sales from company-operated
restaurants in 2001 compared to approximately 53% in 2000. The
decrease in costs as a percentage of the associated revenues was
primarily due to a decrease in marketing expenses.

Restaurant Food, Beverages and
Packaging

Restaurant food, beverages and packaging expenses
were $147.1 million in 2001, a $11.9 million decrease
from 2000. This decrease is directly attributable to the
reduction in sales from company-operated restaurants (which was
principally due to the conversion of company-operated QSRs to
franchised QSRs). Restaurant food, beverages and packaging
expenses were approximately 29% of sales from company-operated
restaurants in 2001, compared to approximately 28% of sales in
2000.

General and Administrative Expenses

General and administrative expenses were
$116.0 million in 2001, a $12.7 million increase from
2000. Approximately $6.0 million of the increase was
related to the reversal of an environmental reserve in 2000 as a
result of our determination that the liability was not probable.
Also, in 2000, we accrued $2.8 million of costs in our
coffee segment related to personnel reductions and concept
development efforts. The remainder of the increase in general
and administrative expenses from 2000 to 2001 was primarily due
to

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increased overhead expenses in our bakery segment
to accommodate that segments franchisee growth and an
increase in corporate expenses related to salaries and benefits.
General and administrative expenses were approximately 17% of
total revenues in 2001 compared to approximately 14% in 2000.


Wholesale Cost of Sales and Operating
Expenses

Wholesale cost of sales and operating expenses
were $54.3 million in 2001, an $8.0 million increase
from 2000. Wholesale cost of sales and operating expenses were
approximately 89% of wholesale revenues in 2001 compared with
83% in 2000. The increase in wholesale cost of sales and other
operating expenses is primarily related to an increase in
wholesale revenues and a $1.8 million book to physical
inventory write-down in 2001 recorded in our coffee segment.

Depreciation and Amortization

Depreciation and amortization was
$40.3 million in 2001, a decrease of $0.9 million from
2000. The decrease was mainly due to reductions in depreciation
expense resulting from the sale of company-operated QSRs to
franchisees in our chicken and bakery segments, partially offset
by depreciation expense associated with 2001 capital additions.
Depreciation and amortization as a percentage of total revenues
was approximately 6% in both 2001 and 2000.

Impairment Charges and Other

Impairment charges and other was
$15.5 million in 2001, a $8.5 million increase from
2000. Approximately $6.0 million of this increase was
associated with higher impairment charges in 2001 and
approximately $7.7 million of the increase was attributable
to net losses on the sale of assets in 2001 compared to net
gains in 2000. Partially offsetting this increase was
approximately $4.8 million related to lower provisions
associated with planned unit closures in 2001 compared to 2000.

Operating Profit

|          |       |                       |       |      |  |            |       |              |  |   |      |       |   |  |        |       |   
|--------- | ----- | --------------------- | ----- | ---- |  | ---------- | ----- | ------------ |  | - | ---- | ----- | - |  | ------ | ----- | --
|          |       |                       |       |      |  | Increase   |       |             
|          |       | 2001                  |       | 2000 |  | (Decrease) |       | As a Percent
|          |       |                       |       |      |  |            |       |             
|          |       |                      
|          |       | (Dollars in millions)
|Chicken   |       | $                     | 91.2  |      |  | $          | 86.7  |              |  | $ | 4.5  |       |   |  | 5.2    | %    
|Bakery    |       |                       | (3.4  | )    |  |            | (1.1  | )            |  |   | (2.3 | )     |   |  | (209.1 | )    
|Coffee    |       |                       | (12.2 | )    |  |            | (3.5  | )            |  |   | (8.7 | )     |   |  | (248.6 | )    
|Corporate |       |                       | (21.7 | )    |  |            | (14.8 | )            |  |   | (6.9 | )     |   |  | (46.6  | )    
|          |       |                       |       |      |  |            |       |              |  |   |      |       |   |  |        |      
|          | Total |                       | $     | 53.9 |  |            | $     | 67.3         |  |   | $    | (13.4 | ) |  |        | (19.9 | )%
|          |       |                       |       |      |  |            |       |              |  |   |      |       |   |  |        |      

On a consolidated basis, operating profit
decreased by $13.4 million in 2001 when compared to 2000.
Fluctuations in the various components of revenue and expense
giving rise to this change have been discussed above. The
following is a general discussion of the fluctuations in
operating profit by business segment.

Our chicken segment had $91.2 million of
operating profit in 2001, a $4.5 million increase when
compared to 2000. That improvement was driven by franchise and
other revenue increases related to franchise unit growth from
conversions of company-operated units and new unit openings.
Converted and new unit openings among franchisees favorably
impact royalty revenue, franchise and development fees,
conversion fees and rental revenue.

The $2.3 million decline in operating profit
associated with our bakery segment was driven by
$2.0 million of higher impairment charges in that segment
in 2001 compared with 2000.

The $8.7 million decline in operating profit
associated with our coffee segment was driven by a
$1.8 million book to physical inventory adjustment and
$2.4 million of higher impairment charges in that segment
in 2001 compared with 2000.

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The $6.9 million decline in operating profit
associated with our corporate operations was driven by the
reversal of a $6.0 million environmental reserve in 2000
for which there was no corresponding financial statement effect
in 2001.

Interest Expense, Net

Interest expense, net was $24.6 million in
2001, an $8.7 million decrease from 2000. Interest expense,
net includes interest expense of $26.1 million and $34.6 million
in 2002 and 2001, respectively, net of interest income. Interest
expense for 2001 included $1.2 million related to the net
premium paid to retire a portion of our outstanding Senior
Subordinated Notes, $0.5 million in write-offs of
associated debt issuance costs and $1.6 million in
amortization expense associated with our debt issuance costs.
Interest expense for 2000 included $0.1 million related to
a net discount associated with the repurchase of a portion of
our Senior Subordinated Notes, $0.5 million in write-offs
of associated debt issuance costs and $1.6 million in
amortization expense associated with our debt issuance costs.
Excluding the impact of these amounts, the decrease in interest
expense from 2000 to 2001 was $9.6 million, which was
primarily due to lower debt balances and lower interest rates in
2001. In 2001, with the proceeds of our initial public offering
and cash provided by operations, we paid down $80.0 million
of our 1997 Credit Facility and repurchased $24.3 million
of our Senior Subordinated Notes.

Income Taxes

Our effective tax rate in 2001 was 46.8% compared
to an effective tax rate of 46.2% in 2000. Our effective tax
rate increased primarily as a result of an increase in
non-deductible goodwill partially offset by an increase in job
tax credits.

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Consolidated Cash Flows

|                                            |                                 |               |       |      |  |      |       |       |   |   |       |      |  
|------------------------------------------- | ------------------------------- | ------------- | ----- | ---- |  | ---- | ----- | ----- | - | - | ----- | ---- | -
|                                            |                                 | 2002          |       | 2001 |  | 2000
|                                            |                                 |               |       |      |  |     
|                                            |                                 |              
|                                            |                                 | (In millions)
|Cash flows provided by operating activities |                                 | $             | 93.8  |      |  | $    | 57.4  |       |   | $ | 59.9  |     
|Cash flows used in investing activities     |                                 |               | (13.6 | )    |  |      | (17.5 | )     |   |   | (19.9 | )   
|Cash flows used in financing activities     |                                 |               | (75.7 | )    |  |      | (50.0 | )     |   |   | (40.4 | )   
|                                            |                                 |               |       |      |  |      |       |       |   |   |       |     
|                                            | Net increase (decrease) in cash |               | $     | 4.5  |  |      | $     | (10.1 | ) |   | $     | (0.4 | )
|                                            |                                 |               |       |      |  |      |       |       |   |   |       |     

Cash flows provided by operating
activities.Net cash flows from
operating activities were $93.8 million in 2002, a
$36.4 million increase from 2001. The increase was
principally the result of a $7.1 million improvement in
operating results before consideration of non-cash charges
relating to depreciation, amortization, asset write-downs
(including the effect of asset write-downs associated with an
accounting change) and interest, $14.5 million increase in
deferred income tax expense, and a $17.8 million increase
in accounts payable and other operating liabilities in 2002
compared to a $4.8 million increase in 2001.

Net cash flows from operating activities in 2001
were $57.4 million, a $2.5 million decrease from 2000.
The decrease was the net effect of various offsetting items,
most notably certain fluctuations in our working capital
components. We had an increase in accounts receivable,
inventories and other operating assets of $19.8 million in
2001 versus a corresponding increase of $0.8 million in
2000, which was offset by an increase in accounts payable and
other operating liabilities in 2001 of $4.8 million versus
a corresponding decrease of $11.3 million in 2000.

Cash flows used in investing activities.Net cash flows used in investing
activities were $13.6 million in 2002, a $3.9 million
decrease from 2001. The decrease was principally the result of
reduced capital expenditures offset by lower proceeds from
dispositions of property and equipment. In 2002, capital
expenditures were $49.7 million compared to
$58.0 million in 2001. Proceeds from the sale of QSRs and
turnkey developments were $35.4 million versus
$39.9 million in 2001.

Net cash flows used in investing activities were
$17.5 million in 2001, a $2.4 million decrease from
2000. The decrease was principally the result of increased
proceeds from the sale of company-operated QSRs and turnkey
developments to franchisees offset by increased capital
expenditures. In 2001, proceeds from the sale of QSRs and
turnkey developments were $39.9 million compared to
$28.9 million in 2000. In 2001, capital expenditures were
$58.0 million compared to $50.0 million in 2000.

Cash flows used in financing activities.Net cash used in financing
activities was $75.7 million in 2002. In 2002, we entered
into a new $275.0 million credit facility (the 2002 Credit
Facility). This facility provided $250.0 million in
proceeds, which were used to repurchase $126.9 million of
Senior Subordinated Notes, pay a $6.5 million premium
associated with the repurchase of the Senior Subordinated Notes,
and retire $78.7 million outstanding on our 1997 Credit
Facility. As part of our share repurchase program, we
repurchased and cancelled approximately 3.7 million of our
common shares for $77.9 million using cash provided by
operations. We also repaid $27.1 million of the Term A and
Term B loans outstanding under the 2002 Credit Facility. The
remaining financing activities included debt issuance costs,
repayment of our Southtrust Line of Credit, fluctuations in our
bank overdraft position and employee stock options.

Net cash used in financing activities was
$50.0 million in 2001. In 2001, we sold, pursuant to an
underwritten public offering, approximately 3.1 million
shares of our common stock at a price of $17.00 per share and
received approximately $46.0 million in net cash proceeds
after deducting approximately $7.3 million in underwriting
commissions, offering expenses and other associated costs. With
the proceeds of the public offering and cash provided by
operations, we paid down $79.9 million of our 1997 Credit
Facility, repurchased $23.1 million of our Senior
Subordinated Notes, and paid a $1.2 million premium
associated with the repurchase of the Senior Subordinated Notes.

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Net cash used in financing activities was
$40.4 million in 2000. In 2000, we utilized cash provided
by operations to pay down $12.6 million of our 1997 Credit
Facility and we repurchased $17.0 million of Senior
Subordinated Notes at a discount of $0.1 million.

Liquidity and Capital Resources

We have financed our business activities
primarily with funds generated from operating activities,
proceeds from the sale of company-operated QSRs to franchisees,
proceeds from the sale of our common stock in our initial public
offering and the issuance of debt under our 2002 Credit Facility.

Based upon our current level of operations,
anticipated growth, and assuming compliance with our 2002 Credit
Facility, we believe that available cash provided from operating
activities, proceeds from the sale of our Seattle Coffee
subsidiary, and available borrowings under our lines of credit
($18.2 million available as of December 29, 2002 and
$30.0 million at November 30, 2003) will be adequate
to meet our anticipated future requirements for working capital,
including various contractual obligations discussed below, and
for capital expenditures throughout 2003 and 2004.

Under caption Matters Relating to the
Restatement in Item 3 of this Annual Report on
Form 10-K, we describe several legal proceedings in which
we are involved that relate to our announcements that we would
restate our financial statements. The lawsuits against AFC
described therein present material and significant risk to us.
Although we believe that we have meritorious defenses to the
claims of liability or for damages in these actions, we are
unable at this time to predict the outcome of these actions or
reasonably estimate a range of damages. The amount of a
settlement of or judgment on one or more of these claims or
other potential claims relating to the same events could
substantially exceed the limits of our D&O insurance. The
ultimate resolution of these matters could have a material
adverse impact on our financial results, financial condition and
liquidity.

Acquisitions and Dispositions

Sale of Seattle Coffee Company.On July 14, 2003, we sold our
Seattle Coffee subsidiary to Starbucks for $72.0 million.
Net proceeds of the sale, after transaction costs and other
adjustments, are expected to be approximately
$63.0 million, which is subject to adjustment based upon
the determination of certain financial results of Seattle Coffee
for pre-closing periods of operations. In this transaction, we
sold substantially all of the continental U.S. and Canadian
operations of Seattle Coffee and its wholesale coffee business.
Following this transaction, we continue to franchise the
Seattles Best Coffee brand in retail locations in Hawaii,
in certain international markets outside North America and on
certain U.S. military bases.

Pursuant to the terms of our 2002 Credit
Facility, we are required to use the net proceeds from the sale
of Seattle Coffee to pay down indebtedness under the facility in
addition to that otherwise reflected in the table of contractual
obligations below. On July 17, 2003, we paid down
$31.3 million of indebtedness under the facility. On
October 31, 2003, we paid down another $29.2 million
of indebtedness. An additional payment of approximately $2.5
million (representing the remaining estimated net proceeds from
the Seattle Coffee sale) may be required.

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Contractual Obligations

The following table summarizes our contractual
obligations, due over the next five years and thereafter, as of
December 29, 2002:

|                                             |  |               |       |      |  |      |      |      |  |      |      |      |  |        |      |  |  |   |      |  |  |   |      |  |  |   |       | 
|-------------------------------------------- |  | ------------- | ----- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ------ | ---- |  |  | - | ---- |  |  | - | ---- |  |  | - | ----- | 
|                                             |  |               |       |      |  |      |      |      |  |      |      |      |  | There-
|                                             |  | Total         |       | 2003 |  | 2004 |      | 2005 |  | 2006 |      | 2007 |  | after 
|                                             |  |               |       |      |  |      |      |      |  |      |      |      |  |       
|                                             |  |              
|                                             |  | (In millions)
|Long-term debt(1)                            |  | $             | 225.1 |      |  | $    | 17.6 |      |  | $    | 12.7 |      |  | $      | 16.3 |  |  | $ | 25.5 |  |  | $ | 61.6 |  |  | $ | 91.4  | 
|Leases(2)                                    |  |               | 166.5 |      |  |      | 29.9 |      |  |      | 26.8 |      |  |        | 22.9 |  |  |   | 19.0 |  |  |   | 16.1 |  |  |   | 51.8  | 
|Purchase obligations:                        |  |               |       |      |  |      |      |      |  |      |      |      |  |        |      |  |  |   |      |  |  |   |      |  |  |   |       | 
|Copeland formula agreement(3)                |  |               | 80.1  |      |  |      | 3.1  |      |  |      | 3.1  |      |  |        | 3.1  |  |  |   | 3.1  |  |  |   | 3.1  |  |  |   | 64.6  | 
|Green coffee beans(3)(4)                     |  |               | 39.5  |      |  |      | 12.9 |      |  |      | 8.3  |      |  |        | 7.9  |  |  |   | 7.1  |  |  |   | 3.3  |  |  |   |      | 
|Accounting and tax outsourcing(3)            |  |               | 32.7  |      |  |      | 4.3  |      |  |      | 4.3  |      |  |        | 4.5  |  |  |   | 4.6  |  |  |   | 4.8  |  |  |   | 10.2  | 
|Information technology outsourcing(3)(5)     |  |               | 21.4  |      |  |      | 2.7  |      |  |      | 2.8  |      |  |        | 2.9  |  |  |   | 3.1  |  |  |   | 3.2  |  |  |   | 6.7   | 
|King Features agreement(3)                   |  |               | 6.8   |      |  |      | 0.9  |      |  |      | 0.9  |      |  |        | 0.9  |  |  |   | 0.9  |  |  |   | 0.9  |  |  |   | 2.3   | 
|Equipment purchase agreement(3)              |  |               | 2.8   |      |  |      | 1.1  |      |  |      | 1.1  |      |  |        | 0.6  |  |  |   |     |  |  |   |     |  |  |   |      | 
|Other:                                       |  |               |       |      |  |      |      |      |  |      |      |      |  |        |      |  |  |   |      |  |  |   |      |  |  |   |       | 
|Post-employment payments to a former officer |  |               | 2.8   |      |  |      | 0.4  |      |  |      | 0.4  |      |  |        | 0.4  |  |  |   | 0.3  |  |  |   | 0.3  |  |  |   | 1.0   | 
|                                             |  |               |       |      |  |      |      |      |  |      |      |      |  |        |      |  |  |   |      |  |  |   |      |  |  |   |       | 
|                                             |  | $             | 577.7 |      |  | $    | 72.9 |      |  | $    | 60.4 |      |  | $      | 59.5 |  |  | $ | 63.6 |  |  | $ | 93.3 |  |  | $ | 228.0 | 
|                                             |  |               |       |      |  |      |      |      |  |      |      |      |  |        |      |  |  |   |      |  |  |   |      |  |  |   |       | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In the third and fourth quarters of 2003, we made
    $60.5 million of accelerated payments reducing the Tranche
    A and Tranche B term loans under our 2002 Credit Facility. The
    payments were triggered by the July 14, 2003 sale of our
    Seattle Coffee subsidiary. These payments were in addition to
    the 2003 payments scheduled above, and they, in turn, reduced
    payments scheduled for future years. We used proceeds from the
    Seattle Coffee transaction to make the payments. An additional
    payment of approximately $2.5 million may be required. See
    the discussion below and at Note 10 to our Consolidated
    Financial Statements for more information concerning our
    long-term borrowings.
|   
|(2) | $163.7 million of the minimum lease payments
    relate to operating leases and the remaining $2.8 million
    relates to capital leases. See Note 11 to the Consolidated
    Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | For information concerning the Copeland formula
    agreement, green coffee bean purchase commitment, the
    information technology outsourcing agreement, the accounting and
    tax outsourcing agreement, the King Features agreement, and the
    equipment purchase agreements see Note 13 to the
    Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(4) | The green coffee bean purchase commitments were
    transferred to Starbucks in the sale of Seattle Coffee discussed
    elsewhere in this Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(5) | On April 1, 2003, the Company entered into
    an additional technology outsourcing agreement, which expires on
    March 31, 2010. Future minimum payments under the agreement
    aggregate to $33.4 million. See Note 24 to the
    Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Long Term Debt

2002 Credit
Facility.On May 23, 2002, we
entered into a new bank credit facility (the 2002 Credit
Facility) with J.P. Morgan Chase, Credit Suisse First
Boston and certain other lenders, which consisted of a
$75.0 million, five-year revolving credit facility, a
$75.0 million, five-year Tranche A term loan and a
$125.0 million, seven-year Tranche B term loan. Under the
terms of the 2002 Credit Facility, we may also obtain letters of
credit.

The revolving credit facility is due in full
without installments on May 23, 2007. The outstanding
balances of the Tranche A term loan and the Tranche B term loan
are due in installments through May 23, 2007 and
May 23, 2009, respectively.

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The Tranche A term loan, the Tranche B term loan
and the revolving credit facility bear interest at LIBOR plus an
applicable margin based on certain financial leverage ratios,
which may fluctuate because of changes in these ratios. As of
December 29, 2002, the margins were 2.00% for the revolving
credit facility and the Tranche A term loan and 2.25% for
the Tranche B term loan. On July 14, 2003, the start
of our third quarter of 2003, these margins changed to 2.25% for
the revolving credit facility and the Tranche A term loan and
2.50% for the Tranche B term loan due to an amendment to the
2002 Credit Facility. On August 22, 2003, these margins
changed to 2.75% for the revolving credit facility and the
Tranche A term loan and 3.00% for the Tranche B term loan due to
an amendment to the 2002 Credit Facility. We also pay a
quarterly commitment fee of 0.125% (0.5% annual rate divided by
4) on the unused portions of the Tranche A term loan and the
revolving credit facility.

At closing, we drew the entire
$125.0 million Tranche B term loan to refinance our
existing bank debt of approximately $62.6 million and
invested the excess in certain highly rated short-term
investments, in accordance with requirements under the 2002
Credit Facility. On June 27, 2002, we retired the remaining
$126.9 million of our Senior Subordinated Notes, due
May 15, 2007 at a price of 105.125 by drawing on the
Tranche A term loan.

On August 9, 2002, we made an optional
prepayment of $25.0 million on our Tranche B term loan
using cash from operations.

The 2002 Credit Facility contains certain
financial and other covenants, including covenants requiring us
to maintain various financial ratios, limiting our ability to
incur additional indebtedness, restricting the amount of capital
expenditures that we may incur, restricting our payment of cash
dividends and limiting the amount of debt which we can loan to
our franchisees or guarantee on their behalf. This facility also
limits our ability to engage in mergers or acquisitions, sell
certain assets, repurchase our stock and enter into certain
lease transactions. This facility is secured by a first priority
security interest in substantially all of our assets. At
December 15, 2003, the Company is in compliance with the
covenants.

Pursuant to the terms of our 2002 Credit
Facility, we are required to use the proceeds from the sale of
Seattle Coffee to pay down indebtedness under the facility in
addition to that reflected in the table of contractual
obligations above. On July 17, 2003, we paid down
$31.3 million of indebtedness under the facility. On
October 31, 2003, we paid down another $29.2 million
of indebtedness. An additional payment of approximately
$2.5 million may be required after the final determination
of any purchase price adjustments.

On March 31, 2003, May 30, 2003,
July 14, 2003, August 22, 2003 and October 30,
2003 we amended our 2002 Credit Facility. The effect of these
amendments was to:



| |   |                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Extend, for purposes of the facility, the filing
    deadline for our 2002 Annual Report on Form 10-K to
    December 15, 2003.                                                                                                                                                                                                                              
|
| |  | Extend, for purposes of the facility, the filing
    deadline for our Quarterly Reports on Form 10-Q for the
    first, second and third quarters of 2003 to February 28,
    2004.                                                                                                                                                                          
|
| |  | Raise the interest rate on outstanding
    indebtedness under the 2002 Credit Facility (as indicated above)
    until such time as we satisfy our 2002 annual reporting
    requirement, our 2003 quarterly reporting requirements and
    attain a bank credit rating of Ba3 and BB-, or better, by each
    of Moodys and Standard & Poors, respectively.
|
| |  | Temporarily reduce our revolving line of credit
    from $75.0 million to $65.0 million until we file and
    deliver all of the required financial statements and demonstrate
    a total leverage ratio of not greater than two to one, at which
    time the revolving line of credit limit will return to the
    original amount of $75.0 million.      
|
| |  | Approve the Seattle Coffee divestiture.                                                                                                                                                                                                                                                                                                                      
|
| |  | Deposit $2.8 million in a collateral
    account. This occurred on October 31, 2003.                                                                                                                                                                                                                                                                         
|
| |  | Adjust the computation of certain loan covenant
    ratios in 2003 to exclude from the computations certain costs of
    a productivity study performed in the first quarter of 2003,
    subject to certain                                                                                                                                                 

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| |  |                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------
| |  | monetary limits, and the various costs associated
    with the restatement of our previously issued financial
    statements.

In connection with these amendments, we paid fees
of approximately $2.4 million in 2003.

As of December 29, 2002, there was
$50.0 million outstanding under our revolving credit
facility, and $6.8 million in outstanding letters of
credit. Our available balance as of December 29, 2002 was
$18.2 million. As of November 30, 2003, there was
$25.6 million in outstanding borrowings under the revolving
credit facility and $9.4 million of outstanding letters of
credit, leaving amounts available for borrowings and additional
letters of credit of $30.0 million.

Southtrust Line of Credit.We had an agreement with
Southtrust Bank consisting of a $5.0 million revolving line
of credit, renewable each year on May 30. Our monthly
interest payments were based on LIBOR plus an applicable margin.
As of December 29, 2002, the margin was 1.125%. We also
paid a quarterly 0.5% commitment fee on the unused portion of
this line of credit. There were no outstanding borrowings under
our Southtrust line of credit, as of December 29, 2002. On
March 31, 2003, we and Southtrust agreed to terminate this
facility.

Senior Subordinated Notes.In May 1997, we completed an
offering of $175.0 million of 10.25% Senior Subordinated
Notes due May 2007. Prior to June 27, 2002, we had
repurchased $48.1 million of these notes in the open market
with proceeds from the sale of company-operated units to
franchisees, cash from operations and proceeds from our 1997
Credit Facility. In 2002, we called the remaining notes
outstanding of $126.9 million and funded the repurchase of
these notes with proceeds from our 2002 Credit Facility.

Share Repurchase Program

On July 22, 2002, our board of directors
approved a share repurchase program of up to $50 million.
On October 7, 2002, our board of directors approved an
increase to this program from $50 million to
$100 million. The program, which is open-ended, allows us
to repurchase our shares from time to time. As of
December 29, 2002, we had repurchased 3,692,963 shares of
our stock for approximately $77.9 million under this
program. We funded these purchases using proceeds from our bank
credit facilities and cash flow from operations. From
December 30, 2002 through the date of this Annual Report on
Form 10-K, there were no additional purchases.

Capital Expenditures

Our capital expenditures consist of re-imaging
activities associated with company-operated QSRs, new unit
construction and development, equipment replacements, the
purchase of new equipment for our company-operated QSRs,
investments in information technology, accounting systems and
improvements at various corporate offices. Capital expenditures
related to re-imaging activities consist of significant
renovations, upgrades and improvements, which on a per unit
basis typically cost between $70,000 and $160,000.

During 2002, we invested $49.7 million in
various capital projects, including $7.7 million in new
restaurant, bakery and cafe locations, $16.9 million in our
re-imaging program, $3.8 million in our Seattle Coffee
wholesale operations, $12.9 million in other capital assets
to maintain, replace and extend the lives of company-operated
QSR equipment and facilities, and $8.4 million to complete
other projects.

During 2001, we invested $58.0 million in
various capital projects, including $12.3 million in new
restaurant, bakery and cafe locations, $21.1 million in our
re-imaging program, $2.9 million in our Seattle Coffee
wholesale operations, $10.9 million in other capital assets
to maintain, replace and extend the lives of company-operated
QSR equipment and facilities, and $10.8 million to complete
other projects.

During 2000, we invested $50.0 million in
various capital projects, including $10.1 million in new
restaurant, bakery and cafe locations, $19.3 million in our
re-imaging program, $2.4 million in our Seattle

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##### Table of Contents



Coffee wholesale operations, $11.3 million
in other capital assets to maintain, replace and extend the
lives of company-operated QSR equipment and facilities, and
$6.9 million to complete other projects.


Substantially all of our capital expenditures
have been financed using cash provided from operating
activities, proceeds from the sale of our company-operated units
to franchisees and borrowings under our bank credit facilities.

Capital expenditures over the next three years
are expected to range from $30 to $35 million per
year. In 2003 and 2004, these expenditures will include
investments in information technology and new accounting systems.

Long-Term Employee Success Plan

Under our Long-Term Employee Success Plan, if our
common stock is publicly traded and the average stock price per
share is at least $46.50 for a period of 20 consecutive
trading days, or our earnings per share for any of the 2001,
2002 or 2003 is at least $3.375, bonuses become payable to all
employees hired before January 1, 2003 who have been
actively employed through the last day of the period in which we
attain either of these financial performance standards. Employee
payouts range from 10% to 110% of the individual employees
base salary at the time either of the standards is met. The
percentage is based upon the individual employees original
date of hire, and can amount to as much as 110% for an employee
whose date of hire was prior to January 1, 1998. The
bonuses are payable in shares of our common stock or, to the
extent an employee is eligible, deferred compensation, and may
be paid in cash if an employee elects to receive a cash payment
and our board of directors agrees to pay the bonus in cash. If
neither of our financial performance standards has been achieved
by December 28, 2003, the plan and our obligation to make
any payments under the plan would terminate. As of
December 29, 2003, AFC did not have a liability recorded in
its consolidated financial statements for the bonus payout as it
is not probable that the financial performance targets discussed
above will be met.

The payment of bonuses that may be required under
our Long-Term Employee Success Plan, whether in cash or stock,
may have a material adverse effect on our earnings per share for
the fiscal quarter and year in which the bonuses are earned, and
could adversely affect our compliance with the covenants and
restrictions contained in our bank credit facility. Further, we
may not have sufficient cash resources to pay these bonuses in
cash at the time they become payable, which would cause us to
pay all or a portion of the bonuses using shares of our common
stock. Assuming that the financial performance standards were
achieved as of the date of this filing, we estimate that we
would be obligated to pay bonuses with an aggregate value of up
to approximately $75 million. We do not expect to pay any
bonuses under this program.

Impact of Inflation

We believe that, over time, we generally have
been able to pass along inflationary increases in our costs
through increased prices of our menu items, and the effects of
inflation on our net income historically have not been, and are
not expected to be, materially adverse. Due to competitive
pressures, however, increases in prices of menu items often lag
behind inflationary increases in costs.

Seasonality

Our Cinnabon bakeries and Seattle Coffee cafes
have traditionally experienced the strongest operating results
during the holiday shopping season between Thanksgiving and New
Years. Any factors that cause reduced traffic at our
Cinnabon bakeries and Seattle Coffee cafes during this period
would impair their ability to achieve normal operating results.

Tax Matters

We are continuously involved in U.S., state and
local tax audits for income, franchise, property and sales and
use taxes. In general, the statute of limitations remains open
with respect to tax returns that

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were filed for each fiscal year after 1998.
However, upon notice of a pending tax audit we often agree to
extend the statute of limitations to allow for complete and
accurate tax audits to be performed. Currently, the IRS is
auditing our U.S. tax returns for years 1999, 2000, and
2001. The state of Texas, our largest state of operations,
recently completed an audit for tax years 1996 through 2000 with
no material additional amount of tax due. Presently, we do not
believe that we have any tax matters that could materially
adversely affect our financial position or results of operations.


In connection with our Cinnabon acquisition, we
acquired U.S. net operating loss carry forwards of
$13.4 million and tax credit carry forwards of
$1.8 million. In addition, we acquired numerous state net
operating loss carry forwards in the states where Cinnabon had
operations prior to our acquisition. The utilization of these
U.S. and state tax carry forwards is restricted under the
Internal Revenue Code and the various state laws. Consequently,
the deferred tax asset related to these items has been fully
offset on our balance sheet with a valuation allowance of
$6.5 million. Accordingly, the balance sheet does not
reflect a net deferred tax asset for these net operating loss
and tax carry forwards.

Any subsequently recognized tax benefits relating
to the valuation allowance for deferred tax assets as of
December 29, 2002 would be allocated to goodwill and other
non-current intangible assets.

Market Risk

We are exposed to market risk from changes in
certain commodity prices, foreign currency exchange rates and
interest rates. All of these market risks arise in the normal
course of business, as we do not engage in speculative trading
activities. The following analysis provides quantitative
information regarding these risks.

Chicken Market Risk.The principal raw material for our
Popeyes and Churchs operations is fresh chicken. It
constitutes approximately half of their restaurant food,
beverages and packaging costs. These costs are
significantly affected by increases in the cost of chicken,
which can result from a number of factors, including increases
in the cost of grain, disease, declining market supply of
fast-food sized chickens and other factors that affect
availability, and greater international demand for domestic
chicken products.

In order to ensure favorable pricing for chicken
purchases and maintain an adequate supply of fresh chicken for
AFC and its franchisees, SMS (a not-for-profit purchasing
cooperative formed by AFC and its franchisees) has entered into
four types of chicken purchasing contracts with chicken
suppliers. The first is a grain-based cost-plus
pricing contract that utilizes prices based upon the cost of
feed grains plus certain agreed upon non-feed and processing
costs. The second is a market-priced formula that includes a
premium for cut specifications. The market-priced contracts have
maximum and minimum prices that AFC and its franchisees will pay
for chicken during the term of the contract. The third is a
modified fixed-price contract for dark meat, with adjustments
that occur only if market prices move outside of specific
ranges, with provisions for certain annual price adjustments.
The fourth contains fixed prices for both eight-piece cut and
dark meat, for periods up to one year. These contracts have
terms ranging from six months to three years. These contracts
establish pricing arrangements, but do not establish any firm
purchase commitments on the part of AFC or its franchisees.

Foreign Currency Exchange Rate Risk.We are exposed to currency risk
from the potential changes in foreign currency rates that
directly impact our revenues and cash flows from our
international operations. For each of 2002, 2001 and 2000,
foreign operations represented less than 1% of sales by
company-operated restaurants; approximately 17% of franchise
revenues; and approximately 10%, 15%, and 13%, respectively, of
wholesale revenues. Aggregated, foreign-sourced revenues for
2002, 2001 and 2000 represented 4.4%, 4.1% and 3.3% of total
revenues, respectively. As of December 29, 2002,
approximately $3.8 million of our accounts receivable were
denominated in foreign currencies.

Due to our international operations, we are
exposed to risks from changes in international economic
conditions and changes in foreign currency rates. On a limited
basis, we have entered into foreign currency agreements with
respect to the Korean Won to reduce our foreign currency risks
associated with royalty

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streams from franchised operations in Korea. Net
losses incurred during 2002, 2001 and 2000 related to these
agreements were not significant to our financial position nor
our results of operations.


Interest Rate Risk.Our net exposure to interest rate
risk consists of our borrowings under our bank credit facility.
Borrowings made pursuant to that facility include interest rates
that are benchmarked to U.S. and European short-term
floating-rate interest rates. As of December 29, 2002, the
balances outstanding under our 2002 Credit Facility totaled
$222.9 million. The impact on our annual results of
operations of a hypothetical one-point interest rate change on
the outstanding balances under our 2002 Credit Facility would be
approximately $2.2 million.

Critical Accounting Policies

Use of Estimates.The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires our management
to make assumptions and estimates that can have a material
impact on our results of operations. Estimates and judgments are
inherent in the calculations of allowances for doubtful
accounts, legal matters, medical, pension and other
post-retirement benefits, income taxes, insurance liabilities,
various other commitments and contingencies, impairment of
assets and the estimation of the useful lives of fixed assets
and other long-lived assets and, from time to time, estimates
are revised based upon more current information and additional
analysis. While management applies its judgment based on
assumptions believed to be reasonable under the circumstances,
actual results could vary from these assumptions. It is possible
that materially different amounts would be reported using
different assumptions.

Revenue Recognition  Sales by
Company-Operated Restaurants.Revenue from the sale of food and beverage products at
company-operated QSRs is recognized upon delivery.

Revenue Recognition  Franchise
Operations.Revenue from
franchising activities is recognized based on the terms of the
underlying agreements.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | Franchise Agreements.In general, our franchise
    agreements provide for the payment of a one-time fee associated
    with the opening of a new QSR and an ongoing royalty based on a
    percentage of sales. These agreements also require contributions
    by the franchisee (and AFC) to an advertising fund, as discussed
    below.                                                                                                                                                           | 
|
| | Development Agreements.In general, our development
    agreements provide for the development of a specified number of
    QSRs within a defined geographic territory in accordance with a
    schedule of opening dates. Development schedules generally cover
    three to five years and typically have benchmarks for the number
    of QSRs to be opened at six to twelve month intervals.
    Development agreement payments are made when the agreement is
    executed and are nonrefundable. | 

Initial franchise fees and development fees are
recorded as deferred franchise revenue when received and are
recognized as revenue when the QSRs covered by the fees are
opened or all material services or conditions relating to the
fees have been substantially performed or satisfied by AFC. We
recognize royalty revenues as earned.

Revenue Recognition  Wholesale
Transactions.Revenue from our
wholesale operations is recognized upon delivery, based upon the
terms of each sale.

Other Revenues.Other revenues are principally
composed of rental income associated with properties leased or
sub-leased to franchisees and other fees associated with unit
conversions. Rental revenues are recognized on the straight-line
basis over the lease term. Fees associated with unit conversions
are recognized when all material services or conditions relating
to the fees have been substantively performed or satisfied by AFC

Slotting Fees.Slotting fees are paid to grocery
stores to obtain favorable shelf positioning for our wholesale
products. Fees paid pursuant to a written contract are deferred
and amortized over the term of

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the contract as a reduction of wholesale
revenues. All other fees of this nature are charged against
wholesale revenues as incurred.


Gains and Losses Associated With Unit
Conversions.In the normal course
of business, we sell the assets of company-operated QSRs to
existing or new franchisees. These transactions are referred to
as unit conversions.

We defer gains on unit conversions when we have
continuing involvement in the assets sold beyond the customary
franchisor role. Our continuing involvement generally includes
seller financing or the leasing of real estate to the
franchisee. Deferred gains are recognized over the remaining
term of the continuing involvement. Losses are recognized
immediately. For unit conversions, the computation of gains or
losses also includes an allocation of goodwill if the underlying
unit was acquired through a transaction accounted for by the
purchase method.

Insurance Accruals.We are self-insured for most
workers compensation, general liability, automotive
liability losses and health care claims. We record our insurance
liabilities based on historical and industry trends, which are
continually monitored, and accruals are adjusted when warranted
by changing circumstances. Since there are many estimates and
assumptions involved in recording insurance liabilities,
differences between actual future events and prior estimates and
assumptions could result in adjustments to these liabilities.

Employee Benefit Plans.Retirement and other benefit
plans, including all relevant assumptions required by generally
accepted accounting principles, are evaluated each year. Due to
the technical nature of retirement accounting, outside actuaries
are used once every two years to provide assistance in
calculating the estimated future obligations. Since there are
many estimates and assumptions involved in retirement benefits,
differences between actual future events and prior estimates and
assumptions could result in adjustments to pension expenses and
obligations.

Litigation Accruals.In the normal course of business,
we must make continuing estimates of outcomes of future legal
proceedings and related liabilities, which requires the use of
managements judgment on the outcome of various issues.
Management may also use outside legal advice to assist in the
estimating process. However, the ultimate outcome of various
legal proceedings could be different than management estimates,
and adjustments to income could be required.

Income Taxes.Income taxes are accounted for
under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.

Depreciation and Amortization.Depreciation is recognized using
the straight-line method in amounts adequate to depreciate costs
over the following estimated useful lives: buildings, up to
35 years; leasehold improvements, up to 15 years;
equipment, up to 15 years; and property under capital
leases, up to the life of the related lease. For finite-lived
intangible assets, amortization is recognized using the
straight-line method over the following estimated useful lives:
20-40 years for franchise value and 3-20 years for
other definite-lived intangible assets.

Impairment of Goodwill, Other Intangible
Assets and Long-Lived Assets.We
evaluate goodwill, other intangible assets and long-lived assets
for impairment on an annual basis (the fourth quarter of each
year) or when circumstances arise indicating that a particular
asset might be impaired.

In accordance with the requirements of
SFAS 142, we assign goodwill and other indefinite-lived
assets to our reporting units for purposes of our impairment
evaluation. Our reporting units are our business segments. The
impairment evaluation is conducted using a two-step process. In
the first step, we compare the carrying value of each reporting
units net assets to its estimated fair value. We estimate
the fair value

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of the net assets using a discounted cash flow
model or market price if available. The operating assumptions
used in the discounted cash flow model are generally consistent
with the past performance of each reporting unit and other
intangible assets and are also consistent with the projections
and assumptions that are used in current operating plans. Such
assumptions are subject to change as a result of changing
economic and competitive conditions. If the fair value of the
reporting units net assets is determined to be less than
the carrying value, a second step is performed. In the second
step, we determine the level of impairment by comparing the
implied fair value of the reporting units goodwill (a
process that assigns the estimated fair value of the reporting
unit to its assets in a manner similar to a purchase price
allocation) to its carrying value. If the estimated fair value
is less than the carrying value, an impairment charge is
recorded for the difference.


For property and equipment at company-operated
QSRs, we perform our annual impairment evaluation on a
site-by-site basis. We evaluate QSRs using a two-year
history of operating losses as our primary indicator of
potential impairment. Based on the best information available,
we write down an impaired QSR to its estimated fair market
value, which becomes its new cost basis. We generally measure
estimated fair market value by discounting estimated future cash
flows. In addition, when we decide to close a QSR, it is
reviewed for impairment and depreciable lives are adjusted. The
impairment evaluation is based on the estimated cash flows from
continuing use through the expected disposal date and the
expected terminal value.

Accounting Standards Adopted in 2002

In the first quarter of 2002, we adopted SFAS
No. 142, Goodwill and Other Intangible Assets
(SFAS 142). At that time, we discontinued
our prior practice of amortizing goodwill and other
indefinite-lived assets. These assets are now being accounted
for by the impairment-only approach. Our finite-lived intangible
assets continue to be amortized on a straight-line basis as in
prior years. In adopting SFAS 142, we recorded a transitional
charge of $11.8 million to reduce the carrying value of the
goodwill associated with our coffee segment. In the Consolidated
Financial Statements, this charge is presented as the cumulative
effect of an accounting change. In the fourth quarter of 2002,
we recorded an additional impairment charge of
$25.5 million relating to goodwill in our coffee segment.
In the Consolidated Financial Statements, this additional charge
is reflected in the caption impairment charges and other
expenses, net.

In the first quarter of 2002, we adopted, SFAS
No. 144. At that time, SFAS 144 had no effect on our
consolidated financial statements. During the fourth quarter of
2002, as part of our annual assessment of impairment, we
recognized impairment charges of $13.6 million pursuant to
the guidelines of SFAS 144. In the Consolidated Financial
Statements, these charges are included within the caption
impairment charges and other expenses, net. These
charges relate to various company-operated QSRs whose operating
results had deteriorated in 2002, warranting a write-down of
fixed asset balances.

During 2002, we adopted SFAS No. 145,
Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections(SFAS 145). As a
result, we have included the write-off of debt issuance costs
associated with the early extinguishment of debt as a component
of interest expense, net in our Consolidated
Financial Statements. Prior years have been reclassified to
reflect adoption of SFAS 145.

Accounting Standards That We Have Not Yet
Adopted

In May 2003, the Financial Accounting Standards
Board (the FASB) issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity(SFAS 150). SFAS 150 establishes
standards for how an issuer classifies and measures three
classes of freestanding financial instruments with
characteristics of both liabilities and equity. It requires that
an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances).
SFAS 150 was effective for financial instruments entered
into or modified after May 31, 2003, and otherwise was
effective at the beginning of the first interim period beginning
after June 15,

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2003. We have not entered into or modified any
financial instruments within the scope of SFAS 150 since
May 31, 2003, nor do we currently hold any significant
financial instruments within its scope.


In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement on Derivative Instruments and Hedging
Activities(SFAS 149). SFAS 149 amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts and hedging activities. SFAS 149 is effective
for contracts entered into or modified after June 30, 2003.
We believe adoption of SFAS 149 will not have a material
effect on our financial position or our results of operations.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51 (FIN 46).
FIN 46 addresses the consolidation of entities whose equity
holders have either (a) not provided sufficient equity at
risk to allow the entity to finance its own activities or
(b) do not possess certain characteristics of a controlling
financial interest. FIN 46 requires the consolidation of
these entities, known as variable interest entities
(VIEs), by the primary beneficiary of the entity.
The primary beneficiary is the entity, if any, that is subject
to a majority of the risk of loss from the VIEs
activities, entitled to receive a majority of the VIEs
residual returns, or both. FIN 46 applies immediately to
variable interest in VIEs created or obtained after
January 31, 2003. As amended by FASB Staff Position
(FSP) No. FIN 46-6, FIN 46 is
effective for variable interests in a VIE created before
February 1, 2003 at the end of the first interim or annual
period ending after December 15, 2003 (the end of fiscal
2003, December 27, 2003, for the Company). FIN 46
requires certain disclosures in financial statements issued
after January 31, 2003, if it is reasonably possible that
the Company will consolidate or disclose information about
variable interest entities when FIN 46 becomes effective.

As discussed in Note 13, we have guaranteed
franchisee loan and lease obligations of approximately
$1.5 million and have provided an additional
$1 million in guarantees under a loan program for
franchisees to purchase or develop new units.

Also as discussed in Note 13, we and our
franchisees own a purchasing cooperative, SMS, for the purpose
of purchasing certain restaurant products. Our equity ownership
is generally proportional to the percentage ownership of the
QSRs we own in relation to the total QSRs that participate in
SMS. We are continuing to evaluate whether this cooperative is a
VIE under the provisions of FIN 46, and if so, whether we
are the primary beneficiary. We do not currently believe
consolidation of this cooperative will be required as a result
of the adoption of FIN 46.

As of the date of this filing, we understand the
FASB is in the process of modifying and/or clarifying certain
provisions of FIN 46. Additionally, certain FSPs relating
to FIN 46 are being deliberated. These modifications and
FSPs, when finalized, could impact our analysis of the
applicability of FIN 46 to entities that are franchisees of
our brands. We are aware of certain interpretations by some
parties of the provisions of FIN 46, given its continuing
evolution, which could have applicability when certain
conditions exist that are not representative of a typical
franchise relationship. These conditions include the franchisor
possessing an equity interest in, or providing significant
levels of, financial support to a franchisee. Except as
discussed in Assets Under Contractual Agreement, of
Note 2 to the Consolidated Financial Statements, we do not
possess any ownership interests in our franchisees.

Additionally, we generally do not provide
financial support to the franchisee in our typical franchise
relationship. While we continue to monitor and analyze
developments regarding FIN 46 that would impact its
applicability to franchise relationships, at this time we do not
believe that the required consolidation of franchise entities,
if any, would materially impact our consolidated financial
statements.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an Amendment of FASB Statement No. 123(SFAS 148). SFAS 148 provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 requiring more prominent
disclosures in both annual and interim financial statements
about the effect of the method used on reported results.
Regardless of whether, when or how a

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company adopts the fair value based method of
accounting, SFAS 148 prescribes a specific tabular format
and requires disclosure in the Summary of Significant
Accounting Policies or its equivalent. We believe adoption
of SFAS 148 will not have a material effect on our
financial position or our results of operations.


In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (Interpretation 45).
Interpretation 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. Interpretation
45 does not prescribe a specific approach for subsequently
measuring the guarantors recognized liability over the
term of the related guarantee. The initial recognition and
initial measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim
or annual periods after December 15, 2002. As it relates to our
loan guarantee programs, we have complied with the disclosure
requirements of Interpretation 45. As it concerns the
recognition provisions of Interpretation 45, we do not believe
that their adoption, in the first quarter of 2003, will have a
material effect on our financial position or our results of
operations.

In June 2002, the Financial Accounting Standards
Board issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities(SFAS 146). SFAS 146 supercedes Emerging
Issues Task Force Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS 146 requires the fair value of a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred as opposed
to the date of an entitys commitment to an exit plan. The
provisions of SFAS 146 are effective for exit or disposal
activities initiated after December 31, 2002, with early
application encouraged. We believe adoption of SFAS 146 will not
have a material effect on our financial position or our results
of operations.

In June 2001, the Financial Accounting Standards
Board issued SFAS No. 143, Accounting for Asset Retirement
Obligations(SFAS 143).SFAS 143
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for
certain obligations of leases and the associated asset
retirement costs. It is effective for fiscal years beginning
after June 15, 2002. SFAS 143 requires that the fair
value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. SFAS 143 will be adopted in
the first quarter of 2003. We believe the effect of adopting
SFAS 143 will result in a charge of less than $1.0 million
to our consolidated results of operation.

Risks Factors That May Affect Financial
Condition and Results of Operations

Certain statements we make in this filing, and
other written or oral statements made by or on our behalf, may
constitute forward-looking statements within the
meaning of the federal securities laws. Words or phrases such as
should result, are expected to, we
anticipate, we estimate, we
project, we believe, or similar expressions
are intended to identify forward-looking statements. These
statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from our
historical experience and our present expectations or
projections. We believe that these forward-looking statements
are reasonable; however, you should not place undue reliance on
such statements. Such statements speak only as of the date they
are made, and we undertake no obligation to publicly update or
revise any forward-looking statement, whether as a result of
future events, new information or otherwise. The following risk
factors, and others that we may add from time to time, are some
of the factors that could cause our actual results to differ
materially from the expected results described in our
forward-looking statements.

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| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Litigation or regulatory actions arising in
    connection with the restatement of our financial statements
    could adversely affect our financial condition.

We, and various of our present and former
directors and officers, are involved in several matters relating
to our announcement that we would restate our financial
statements for the first three quarters of fiscal year 2002 and
for fiscal years 2001 and 2000. Those lawsuits and other legal
matters in which we have become involved following the
announcement of the restatement are described in Item 3,
Legal Proceedings in Part I of this Annual Report on
Form 10-K. Those lawsuits present material and significant
risk to us. Although we believe that we have meritorious
defenses to the claims of liability or for damages in these
actions, we are unable at this time to predict the outcome of
these actions or reasonably estimate a range of damages in the
event plaintiffs in these or other potential matters relating to
the same events prevail under one or more of their claims. The
amount of a settlement of or judgment on one or more of these
claims could substantially exceed the limits of our D&O
insurance. The ultimate resolution of these matters could have a
material adverse impact on our financial results, financial
condition, and liquidity, and on the trading price of our common
stock.

There can be no assurance that these lawsuits and
other legal matters will not have a disruptive effect upon the
operations of the business, or that these matters will not
consume the time and attention of our senior management. In
addition, we are likely to incur substantial expenses in
connection with such matters, including substantial fees for
attorneys and other professional advisors.

We have purchased D&O insurance that may
provide coverage for some or all of these matters. We have given
notice to our D&O insurers of the claims described above,
and the insurers have responded by requesting additional
information and by reserving their rights under the policies,
including the rights to deny coverage under various policy
exclusions or to rescind the policies in question as a result of
our announced restatement of our financial statements. There is
risk that the D&O insurers will rescind the policies; that
some or all of the claims will not be covered by such policies;
or that, even if covered, our ultimate liability will exceed the
available insurance.



| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Relationships with franchisees and our
    vendors and suppliers may be adversely affected by our
    restatement of our financial results and related
    litigation.

Due to our restatement of our financial
statements and related litigation, new or existing franchisees,
vendors, suppliers or others may have concerns that we will
become unreliable in operating our business or that our brand
image will be harmed. As a result, we may experience a decrease
in the number of new franchisees or a reluctance on the part of
existing franchisees to renew their agreements with us. In
addition, we may experience a loss of other important business
relationships. If our franchisees, vendors, suppliers or others
lose confidence in our ability to operate our business or the
reputation of our brands, our business may be materially harmed.



| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because our operating results are closely
    tied to the success of our franchisees, the failure of one or
    more of these franchisees could adversely affect our operating
    results.

Our operating results are increasingly dependent
on our franchisees and, in some cases, on certain franchisees
that operate a large number of restaurants and bakeries. How
well our franchisees operate their units is outside of our
direct control. Any failure of these franchisees to operate
their franchises successfully could adversely affect our
operating results. From the beginning of 1996 to
December 29, 2002, the number of our franchised units
increased from 1,477 to 3,532. We currently have over 575
franchisees. In addition, one of our domestic franchisees
currently operates over 150 Popeyes restaurants, another
domestic franchisee currently operates approximately 100
Churchs restaurants, and a third domestic franchisee
currently operates over 100 Cinnabon bakeries. In addition, each
of our international franchisees is generally responsible for
the development of significantly more restaurants, bakeries or
cafes than our domestic franchisees. As a result, our
international operations are more closely tied to the success of
a smaller number of franchisees than our domestic operations.
There can be no assurance that our domestic and international
franchisees will operate their franchises successfully.

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| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our senior management left us, our
    operating results could be adversely affected, and we may not be
    able to attract and retain additional qualified management
    personnel.

We are dependent on the experience and industry
knowledge of Frank J. Belatti, our Chairman of the Board, Chief
Executive Officer and interim Chief Financial Officer, and Dick
R. Holbrook, our President and Chief Operating Officer, and
other members of our senior management team. Since the departure
of our previous Chief Financial Officer, Mr. Belatti has
also been serving in that capacity while we undertake a search
to hire a new Chief Financial Officer. If, for any reason, our
senior executives do not continue to be active in management or
if we are unable to retain qualified new members of senior
management, our operating results could be adversely affected.
We cannot assure you that we will be able to attract and retain
additional qualified senior executives as needed. Specifically,
the restatement of our financial statements and the pending
securities litigation may adversely affect our ability to
attract and retain qualified senior management. We have
employment agreements with each of Messrs. Belatti and
Holbrook; however, these agreements do not ensure their
continued employment with us.



| |                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The number of new units to be opened by
    franchisees has been and may continue to be adversely affected
    by our delay in releasing audited financial statements for 2002
    and filing quarterly financial statements for
    2003.

Under federal regulations and certain state
franchising laws in the United States, we must provide a
franchise offering circular to prospective franchisees at the
earlier of the first personal meeting with a prospective
franchisee or ten business days before the franchisee signs a
franchise agreement or pays us any money. This offering circular
must include current financial information. Because of our delay
in releasing audited financial statements for 2002 and filing
quarterly financial statements for 2003, we have not had an
offering circular with current financial information and, with
certain exceptions, we have been unable to sell or offer to sell
franchises to prospective franchisees in the United States since
the expiration of our prior years franchise offering
circular. This delay will result in the number of new units to
be opened by domestic franchisees during 2003 being below the
number we had previously anticipated and may adversely affect
the number of new units to be opened by franchisees in 2004 and
future years.



| |                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to relist our common stock
    with the Nasdaq National Market or another major securities
    market or exchange, the trading price of our common stock may
    decline substantially and shareholders will experience a
    significant decrease in the liquidity of our common
    stock.

On April 16, 2003, the Nasdaq National
Market notified us by letter that we had failed to file our 2002
Annual Report on Form 10-K, which we were required to file
pursuant to Nasdaq Marketplace Rule 4310(c)(14). In
connection with this notification, a fifth character, the letter
E, was temporarily added to our stock symbol. On May 29,
2003, the Nasdaq National Market notified us that we had failed
to file our Quarterly Report on Form 10-Q for the quarterly
period ended April 20, 2003, also required by
Rule 4310(c)(14). We were unable to make these filings on a
timely basis due to the extended time needed to complete the
audit work on our 2002, 2001 and 2000 financial statements and
the associated restatement described in Note 23 to the
Consolidated Financial Statements.

On June 19, 2003, we announced that the
Nasdaq Listing Qualifications Panel had determined that they
would continue listing our common stock on the Nasdaq National
Market, subject to certain specified conditions, including the
filing of this Annual Report on Form 10-K by July 16,
2003 and the filing of our 2003 Quarterly Reports on
Form 10-Q by certain specified dates. On July 15,
2003, we informed the Panel that we would not be able to meet
the conditions, and we requested that the Panel provide us an
additional extension. On August 14, 2003, we announced that the
Nasdaq Listing Qualifications Panel had notified us that our
common stock would be delisted from the Nasdaq National Market
as of the opening of business on Monday, August 18, 2003,
because we had not yet made the required SEC filings. On that
date our common stock began trading on the Pink Sheets. Because
we are not current in our periodic SEC reporting requirements,
we are presently ineligible to trade on the OTC Bulletin Board.

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There can be no assurance that we will be able to
relist our common stock on the Nasdaq National Market or any
other major securities market or exchange. If we are unable to
relist our common stock, the trading price of our common stock
may decline substantially and shareholders will experience a
significant decrease in the liquidity of our common stock.
Securities that trade on the Pink Sheets, including our common
stock, may also be subject to higher transaction costs for
trades and have reduced liquidity compared to securities that
trade on the Nasdaq National Market and other organized markets
and exchanges.



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to successfully address
    the deficiencies in our internal controls, our ability to report
    our financial results on a timely and accurate basis may
    continue to be adversely affected.

Our independent auditors advised our Audit
Committee that, in connection with their audits of our 2002,
2001 and 2000 financial statements, they identified certain
deficiencies that constituted material control weaknesses. These
weaknesses contributed to the restatement of our financial
statements for the first three quarters of 2002 and for fiscal
years 2001, 2000, 1999 and 1998. In addition, our Audit
Committee, pursuant to an independent investigation into several
accounting issues that arose in connection with the restatement,
concluded that our accounting, financial reporting and internal
control functions needed significant improvement. We have begun
implementing various actions to address the issues identified in
the evaluation of our controls and procedures. If these actions
are not successful in addressing these internal control issues,
our ability to report our financial results on a timely and
accurate basis may continue to be adversely affected.



| |                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our 2002 Credit Facility may limit our
    ability to expand our business, and our ability to comply with
    the covenants, tests and restrictions contained in these
    agreements may be affected by events that are beyond our
    control.

Our 2002 Credit Facility contains financial and
other covenants requiring us, among other things, to maintain
financial ratios and meet financial tests. It also restricts our
ability to incur additional indebtedness, engage in mergers,
acquisitions or reorganizations, pay dividends, create or allow
liens, and make capital expenditures. The restrictive covenants
in our 2002 Credit Facility may limit our ability to expand our
business, and our ability to comply with these provisions and to
repay or refinance our 2002 Credit Facility may be affected by
events beyond our control. A failure to make any required
payment under our 2002 Credit Facility or to comply with any of
the financial and operating covenants included in the 2002
Credit Facility would result in an event of default, permitting
the lenders to accelerate the maturity of outstanding
indebtedness. This acceleration could also result in the
acceleration of other indebtedness that we may have outstanding
at that time. During 2003 we obtained amendments to our 2002
Credit Facility extending the periods in which we may file our
2002 audited financial statements, our 2003 quarterly financial
statements and to adjust certain financial ratios for 2003.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | If we are unable to franchise a sufficient
    number of QSRs, our growth strategy could be at
    risk.

As of December 29, 2002, we franchised 2,709
Popeyes, Churchs, Cinnabon and Seattle Coffee units
domestically and 823 units in Puerto Rico and 33 foreign
countries. Our growth strategy is significantly dependent on
increasing the number of our franchised QSRs, both through sales
of new franchises and sales of existing company-operated units
to new and existing franchisees. If we are unable to franchise a
sufficient number of QSRs, our growth strategy could be
significantly impaired.

Our ability to successfully franchise additional
QSRs will depend on various factors, including the availability
of suitable sites, the negotiation of acceptable leases or
purchase terms for new locations, permitting and regulatory
compliance, the ability to meet construction schedules, the
financial and other capabilities of our franchisees, our ability
to manage this anticipated expansion, and general economic and
business conditions. Many of the foregoing factors are beyond
the control of our franchisees. Further, there can be no
assurance that our franchisees will successfully develop or
operate their units in a manner consistent with our concepts and
standards, or will have the business abilities or access to
financial resources necessary to open the units required by
their agreements. Historically, there have been many

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instances in which Churchs and Popeyes
franchisees have not fulfilled their obligations under their
development agreements to open new units.




| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | If the cost of chicken increases, our cost
    of sales will increase and our operating results could be
    adversely affected.

The principal raw material for our Popeyes and
Churchs operations is fresh chicken. It constitutes
approximately half of their restaurant food, beverages and
packaging costs. Any material increase in the costs of
these food products could adversely affect our operating
results. Our company-operated and franchised restaurants
purchase fresh chicken from approximately 13 suppliers who
service us from 37 plant locations. These costs are
significantly affected by increases in the cost of chicken,
which can result from a number of factors, including increases
in the cost of grain, disease, declining market supply of
fast-food sized chickens and other factors that affect
availability. Because our purchasing agreements for fresh
chicken allow the prices that we pay for chicken to fluctuate, a
rise in the prices of chicken products could expose us to cost
increases. If we fail to anticipate and react to increasing food
costs by adjusting our purchasing practices or increasing our
sales prices, our cost of sales may increase and our operating
results could be adversely affected.



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | If we face labor shortages or increased
    labor costs, our growth and operating results could be adversely
    affected.

Labor is a primary component in the cost of
operating our QSRs. As of December 29, 2002, we employed
8,935 hourly-paid employees in our company-operated units. If we
face labor shortages or increased labor costs because of
increased competition for employees, higher employee turnover
rates or increases in the federal minimum wage or other employee
benefits costs (including costs associated with health insurance
coverage), our operating expenses could increase and our growth
could be adversely affected. Our success depends in part upon
our and our franchisees ability to attract, motivate and
retain a sufficient number of qualified employees, including QSR
managers, kitchen staff and servers, necessary to keep pace with
our expansion schedule. The number of qualified individuals
needed to fill these positions is in short supply in some areas.
Although we have not yet experienced any significant problems in
recruiting or retaining employees for our company-operated
units, any future inability to recruit and retain sufficient
individuals may delay the planned openings of new units.
Competition for qualified employees could also require us to pay
higher wages to attract a sufficient number of employees.



| |                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our expansion into new markets may present
    additional risks that could adversely affect the success of our
    new units, and the failure of a significant number of these
    units could adversely affect our operating
    results.

We expect to enter into new geographic markets in
which we have no prior operating or franchising experience. We
face challenges in entering new markets, including
consumers lack of awareness of our brands, difficulties in
hiring personnel, and problems due to our unfamiliarity with
local real estate markets and demographics. New markets may also
have different competitive conditions, consumer tastes and
discretionary spending patterns than our existing markets. Any
failure on our part to recognize or respond to these differences
may adversely affect the success of our new units. The failure
of a significant number of the units that we open in new markets
could adversely affect our operating results.



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in consumer preferences and
    demographic trends, as well as concerns about health or food
    quality, could result in a loss of customers and reduce our
    revenues.

Foodservice businesses are often affected by
changes in consumer tastes, national, regional and local
economic conditions, discretionary spending priorities,
demographic trends, traffic patterns and the type, number and
location of competing restaurants. Our franchisees, and we, are
from time to time, the subject of complaints or litigation from
guests alleging illness, injury or other food quality, health or
operational concerns. Adverse publicity resulting from these
allegations may harm our reputation or our franchisees
reputation, regardless of whether the allegations are valid or
not, whether we are found liable or not, or

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those concerns relate only to a single unit or a
limited number of units or many units. In addition, the
restaurant industry is currently under heightened legal and
legislative scrutiny resulting from the perception that the
practices of restaurant companies have contributed to the
obesity of their guests. Additionally, some animal rights
organizations have engaged in confrontational demonstrations at
certain restaurant companies across the country. As a multi-unit
restaurant company, we can be adversely affected by the
publicity surrounding allegations involving illness, injury, or
other food quality, health or operational concerns. Moreover,
complaints, litigation or adverse publicity experienced by one
or more of our franchisees could also adversely affect our
business as a whole. If we are unable to adapt to changes in
consumer preferences and trends, or we have adverse publicity
due to any of these concerns, we may lose customers and our
revenues may decline.




| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to compete successfully
    against other companies in the QSR industry or to develop new
    products that appeal to consumer preferences, we could lose
    customers and our revenues may decline.

The QSR industry is intensely competitive with
respect to price, quality, brand recognition, service and
location. If we are unable to compete successfully against other
foodservice providers, we could lose customers and our revenues
may decline. We compete against other QSRs, including chicken,
hamburger, pizza, Mexican and sandwich restaurants, other
purveyors of carry out food and convenience dining
establishments, including national restaurant chains. Many of
our competitors possess substantially greater financial,
marketing, personnel and other resources than we do. There can
be no assurance that consumers will continue to regard our
products favorably, that we will be able to develop new products
that appeal to consumer preferences, or that we will be able to
continue to compete successfully in the QSR industry. In
addition, KFC, our primary competitor in the chicken segment of
the QSR industry, has far more units, greater brand recognition
and greater financial resources, all of which may affect our
ability to compete.

Our Cinnabon bakeries compete directly with
national chains located in malls and transportation centers such
as Auntie Annes, The Great American Cookie Company and
Mrs. Fields, as well as numerous regional and local
companies. Our Cinnabon bakeries also compete indirectly with
other QSRs, traditional bakeries, donut shops, ice cream and
frozen yogurt shops and pretzel and cookie companies.



| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our quarterly results and same-store sales
    may fluctuate significantly and could fall below the
    expectations of securities analysts and investors, which could
    cause the market price of our common stock to
    decline.

Our quarterly operating results and same-store
sales have fluctuated significantly in the past and may continue
to fluctuate significantly in the future as a result of a
variety of factors, many of which are outside of our control. If
our quarterly results or same-store sales fluctuate or fall
below the expectations of securities analysts and investors, the
market price of our common stock could decline. Our business is
subject to seasonal fluctuations, which may cause our operating
results to vary significantly depending upon the region of the
U.S. in which a particular unit is located, as well as the time
of year and the weather. For example, inclement weather may
reduce the volume of consumer traffic at QSRs, and may impair
the ability of our system-wide units to achieve normal operating
results for short periods of time. In particular, our Cinnabon
bakeries and Seattle Coffee cafes have traditionally experienced
the strongest operating results during the holiday shopping
season between Thanksgiving and New Years. Consequently,
any factors that cause reduced traffic at our Cinnabon bakeries
and Seattle Coffee cafes during this period would have a greater
effect because of this seasonality.

Factors that may cause our quarterly results and
same-store sales to fluctuate include the following:



| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | the disposition of company-operated restaurants;                                
|
| |  | the opening of new restaurants, bakeries and
    cafes by us or our franchisees;
|
| |  | increases in labor costs;                                                       
|
| |  | increases in the cost of food products;                                         

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| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | the ability of our franchisees to meet their
    future commitments under development agreements;        
|
| |  | consumer concerns about food quality;                                                                    
|
| |  | the level of competition from existing or new
    competitors in the QSR industry; and                   
|
| |  | economic conditions generally, and in each of the
    markets in which we or our franchisees are located.

Accordingly, results for any one-quarter are not
indicative of the results to be expected for any other quarter
or for the full year, and same-store sales for any future period
may decrease.



| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to extensive government
    regulation, and our failure to comply with existing regulations
    or increased regulations could adversely affect our business and
    operating results.

We are subject to numerous federal, state, local
and foreign government laws and regulations, including those
relating to:



| |   |                                                             
| | - | ------------------------------------------------------------
| |  | the preparation and sale of food;                           
|
| |  | building and zoning requirements;                           
|
| |  | environmental protection;                                   
|
| |  | minimum wage, overtime and other labor
    requirements;    
|
| |  | compliance with the Americans with Disabilities
    Act; and
|
| |  | working and safety conditions.                              

If we fail to comply with existing or future
regulations, we may be subject to governmental or judicial fines
or sanctions. In addition, our capital expenses could increase
due to remediation measures that may be required if we are found
to be noncompliant with any of these laws or regulations.

We are also subject to regulation by the Federal
Trade Commission and to state and foreign laws that govern the
offer, sale and termination of franchises and the refusal to
renew franchises. The failure to comply with these regulations
in any jurisdiction or to obtain required approvals could result
in a ban or temporary suspension on future franchise sales or
fines or require us to make a rescission offer to franchisees,
any of which could adversely affect our business and operating
results.



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | We continue to increase the size of our
    franchisee system, and this growth may place a significant
    strain on our resources.

The continued growth of our franchisee system
will require the implementation of enhanced business support
systems, management information systems and additional
management, franchise support and financial resources. Failure
to implement these systems and secure these resources could have
a material adverse effect on our operating results. There can be
no assurance that we will be able to manage our expanding
franchisee system effectively.



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | Shortages or interruptions in the supply or
    delivery of fresh food products could adversely affect our
    operating results.

We and our franchisees are dependent on frequent
deliveries of fresh food products that meet our specifications.
Shortages or interruptions in the supply of fresh food products
caused by unanticipated demand, problems in production or
distribution, inclement weather or other conditions could
adversely affect the availability, quality and cost of
ingredients, which would adversely affect our operating results.

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| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Currency, economic, political and other
    risks associated with our international operations could
    adversely affect our operating results.

As of December 29, 2002, we had 821
franchised restaurants, bakeries and cafes in Puerto Rico and 33
foreign countries, including a significant number of franchised
restaurants in Asia. Such operations are transacted in the
respective local currency. The amount owed us is based on a
conversion of the royalties and other fees to U.S. dollars
using the prevailing exchange rate. In particular, the royalties
are based on a percentage of net sales generated by our foreign
franchisees operations. Consequently, our revenues from
international franchisees are exposed to the potentially adverse
effects of our franchisees operations, currency exchange
rates, local economic conditions, political instability and
other risks associated with doing business in foreign countries.

We intend to expand our international franchise
operations significantly over the next several years. We expect
that the portion of our revenues generated from international
operations will increase in the future, thus increasing our
exposure to changes in foreign economic conditions and currency
fluctuations.



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to adequately protect
    our intellectual property, which could harm the value of our
    brands and branded products and adversely affect our
    business.

We depend in large part on our brands and branded
products and believe that they are very important to the conduct
of our business. We rely on a combination of trademarks,
copyrights, service marks, trade secrets and similar
intellectual property rights to protect our brands and branded
products. The success of our expansion strategy depends on our
continued ability to use our existing trademarks and service
marks in order to increase brand awareness and further develop
our branded products in both domestic and international markets.
We also use our trademarks and other intellectual property on
the Internet. If our efforts to protect our intellectual
property are not adequate, or if any third party misappropriates
or infringes on our intellectual property, either in print or on
the Internet, the value of our brands may be harmed, which could
have a material adverse effect on our business, including the
failure of our brands and branded products to achieve and
maintain market acceptance.

We franchise our QSRs to various franchisees.
While we try to ensure that the quality of our brands and
branded products is maintained by all of our franchisees, we
cannot be certain that these franchisees will not take actions
that adversely affect the value of our intellectual property or
reputation.

We have registered certain trademarks and have
other trademark registrations pending in the U.S. and
foreign jurisdictions. The trademarks that we currently use have
not been registered in all of the countries in which we do
business and may never be registered in all of these countries.
We cannot be certain that we will be able to adequately protect
our trademarks or that our use of these trademarks will not
result in liability for trademark infringement, trademark
dilution or unfair competition.

There can be no assurance that all of the steps
we have taken to protect our intellectual property in the
U.S. and foreign countries will be adequate. In addition,
the laws of some foreign countries do not protect intellectual
property rights to the same extent as the laws of the U.S.
Further, through acquisitions of third parties, we may acquire
brands and related trademarks that are subject to the same risks
as the brands and trademarks we currently own.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because many of our properties were used as
    retail gas stations in the past, we may incur substantial
    liabilities for remediation of environmental contamination at
    our properties.

Approximately 125 of our 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, and some of these
properties may currently contain abandoned underground storage
tanks. It is possible that petroleum products and other
contaminants may have been released at these properties into the
soil or groundwater. Under applicable federal and state
environmental laws, we, as the current owner or operator of
these sites, may be jointly and severally liable for the costs
of investigation and remediation

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of any contamination, as well as any other
environmental conditions at our properties that are unrelated to
underground storage tanks. If we are found liable for the costs
of remediation of contamination at any of these properties, our
operating expenses would likely increase and our operating
results would be materially adversely affected. We have obtained
insurance coverage that we believe will be adequate to cover any
potential environmental remediation liabilities. However, there
can be no assurance that the actual costs of any potential
remediation liabilities will not materially exceed the amount of
our policy limits.







|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7a. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK

Information about market risk can be found in
Item 7 of this report under the caption Market
Risk.






|        |                                                             
|------- | ------------------------------------------------------------
|Item 8. | CONSOLIDATED FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA

We have included our Consolidated Financial
Statements, which are required by this item, beginning on
Page F-1 of this report and hereby incorporate by reference
the relevant portions of those statements and accompanying notes
into this Item 8.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
    ON ACCOUNTING AND FINANCIAL DISCLOSURE

As recommended by our Audit Committee, our Board
of Directors on April 15, 2002 decided to no longer engage
Arthur Andersen LLP (Andersen) as AFCs
independent public accountants and engaged KPMG LLP
(KPMG) to serve as our independent public
accountants for the fiscal year ending December 29, 2002.

Andersens reports on our consolidated
financial statements for each of the years ended
December 30, 2001 and December 31, 2000 did not
contain an adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or
accounting principles.

During our fiscal years ended December 30,
2001 and December 31, 2000 and through the period preceding
Andersens dismissal, there were no disagreements with
Andersen on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure
which, if not resolved to Andersens satisfaction, would
have caused them to make reference to the subject matter in
connection with their report on our consolidated financial
statements for such years; and there were no reportable events,
as listed in Item 304(a)(1)(v) of Regulation S-K.

During our fiscal years ended December 30,
2001 and December 31, 2000 and through the period prior to
our engagement of KPMG, we did not consult KPMG with respect to
the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our consolidated financial
statements, or any other matters or reportable events listed in
Items 304(a)(2)(i) and (ii) of Regulation S-K.

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|         |                        
|-------- | -----------------------
|Item 9A. | CONTROLS AND PROCEDURES

Disclosure controls and procedures.Disclosure controls and procedures
are controls and other procedures of a registrant designed to
ensure that information required to be disclosed by the
registrant in the reports that it files or submits under the
Securities Exchange Act of 1934 (the Exchange Act)
are properly recorded, processed, summarized and reported,
within the time periods specified in the SECs rules and
forms. Disclosure controls and procedures include processes to
accumulate and evaluate relevant information and communicate
such information to a registrants management, including
its principal executive and financial officers, as appropriate,
to allow for timely decisions regarding required disclosures.

CEO and CFO certifications.Attached as Exhibit 31.1 and
31.2 to this Annual Report on Form 10-K are certifications
by our CEO and CFO. At present, our CEO is serving as our
interim CFO. These certifications are required in accordance
with Section 302 of the Sarbanes-Oxley Act of 2002 (the
Section 302 Certifications). This portion of
our Annual Report on Form 10-K describes the results of our
controls evaluation referred to in the Section 302
Certifications.

Our evaluation of AFCs disclosure
controls and procedures.We
evaluated the effectiveness of the design and operation of
AFCs disclosure controls and procedures as of the end of
fiscal year 2002, as required by Rule 13a-15 of the
Exchange Act. This evaluation was carried out under the
supervision and with the participation of our management,
including our CEO who is also serving as our interim CFO. This
evaluation included a review of certain deficiencies in internal
controls at our Seattle Coffee subsidiary initially disclosed in
Item 4 of our Quarterly Report on Form 10-Q for the quarter
ended October 6, 2002; findings and advice from KPMG
arising in conjunction with their audits recently completed that
included the restatement of previously issued financial
information (see Notes 23 and 25 to our Consolidated
Financial Statements); and an independent investigation
initiated by our Audit Committee, each of which is described
below.

KPMG assessed the internal controls at our
Seattle Coffee subsidiary as part of their interim review of our
consolidated operations for the third quarter of 2002 and they
advised us that there were significant deficiencies in those
internal controls. From that assessment, we and our Audit
Committee received process improvement recommendations related
to Seattle Coffees systems and processes. Shortly
thereafter, we began to address and implement corrective actions
as a result of these recommendations.

In connection with their audits of our financial
statements for 2002, 2001 and 2000, KPMG assessed the internal
controls of AFC and our subsidiaries and advised our Audit
Committee that certain identified deficiencies constituted
material control weaknesses (as defined by standards established
by the American Institute of Certified Public Accountants). In
their communications with our Audit Committee, KPMG stated that
the more significant deficiencies were:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | inadequate and untimely resolution of balance
    sheet account reconciliation discrepancies,         
|
| |  | absence of appropriate reviews and approvals of
    transactions and accounting,                      
|
| |  | inadequate procedures for appropriately assessing
    and applying accounting principles, and         
|
| |  | failure of identified controls in preventing or
    detecting misstatements of accounting information.

Our management and our Audit Committee took a
leadership role in assessing the underlying issues giving rise
to the restatement and in ensuring proper steps were taken to
improve our control environment. Our management and our Audit
Committee took these actions in consultation with KPMG.
Independent legal counsel to the Audit Committee and a forensic
accounting firm performed an independent investigation into
several accounting issues that arose in connection with the
restatement. That investigation concluded that there was not
evidence that our management intentionally used improper
accounting practices to manipulate earnings and that there was
no evidence of any fraud or intentional misconduct on the part
of AFC, our officers or our employees. The Audit Committee,
however, also concluded that our accounting, financial reporting
and internal control functions needed significant improvement,
including our system of documenting transactions. The Audit
Committee further concluded that our internal technical
accounting expertise was weak, and that enhanced training,
staffing and discipline in the accounting and internal audit
areas were needed. The Audit Committee

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found that our management has proactively
identified a number of these issues and has appropriately taken
steps to address them.


Actions taken in response to our
evaluation.There was no change in
our internal control over financial reporting that occurred
during the fourth quarter of 2002 identified in connection with
the evaluation described above that has materially affected, or
is reasonably likely to materially affect, our internal control
over financial reporting. As a result of the findings described
above, during 2003 we began implementing the following actions
to address the issues we identified in our evaluation of
controls and procedures:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have sought to thoroughly understand the
    nature of the issues through discussions with KPMG and the
    independent counsel and forensic accountants engaged by our
    Audit Committee.                                                                                                                                                                                                                                                                                 
|
| |  | Our Audit Committee has exercised increased
    oversight over managements assessment of internal controls
    and response to control weaknesses identified in the above
    assessments.                                                                                                                                                                                                                                                                                     
|
| |  | We have hired outside consultants to assist our
    internal audit group in documenting our accounting and business
    processes and identifying areas that require control or process
    improvement.                                                                                                                                                                                                                                                                        
|
| |  | We are establishing new internal control
    processes based on discussions with the Audit Committees
    independent counsel and forensic accountants, KPMG and other
    consultants we have engaged to help us in this regard and our
    own management team seeking to remedy the problems identified.                                                                                                                                                                    
|
| |  | We are currently engaged in a search for a new
    chief financial officer.                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | We have employed a new Vice President, Finance
    who has an extensive public accounting background, as a former
    audit partner of a Big-Four accounting firm, and broad SEC
    reporting experience.                                                                                                                                                                                                                                                                      
|
| |  | We have hired a Director of Internal Control
    whose primary responsibilities are to oversee the establishment
    of formalized policies and procedures throughout our
    organization and to document and assess our system of internal
    controls.                                                                                                                                                                                                                      
|
| |  | We are establishing processes whereby the chief
    financial officers at each of our brands have responsibility for
    the accuracy of their brands financial statements and
    other accounting information associated with their brands
    operation.                                                                                                                                                                                                                   
|
| |  | We have hired controllers for each of our brands
    who are responsible for the daily maintenance of each respective
    brands accounting system (such tasks were previously
    performed through a centralized corporate function).                                                                                                                                                                                                                                        
|
| |  | We are instituting more rigorous procedures for
    period-end analysis of balance sheet and income statement
    accounts, period-end reconciliations of subsidiary ledgers, and
    the correction of reconciling items in a timely manner. We are
    also enhancing our accounting documentation policies.                                                                                                                                                                  
|
| |  | We are upgrading our IT systems throughout our
    organization including in-store systems, our general ledger
    packages, our fixed assets, accounts receivable, accounts
    payable, and payroll systems, and our corporate reporting
    packages. We are redesigning our internal reporting packages and
    standardizing our internal reporting tools, all with the purpose
    of improving the quality and flow of financial information
    within our organization.
|
| |  | We are instituting new procedures around our
    quarterly reporting processes whereby significant accounting
    issues are discussed and documented, reviewed with our external
    auditors and our Audit Committee, formally approved by our
    management, and given timely effect in our books and records.                                                                                                                                                              
|
| |  | We have formed a Disclosure Committee and adopted
    a Disclosure Committee Manual to assist our CEO and CFO in
    certifying our public filings, and complying with all SEC rules
    and regulations.                                                                                                                                                                                                                                                                       
|
| |  | We are broadening the scope of our internal audit
    function and have changed its reporting responsibility. It now
    reports directly to the Audit Committee and CEO.                                                                                                                                                                                                                                                                                                       
|
| |  | We have established a whistle-blower policy to
    accommodate confidential, anonymous submission by our employees
    of concerns regarding questionable accounting or auditing
    matters as required by Section 307 of the Sarbanes-Oxley
    Act of 2002.                                                                                                                                                                                                                  

We believe that our disclosure controls and
procedures have improved due to the scrutiny of such matters by
our management and Audit Committee, our external auditors, and
other consultants we have engaged to

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##### Table of Contents



assist us in assessing and improving our system
of internal controls. We believe our controls and procedures
will continue to improve as we complete the implementation of
the actions described above.


Based in part upon these changes, our CEO, acting
also as our interim CFO, believes that as of the filing date of
this Annual Report on Form 10-K, our disclosure controls
and procedures are reasonably designed to ensure that
information required to be disclosed by us in the reports we
file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
rules and forms of the SEC.

Other than as described above, there have been no
changes in our internal control over financial reporting
identified in our evaluation that occurred since our fourth
quarter of fiscal 2002 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.

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##### Table of Contents






PART III.




Item 10.     DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officer and Director
Biographies

The following provides information about our
directors and executive officers as of November 30, 2003.

Frank J. Belatti,age 55, has served as Chairman of
the Board and Chief Executive Officer since we commenced
operations in November 1992, following the reorganization of our
predecessor. Mr. Belatti has served as our interim Chief
Financial Officer since the resignation of our prior Chief
Financial Officer on April 28, 2003. From 1990 to 1992,
Mr. Belatti was employed as President and Chief Operating
Officer of HFS, the franchisor of hotels for Ramada and Howard
Johnson. From 1989 to 1990, Mr. Belatti was President and
Chief Operating Officer of Arbys, Inc., and from 1985 to
1989 he served as the Executive Vice President of Marketing at
Arbys. From 1986 to 1990, Mr. Belatti also served as
President of Arbys Franchise Association Service
Corporation, which created and developed the marketing programs
and new products for the Arbys system. Mr. Belatti
received the 1999 Entrepreneur of the Year Award from the
International Franchise Association. Mr. Belatti serves as
a member of the board of directors of Radio Shack Corporation
and Galyans Trading Company, Inc.

Dick R. Holbrook,age 50, has served as our
President and Chief Operating Officer since August 1995. From
November 1992 to July 1995, Mr. Holbrook served as our
Executive Vice President and Chief Operating Officer. He has
been a director since April 1996. Mr. Holbrook has served
as our interim President of Popeyes Chicken & Biscuits
since the resignation of our prior President of Popeyes
Chicken & Biscuits in January 2003. From 1991 to 1992,
Mr. Holbrook served as Executive Vice President of
Franchise Operations for HFS. From 1972 to 1991,
Mr. Holbrook served in various management positions with
Arbys, most recently as Senior Vice President of Franchise
Operations. Mr. Holbrook serves on the board of directors
of Rare Hospitality International, Inc.

Victor Arias, Jr.,age 47, has served as a director
since May 2001. Mr. Arias has been an executive search
consultant for Spencer Stuart, an executive search firm, since
April 2002. From 1996 until April 2002, Mr. Arias served as
Executive Vice President & Regional Managing Director
of DHR International, an executive search firm. From 1993 to
1996, Mr. Arias was Executive Vice President and National
Marketing Director of Faison-Stone, a real estate development
company. From 1984 to 1993, Mr. Arias was Vice President of
La Salle Partners, a corporate real estate services company. He
currently serves on the board of trustees of Stanford University.

Carolyn Hogan Byrd,age 55, has served as a director
since May 2001. Ms. Byrd founded GlobalTech Financial, LLC,
a financial services and consulting company headquartered in
Atlanta, Georgia, in May 2000 and currently serves as chairman
and chief executive officer. From November 1997 to October 2000,
Ms. Byrd served as president of The Coca-Cola Financial
Corporation. From 1977 to 1997, Ms. Byrd served in a
variety of domestic and international positions with The
Coca-Cola Company. Ms. Byrd currently serves on the board
of directors of Rare Hospitality International, Inc., The
St. Paul Companies, Inc. and Circuit City Stores, Inc., and
on the Federal Reserve Bank of Atlanta Advisory Board.

R. William Ide, III,age 63, has served as a director
since August 2001. Since January 1, 2003, Mr. Ide has
been a partner with McKenna, Long & Aldridge, LLP, a
national law firm. From July 2001 to July 2002, Mr. Ide
provided legal services and business consulting through the
offices of R. William Ide. From 1996 to June 2001,
Mr. Ide served as Senior Vice President, Secretary and
General Counsel of Monsanto Corporation. From 1993 to 1996,
Mr. Ide was a partner with Long, Aldridge &
Norman, a multi-city law firm. Mr. Ide served as Counselor
to the United States Olympic Committee from 1998 to 2001, was
president of the American Bar Association from 1993 to 1994 and
currently serves as a Fellow to the Directors Institutes
of the Conference Board and of the Goizueta Business School at
Emory University.

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Kelvin J. Pennington,age 45, has served as a director
since May 1996. Since 1995, Mr. Pennington has served as
President of Pennington Partners & Co. which is a
general partner of PENMAN Partners, the management company for
the PENMAN Private Equity and Mezzanine Fund, L.P.

John M. Roth,age 45, has served as a director
since April 1996. Mr. Roth joined Freeman Spogli &
Co. in March 1988 and became a principal in 1993. From 1984 to
1988, Mr. Roth was employed by Kidder, Peabody &
Co. Incorporated in the Mergers and Acquisitions Group.
Mr. Roth also serves as a member of the board of directors
of Advance Auto Parts, Inc., Asbury Automotive Group, Inc. and
Galyans Trading Company, Inc.

Ronald P. Spogli,age 55, has served as a director
since April 1996. Mr. Spogli is a founding principal of
Freeman Spogli & Co., which he founded in 1983.
Mr. Spogli also serves as a member of the board of
directors of Hudson Respiratory Care, Inc., Advance Auto Parts,
Inc. and Galyans Trading Company, Inc.

Peter Starrett,age 56, has served as a director
since September 1998. In August 1998, Mr. Starrett founded
Peter Starrett Associates, a retail advisory firm, and currently
serves as its President. From 1990 to 1998, Mr. Starrett
served as 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 Guitar Center, Inc.,
The Pantry, Inc., Pacific Sunwear, Inc. and Galyans
Trading Company, Inc.

Allan J. Tanenbaum,age 57, has served as Senior Vice
President  Legal Affairs, General Counsel and
Secretary since February 2001. From June 1996 to February 2001,
Mr. Tanenbaum was a shareholder in Cohen Pollock Merlin
Axelrod & Tanenbaum, P.C., an Atlanta, Georgia law
firm, and prior to June 1996, for 25 years, a shareholder
in Frankel, Hardwick, Tanenbaum & Fink, P.C.
Mr. Tanenbaum serves on the board of directors of The
National Council of Chain Restaurants, The Atlanta Bar
Foundation, The Hank Aaron Chasing The Dream Foundation, Inc.
and The Childrens Museum of Atlanta, and represents the
State Bar of Georgia in the House of Delegates of the American
Bar Association.

Hala Moddelmog,age
47, has served as President of Churchs Chicken since
January 1996. From May 1993 to December 1995, Ms. Moddelmog
was Vice President of Marketing and then Senior Vice President
and General Manager for Churchs. From 1990 to 1993,
Ms. Moddelmog was Vice President of Product Marketing and
Strategic Planning at Arbys Franchise Association Service
Corporation. Ms. Moddelmog serves on the advisory board of
Source Food Technology, Inc., Harmony (Atlantas
International Youth Chorus), Atlanta Womens Foundation and
Advantage: Women 2003. She is the present board chair of
Leadership Atlanta and past board member of Emory
Universitys Board of Visitors.

Chris Elliot,age 49, has served as President
of Cinnabon since January 2003. From June 2002 to December 2002,
Mr. Elliot was the Interim President of Cinnabon. From
August 2001 to November 2002, Mr. Elliot was Chief
Operating Officer of Cinnabon. Prior to joining Cinnabon,
Mr. Elliot was Chief Operating Officer of Churchs
Chicken from June 1997 to July 2001.

Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Securities Exchange Act
of 1934 requires our directors and executive officers and
persons who own more than 10% of a registered class of our
equity securities to file with the SEC reports of ownership and
changes in ownership of our common stock. Directors, executive
officers and greater than 10% shareholders are required by SEC
regulations to furnish us with copies of all Section 16(a)
forms they file. Based solely on a review of the copies of these
reports furnished to us or written representations that no other
reports were required,we believe that during 2002, all
of our directors, executive officers and greater than 10%
beneficial owners complied with these requirements.

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Item 11.     EXECUTIVE
COMPENSATION

The following table sets forth the compensation
received for services rendered to us by our Chief Executive
Officer and the other four most highly compensated executive
officers whose salary and bonus exceeded $100,000 for 2002. We
refer to these individuals as our named executive officers.

Summary Compensation Table

|                            |                               |      |      |                     |  |              |         |            |  |                 |         |         |  |  |         |        |  |   |        |        | 
|--------------------------- | ----------------------------- | ---- | ---- | ------------------- |  | ------------ | ------- | ---------- |  | --------------- | ------- | ------- |  |  | ------- | ------ |  | - | ------ | ------ | 
|                            |                               |      |      |                     |  | Long-Term    |         |           
|                            |                               |      |      | Annual Compensation |  | Compensation |         |           
|                            |                               |      |      |                     |  |              |         |           
|                            |                               |      |      |                     |  | Securities   |         |           
|                            |                               |      |      |                     |  | Underlying   |         | All Other 
|Name and Principal Position |                               | Year |      | Salary              |  | Bonus        |         | Options(#) |  | Compensation(1)
|                            |                               |      |      |                     |  |              |         |            |  |                
|Frank J. Belatti            |                               |      | 2002 |                     |  | $            | 574,999 |            |  | $               | 181,750 |         |  |  | 120,000 |        |  | $ | 12,240 |       
|                            | Chairman of the Board and     |      |      | 2001                |  |              |         | 574,999    |  |                 |         | 382,812 |  |  |         | 60,000 |  |   |        | 18,360 | 
|                            | Chief Executive Officer       |      |      | 2000                |  |              |         | 529,328    |  |                 |         | 432,500 |  |  |         | 33,333 |  |   |        | 18,360 | 
|Dick R. Holbrook            |                               |      | 2002 |                     |  |              | 424,999 |            |  |                 | 118,750 |         |  |  | 70,000  |        |  |   | 4,623  |       
|                            | President and Chief           |      |      | 2001                |  |              |         | 424,999    |  |                 |         | 285,812 |  |  |         | 46,666 |  |   |        | 6,395  | 
|                            | Operating Officer             |      |      | 2000                |  |              |         | 376,422    |  |                 |         | 245,000 |  |  |         | 26,666 |  |   |        | 6,935  | 
|Gerald J. Wilkins           |                               |      | 2002 |                     |  |              | 350,000 |            |  |                 | 81,313  |         |  |  | 52,500  |        |  |   | 10,966 |       
|                            | Executive Vice President      |      |      | 2001                |  |              |         | 350,000    |  |                 |         | 362,359 |  |  |         | 40,531 |  |   |        | 22,414 | 
|                            | Chief Financial Officer(2)    |      |      | 2000                |  |              |         | 325,481    |  |                 |         | 200,000 |  |  |         | 20,000 |  |   |        | 5,510  | 
|Jon Luther                  |                               |      | 2002 |                     |  |              | 339,999 |            |  |                 | 81,850  |         |  |  | 50,000  |        |  |   | 9,696  |       
|                            | President of Popeyes          |      |      | 2001                |  |              |         | 339,999    |  |                 |         | 271,857 |  |  |         | 33,333 |  |   |        | 14,544 | 
|                            | Chicken & Biscuits(3)         |      |      | 2000                |  |              |         | 319,962    |  |                 |         | 175,000 |  |  |         | 13,333 |  |   |        | 14,544 | 
|Hala Moddelmog              |                               |      | 2002 |                     |  |              | 339,999 |            |  |                 | 81,850  |         |  |  | 40,000  |        |  |   | 6,687  |       
|                            | President of Churchs Chicken |      |      | 2001                |  |              |         | 339,999    |  |                 |         | 113,156 |  |  |         | 30,000 |  |   |        | 4,285  | 
|                            |                               |      | 2000 |                     |  |              | 324,692 |            |  |                 | 100,000 |         |  |  | 16,666  |        |  |   | 3,010  |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes life insurance premiums that we paid for
    split dollar life insurance policies for Mr. Belatti in the
    amount of $12,240 in 2002, and $18,360 in each of 2001 and 2000,
    for Mr. Holbrook in the amount of $4,623 in 2002, and
    $6,935 in each of 2001 and 2000, for Mr. Wilkins in the
    amount of $2,544 in 2002, and $3,816 in each of 2001 and 2000,
    for Mr. Luther in the amount of $9,696 in 2002, and $14,544
    in each of 2001 and 2000, and for Ms. Moddelmog in the
    amount of $1,735 in 2002, and $1,735 in each of 2001 and 2000.
    Ms. Moddelmog received an additional amount of $1,952 for
    reimbursement of a supplemental life insurance policy. Also
    includes amounts that we credited to accounts under our Deferred
    Compensation Plan for Mr. Wilkins in the amounts of $8,422
    in 2002, $18,598 in 2001 and $1,694 in 2000, and matching
    contributions that we made pursuant to our 401(k) Savings Plan
    for Ms. Moddelmog in the amounts of $3,000 in 2002, $2,550
    in 2001 and $1,275 in 2000.
|   
|(2) | Mr. Wilkins resigned his position as
    Executive Vice President and Chief Financial Officer in April
    2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(3) | Mr. Luther resigned his position as
    President of Popeyes Chicken & Biscuits effective
    January 10, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Option Grants in Last Fiscal Year

The following table provides summary information
regarding stock options granted during fiscal 2002 to each of
our named executive officers. The potential realizable value is
calculated assuming that the fair market value of our common
stock appreciates at the indicated annual rate compounded
annually for the entire term of the option, and that the option
is exercised and sold on the last day of its term for the

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appreciated stock price. The assumed rates of
appreciation are mandated by the rules of the SEC and do not
represent our estimate of the future prices or market value of
our common stock.


|                     |  |            |         |              |  |           |       |            |  |                               |       |     |  |  |           |  |  |   |           |  |  |   |           | 
|-------------------- |  | ---------- | ------- | ------------ |  | --------- | ----- | ---------- |  | ----------------------------- | ----- | --- |  |  | --------- |  |  | - | --------- |  |  | - | --------- | 
|                     |  |            |         |              |  |           |       |            |  |                              
|                     |  |            |         |              |  |           |       |            |  | Potential Realizable Value at
|                     |  | Number of  |         | % of Total   |  |           |       |            |  | Assumed Annual Rates of      
|                     |  | Securities |         | Options      |  |           |       |            |  | Stock Price Appreciation for 
|                     |  | Underlying |         | Granted to   |  | Exercise  |       |            |  | Option Term                  
|                     |  | Options    |         | Employees in |  | Price Per |       | Expiration |  |                              
|Name                 |  | Granted(1) |         | Fiscal Year  |  | Share     |       | Date       |  | 5%                            |       | 10%
|                     |  |            |         |              |  |           |       |            |  |                               |       |    
|Frank J. Belatti     |  |            | 120,000 |              |  |           | 11.83 | %          |  | $                             | 28.01 |     |  |  | 1/24/2009 |  |  | $ | 1,368,346 |  |  | $ | 3,188,828 | 
|Dick R. Holbrook     |  |            | 70,000  |              |  |           | 6.90  | %          |  | $                             | 28.01 |     |  |  | 1/24/2009 |  |  | $ | 798,202   |  |  | $ | 1,860,150 | 
|Gerald J. Wilkins(2) |  |            | 52,500  |              |  |           | 5.18  | %          |  | $                             | 28.01 |     |  |  | 1/24/2009 |  |  | $ | 598,651   |  |  | $ | 1,395,112 | 
|Jon Luther(3)        |  |            | 50,000  |              |  |           | 4.93  | %          |  | $                             | 28.01 |     |  |  | 1/24/2009 |  |  | $ | 570,144   |  |  | $ | 1,328,968 | 
|Hala Moddelmog       |  |            | 40,000  |              |  |           | 3.94  | %          |  | $                             | 28.01 |     |  |  | 1/24/2009 |  |  | $ | 456,115   |  |  | $ | 1,062,943 | 



---



|    |                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Option grants were made under the 1996
    Nonqualified Stock Option Plan and are exercisable in four equal
    annual increments beginning on January 24, 2003.
|   
|(2) | Mr. Wilkins resigned his position as
    Executive Vice President and Chief Financial Officer in April
    2003.                                                
|   
|(3) | Mr. Luther resigned his position as
    President of Popeyes Chicken & Biscuits effective
    January 10, 2003.                                                 

Aggregated Option Exercises in the Last Fiscal
Year

and Fiscal Year-End Option Values


The following table provides summary information
concerning exercises of stock options by each of our named
executive officers during fiscal 2002 and the shares of common
stock represented by outstanding options held by each of our
named executive officers as of December 29, 2002. The
values of unexercised options at fiscal year-end is based upon
$21.75, the fair market value of our common stock at
December 27, 2002 (the last trading day of fiscal 2002),
less the exercise price per share.

|                     |  |             |        |                |  |                            |           |                            |  |             |           |               |  |  |         |  |  |   |            |  |  |   |         | 
|-------------------- |  | ----------- | ------ | -------------- |  | -------------------------- | --------- | -------------------------- |  | ----------- | --------- | ------------- |  |  | ------- |  |  | - | ---------- |  |  | - | ------- | 
|                     |  |             |        |                |  |                            |           |                           
|                     |  |             |        |                |  | Number of Securities       |           | Value of                  
|                     |  |             |        |                |  | Underlying Unexercised     |           | Unexercised In-the-Money  
|                     |  | Shares      |        |                |  | Options at Fiscal Year-End |           | Options at Fiscal Year-End
|                     |  | Acquired    |        |                |  |                            |           |                           
|Name                 |  | on Exercise |        | Value Realized |  | Exercisable                |           | Unexercisable              |  | Exercisable |           | Unexercisable
|                     |  |             |        |                |  |                            |           |                            |  |             |           |              
|Frank J. Belatti     |  |             | 93,000 |                |  | $                          | 2,736,577 |                            |  |             | 1,149,398 |               |  |  | 186,667 |  |  | $ | 19,036,501 |  |  | $ | 508,686 | 
|Dick R. Holbrook     |  |             | 60,000 |                |  | $                          | 1,543,588 |                            |  |             | 483,091   |               |  |  | 122,500 |  |  | $ | 7,453,211  |  |  | $ | 401,750 | 
|Gerald J. Wilkins(1) |  |             | 70,000 |                |  | $                          | 1,698,247 |                            |  |             | 64,769    |               |  |  | 96,233  |  |  | $ | 767,732    |  |  | $ | 332,131 | 
|Jon Luther(2)        |  |             | 49,000 |                |  | $                          | 1,055,580 |                            |  |             | 43,030    |               |  |  | 85,001  |  |  | $ | 429,070    |  |  | $ | 265,560 | 
|Hala Moddelmog       |  |             | 47,115 |                |  | $                          | 1,295,251 |                            |  |             | 43,020    |               |  |  | 74,167  |  |  | $ | 576,149    |  |  | $ | 262,912 | 



---



|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(1) | Mr. Wilkins resigned his position as
    Executive Vice President and Chief Financial Officer in April
    2003.
|   
|(2) | Mr. Luther resigned his position as
    President of Popeyes Chicken & Biscuits in January 2003.                

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Report on Executive Compensation

Filings made by companies with the SEC
sometimes incorporate information by reference. This
means that you are being referred to information that has been
previously filed with the SEC and that this information should
be considered as part of the filing you are reading. The Report
on Executive Compensation and Stock Performance Graph in this
Annual Report on Form 10-K are not incorporated by
reference into any of our other filings with the SEC.

The People Services (Compensation) Committee was
established by the Board of Directors in August 2001 to among
other things, establish executive compensation for 2002 and
subsequent years. The People Services (Compensation) Committee
has furnished the following report on executive compensation for
2002. This report was prepared in February of 2003, prior to our
announcement indicating that we would restate our financial
statements for fiscal years 2000 and 2001 and the first three
quarters of 2002. The People Services (Compensation) Committee
is currently reviewing AFCs executive compensation
philosophy and policies.

Executive compensation philosophy

We strive to offer compensation and reward
programs designed to support our business mandate of
Creating Equity Through Opportunity. Our
compensation philosophy has four main tenets: (1) desired
strategy, (2) desired culture, (3) desired behaviors and
(4) desired positioning of pay elements. The tenets are
described below:

Desired Strategy



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | to attract, retain, energize and reward superior
    talent
|
| |  | drive AFCs short-term performance                         
|
| |  | provide equity and ownership opportunities                 
|
| |  | build long-term enterprise value                           

Desired Culture



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | have a shared purpose and goals for all
    stakeholders through the vision of the New Age of
    Opportunity
|
| |  | attain alignment with our core values                                                                          

Desired Behaviors



| |   |                                                          
| | - | ---------------------------------------------------------
| |  | performance-oriented mindset                             
|
| |  | energy and motivation                                    
|
| |  | accountability                                           
|
| |  | respect for and collaboration with corporate
    partners

Desired Positioning of Pay Elements



| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | base salary positioned at the median for the
    industry                                                 
|
| |  | annual incentives targeted to position total cash
    compensation in the 75th percentile for the industry
|
| |  | long-term incentives positioned at the median for
    the industry                                        

We believe it is important for our executives to
have ownership incentives in AFC and to operate in an
environment that measures rewards against personal and company
goals. We believe this philosophy attracts, retains and
motivates key executives critical to our long-term success.

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Components of executive compensation

Our compensation program for executives consists
of three key elements:



| |   |                                 
| | - | --------------------------------
| |  | Annual base salary              
|
| |  | Annual incentive bonus          
|
| |  | Long-term incentive compensation

Annual base salaries are targeted at the median
level for base salaries in our industry and are adjusted to
reflect each executives vision, strategic orientation,
responsibility level, ethics, global perspective, organizational
relationship building skills, service orientation,
cross-cultural effectiveness, teamwork, talent development,
financial acumen, problem solving and decision making. We review
each executives base salary annually.

Annual incentive bonuses are based on achievement
of several financial and strategic objectives. In 2002, we
established targeted annual cash-based incentive bonuses for
each executive as a percentage of base salary that were based
primarily on our achievement of specified earnings targets.

Long-term incentive compensation serves to reward
executives with equity and cash compensation for meeting
operational and financial objectives over a multi-year period.
By rewarding our executives for maximizing shareholder value,
our long-term incentive compensation is designed to align our
executives interests with those of our shareholders. This
type of compensation also encourages our key employees to make a
long-term commitment to us.

Chief Executive Officer Compensation

In determining Mr. Belattis
compensation for 2002, the People Services (Compensation)
Committee, with the aid of outside compensation consultants,
conducted an external market assessment of competitive levels of
compensation for CEOs managing companies of similar size,
complexity and performance level and at other companies within
AFCs industry.

Mr. Belatti received a base salary of
$575,000 in 2002. He also received an annual incentive cash
bonus of $181,750, which amounted to 25.89% of his potential
annual incentive bonus. The annual bonus is paid as earnings
targets for respective quarters are achieved. The bonus paid in
2002 relates to the achievement of earnings goals associated
with the first quarter of 2002. Mr. Belatti received a grant of
120,000 stock options based upon the Committees desire to
tie his compensation more closely to the achievement of
long-term goals. In determining the long-term incentive
component of Mr. Belattis compensation, the Committee
considered his current equity stake in AFC and utilized an
incentive bonus target as a percentage of his base salary.

Long-Term Employee Success Plan

Under the Long-Term Employee Success Plan
(LTESP), if our average common stock price per share
is at least $46.50 for a period of 20 consecutive trading days
or our earnings per share for 2003 is at least $3.375, bonuses
become payable to all of our employees who were hired prior to
January 1, 2003 who have been actively employed through the
last day of the period in which we attain either of these
financial performance standards.

Payments to employees would range from 10% to
110% of the individual employees base salary at the time
either of the standards is met, depending upon the
employees original date of hire.

The bonuses under the LTESP are payable in shares
of our common stock or, to the extent an employee is eligible,
deferred compensation, and may be paid in cash if an employee
elects to receive a cash payment and our Board agrees to pay the
bonus in cash. If neither of the financial performance standards
is achieved by December 28, 2003, the plan and our
obligation to make any payments under the plan would terminate.

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Limitations on the deductibility of
compensation

Section 162(m) of the Internal Revenue Code
limits the deductibility of executive compensation paid by
publicly held corporations to $1 million per employee. The
$1 million limitation generally does not apply to
compensation based on performance goals if certain requirements
are met. We believe that our executive officer compensation
plans each satisfy the requirements of Section 162(m). The
People Services (Compensation) Committee, as much as possible,
uses and intends to use performance-based compensation, which
should minimize the effect of these tax deduction limits.
However, we believe that we must attract, retain and reward the
executive talent necessary to maximize shareholder value and
that the loss of a tax deduction may be necessary and
appropriate in some circumstances.

This report, dated February 2003, has been
furnished by the following members of our People Services
(Compensation) Committee:



| |   |                         
| | - | ------------------------
| |  | Victor Arias, Jr., Chair
|
| |  | Kelvin J. Pennington    
|
| |  | John M. Roth            

Employment Agreements

Frank J. Belatti.On
August 31, 2001, we entered into an amended employment
agreement with Mr. Belatti that provides for a current
annual base salary of $575,000, effective as of January 1,
2001, an annual incentive bonus that is based on our achievement
of certain performance targets, fringe benefits and
participation in our benefit plans. The initial term of the
agreement ends December 31, 2004, but automatically extends
for an additional year following the end of each year of
employment, without further action by us or Mr. Belatti,
unless we or Mr. Belatti provide written notice of
non-extension to the other at least one year prior to the end of
that year of employment. If Mr. Belattis employment
is terminated without cause or upon expiration of the term,
Mr. Belatti is entitled to receive, or if we give him
written notice that we will not extend his employment,
Mr. Belatti may elect to receive in lieu of continued
employment, among other things, an amount equal to two times his
annual base salary plus two times the target incentive bonus for
the year in which the termination occurs. In addition, all of
his unvested options would become immediately exercisable. If
there is a change of control and within one year thereafter a
significant reduction of or change in Mr. Belattis
responsibilities, title or duties, Mr. Belatti may
terminate his employment and receive the same severance he would
have received upon a termination without cause.

Dick R. Holbrook.On
August 31, 2001, we entered into an amended employment
agreement with Mr. Holbrook that provides for a current
annual base salary of $425,000, effective as of January 1,
2001, an annual incentive bonus that is based on our achievement
of certain performance targets, fringe benefits and
participation in our benefit plans. The initial term of the
agreement ends on December 31, 2004, but automatically
extends for an additional year following the end of each year of
employment, without further action by us or Mr. Holbrook,
unless we or Mr. Holbrook provide written notice of
non-extension to the other at least one year prior to the end of
that year of employment. If Mr. Holbrooks employment
is terminated without cause or upon expiration of the term,
Mr. Holbrook is entitled to receive, or if we give him
written notice that we will not extend his employment,
Mr. Holbrook may elect to receive in lieu of continued
employment, among other things, an amount equal to two times his
annual base salary plus two times his target incentive bonus for
the year in which the termination occurs. In addition, all of
his unvested options would become immediately exercisable. If
there is a change of control and within one year thereafter a
significant reduction of or change in Mr. Holbrooks
responsibilities, title or duties, Mr. Holbrook may
terminate his employment and receive the same severance he would
have received upon a termination without cause.

Gerald J. Wilkins.On August 31, 2001, we entered
into an amended employment agreement with Mr. Wilkins that
provided for a current annual base salary of $350,000, effective
as of January 1, 2001, an annual incentive bonus based on
our achievement of certain performance targets, fringe benefits
and participation in our benefit plans. On April 28, 2003,
Mr. Wilkins resigned his employment with AFC. In

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conjunction with his departure, we agreed to pay
Mr. Wilkins $647,000 over a two-year period as severance,
$129,550 over a 4-month period as part of a consulting
arrangement, and to accelerate the vesting of 5,000 stock
options with a strike price of $13.13 per share,
20,266 stock options with a strike price of $15.00 per
share, and 39,375 stock options with a strike price of
$28.01 per share. Additionally, Mr. Wilkins was
provided additional benefits with an estimated value of $37,000.


Jon Luther.On
August 31, 2001, we entered into an amended employment
agreement with Mr. Luther that provided for an annual base
salary of $340,000, effective as of January 1, 2001, an
annual incentive bonus based on our achievement of certain
performance targets, fringe benefits and participation in our
benefit plans. Effective January 10, 2003, Mr. Luther
resigned his employment with AFC. There were no fringe benefits
or severance paid to Mr. Luther as part of resignation
other than customary amounts relating to unused vacation.

Hala Moddelmog.On
August 31, 2001, we entered into an amended employment
agreement with Ms. Moddelmog that provides for a current
annual base salary of $340,000, effective as of January 1,
2001, an annual incentive bonus that is based on our achievement
of certain performance targets, fringe benefits and
participation in our benefit plans. The initial term of the
agreement ended on December 31, 2002, but the agreement
automatically extends for an additional year following the end
of each year of employment, without further action by us or
Ms. Moddelmog, unless we or Ms. Moddelmog provide
written notice of non-extension to the other at least
30 days prior to the end of that year of employment. If
Ms. Moddelmogs employment is terminated without cause
or upon expiration of the term, Ms. Moddelmog is entitled
to receive an amount equal to her annual base salary plus the
amount of her target incentive bonus for the year in which the
termination occurs. In addition, all of her unvested options
would become immediately exercisable. If there is a change of
control and within one year thereafter a significant reduction
in Ms. Moddelmogs responsibilities or duties,
Ms. Moddelmog may terminate her employment and receive the
same severance she would have received upon a termination
without cause.

Compensation Committee Interlocks and Insider
Participation

For fiscal 2002, the People Services
(Compensation) Committee established the compensation for all
our executive officers. No member of the People Services
(Compensation) Committee was an officer or employee of AFC or
any of its subsidiaries during fiscal 2002 or any prior year.
None of our executive officers currently serves on the
compensation committee or board of directors of any other
company of which any member of our People Services
(Compensation) Committee is an executive officer.

Director Compensation

Victor Arias, Jr., Carolyn Hogan Byrd,
R. William Ide, III and Kelvin J. Pennington
receive a $15,000 annual retainer, $2,500 per board
meeting, $1,000 per committee meeting ($1,500 for the Audit
Committee), if a committee meeting is held on any day other than
a day on which a board meeting is held and a $5,000 annual
retainer ($10,000 for the Audit Committee) for serving as a
committee chair. Each of those directors, except for Kelvin J.
Pennington, received an initial grant of 5,000 options upon
appointment to the Board (with these options vesting over three
years, conditioned upon continued service as a member of our
Board). Each of those directors will receive an annual grant of
5,000 options subject to the same terms. Our other
non-employee directors who joined the board prior to our initial
public offering, and our employee directors receive no director
compensation. All of our directors are reimbursed for reasonable
expenses incurred in attending board meetings.

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STOCK PERFORMANCE GRAPH

The following stock performance graph compares
the performance of our common stock to the Standard &
Poors 500 Stock Index (S&P 500 Index) and
a Peer Group Index. The stock price performance graph assumes an
investment of $100 in our common stock at the closing price on
March 2, 2001, the first date upon which our common stock
was listed on the Nasdaq National Market after our initial
public offering, and an investment of $100 in each of the two
indexes on March 2, 2001 and further assumes the
reinvestment of all dividends. We did not pay any dividends
during this period. Stock price performance for the period from
March 2, 2001 through December 29, 2002 is not
necessarily indicative of future results.

Stock Performance Graph




|                      |  |         |     |          |  |          |     |  |  |   |     | 
|--------------------- |  | ------- | --- | -------- |  | -------- | --- |  |  | - | --- | 
|                     
|                     
|                      |  | 3/02/01 |     | 12/30/01 |  | 12/29/02
|                     
|                     
|AFC Enterprises, Inc. |  | $       | 100 |          |  | $        | 140 |  |  | $ | 107 | 
|S & P 500             |  | $       | 100 |          |  | $        | 94  |  |  | $ | 71  | 
|Peer Group            |  | $       | 100 |          |  | $        | 133 |  |  | $ | 120 | 



The Peer Group Index is comprised of the
following restaurant, coffee and bakery companies: Brinker
International, Inc., CKE Restaurants, Inc., Darden Restaurants,
Inc., Green Mountain Coffee, Inc., Jack in the Box, Inc., Krispy
Kreme Doughnuts, Inc., Papa Johns International, Inc.,
Sonic Corp., Yum! Brands, Inc. and Wendys International,
Inc. This Peer Group Index has been weighted by the market
capitalization of each component company.

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|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Stock Ownership

The following table sets forth information known
to us regarding the beneficial ownership of our common stock as
of November 30, 2003 by:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | each shareholder known by us to own beneficially
    more than 5% of our common stock;
|
| |  | each of our directors;                                                                
|
| |  | each of our named executive officers; and                                             
|
| |  | all of our directors and executive officers as a
    group.                           

Beneficial ownership is determined in accordance
with the rules of the SEC. In computing the number of shares
beneficially owned by a person and the percentage of ownership
held by that person, shares of common stock subject to options
held by that person that are currently exercisable or will
become exercisable within 60 days after November 30,
2003 are deemed outstanding, while these shares are not deemed
outstanding for computing percentage ownership of any other
person. Unless otherwise indicated in the footnotes below, the
persons and entities named in the table have sole voting and
investment power with respect to all shares beneficially owned,
subject to community property laws where applicable. The address
for those individuals for which an address is not otherwise
indicated is: c/o AFC Enterprises, Inc., Six Concourse Parkway,
Suite 1700, Atlanta, Georgia 30328-5352.

The percentages of common stock beneficially
owned are based on 27,954,510 shares of common stock outstanding
as of November 30, 2003.

|                                                                     |  |              |            |            |  |  |       |  
|-------------------------------------------------------------------- |  | ------------ | ---------- | ---------- |  |  | ----- | -
|                                                                     |  | Shares       |            |           
|                                                                     |  | Beneficially |            | Percentage
|Name                                                                 |  | Owned        |            | of Class  
|                                                                     |  |              |            |           
|Directors and Executive Officers:                                    |  |              |            |            |  |  |       |  
|Frank J. Belatti(1)                                                  |  |              | 1,846,675  |            |  |  | 6.33  | %
|Dick R. Holbrook(2)                                                  |  |              | 788,027    |            |  |  | 2.76  | %
|Gerald J. Wilkins(3)                                                 |  |              | 230,661    |            |  |  | *     |  
|Jon Luther(4)                                                        |  |              | 3,334      |            |  |  | *     |  
|Hala Moddelmog(5)                                                    |  |              | 112,821    |            |  |  | *     |  
|Victor Arias, Jr.(6)                                                 |  |              | 5,000      |            |  |  | *     |  
|Carolyn Hogan Byrd(7)                                                |  |              | 9,000      |            |  |  | *     |  
|R. William Ide, III(8)                                               |  |              | 7,000      |            |  |  | *     |  
|Kelvin J. Pennington(9)                                              |  |              | 0          |            |  |  | *     |  
|John M. Roth(10)(11)                                                 |  |              | 7,517,615  |            |  |  | 26.89 | %
|Ronald P. Spogli(10)(11)                                             |  |              | 7,517,615  |            |  |  | 26.89 | %
|Peter Starrett(11)                                                   |  |              | 14,334     |            |  |  | *     |  
|All directors and executive officers as a group
    (16 persons)(12) |  |              | 10,685,047 |            |  |  | 35.56 | %
|Five Percent Shareholders:                                           |  |              |            |            |  |  |       |  
|Freeman Spogli & Co.(11)(13)                                         |  |              | 7,517,615  |            |  |  | 26.89 | %
|Wellington Management Company, LLP(14)                               |  |              | 1,741,500  |            |  |  | 6.23  | %
|Neuberger Berman, Inc(15)                                            |  |              | 2,239,985  |            |  |  | 8.01  | %
|Investors Management Corporation(16)                                 |  |              | 1,726,084  |            |  |  | 6.17  | %
|Duke Buchan, III(17)                                                 |  |              | 1,765,848  |            |  |  | 6.32  | %
|Strong Financial Corporation(18)                                     |  |              | 3,370,070  |            |  |  | 12.06 | %

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---



| |   |                                                            
| | - | -----------------------------------------------------------
| | * | Less than 1% of the outstanding shares of common
    stock.



|    |                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 1,216,065 shares of common stock
    issuable with respect to options exercisable within 60 days
    of November 30, 2003. Also includes 194,476 shares of
    common stock held by four irrevocable trusts established by
    Mr. Belatti.        
|   
|(2) | Includes 558,924 shares of common stock issuable
    with respect to options exercisable within 60 days of
    November 30, 2003. Also, includes 30,805 shares of common
    stock held by a grantor retained annuity trust established by
    Mr. Holbrook.
|   
|(3) | Includes 103,513 shares of common stock issuable
    with respect to options exercisable within 60 days of
    November 30, 2003. Also, includes 15,403 shares of common
    stock held by a grantor retained annuity trust established by
    Mr. Wilkins. 
|   
|(4) | Mr. Luther resigned his position as
    President of Popeyes Chicken & Biscuits in January 2003.                                                                                                                                                            
|   
|(5) | Includes 89,687 shares of common stock issuable
    with respect to options exercisable within 60 days of
    November 30, 2003.                                                                                                                            
|   
|(6) | Includes 5,000 shares of common stock issuable
    with respect to options exercisable within 60 days of
    November 30, 2003. Mr. Arias business address is
    1717 Main Street, Suite 5600, Dallas, Texas 75201.                                       
|   
|(7) | Includes 5,000 shares of common stock issuable
    with respect to options exercisable within 60 days of
    November 30, 2003. Ms. Byrds business address is
    GlobalTech Financial, LLC, 2839 Paces Ferry Road,
    Suite 810, Atlanta, Georgia 30339. 
|   
|(8) | Includes 5,000 shares of common stock issuable
    with respect to options exercisable within 60 days of
    November 30, 2003. Mr. Ides business address is
    Suite 5300, 303 Peachtree Street NE, Atlanta, Georgia 30308.                              
|   
|(9) | Mr. Penningtons business address is 30
    North LaSalle Street, Suite 1620, Chicago, Illinois 60602.                                                                                                                                                      



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Messrs. Roth and Spogli are officers,
    directors and/or managers of entities that are general or
    limited partners of FS Equity Partners III, L.P.,
    FS Equity Partners International, L.P., and FS Equity
    Partners IV, L.P., and may be deemed to be the beneficial
    owners of the 7,517,615 shares of common stock held by
    FS Equity Partners III, FS Equity Partners International
    and FS Equity Partners IV.                                                                                                                 
|    
|(11) | The business address of Freeman Spogli & Co.,
    FS Equity Partners III, FS Equity Partners IV and
    Messrs. Roth, Spogli and Starrett is c/o Freeman
    Spogli & Co., 11100 Santa Monica Boulevard,
    Suite 1900, Los Angeles, California 90025. The business
    address of FS Equity Partners International is c/o
    Paget-Brown & Company, Ltd., West Winds Building, Third
    Floor, Grand Cayman, Cayman Islands, British West Indies.                                                                                                    
|    
|(12) | Includes 7,517,615 shares of common stock held by
    affiliates of Freeman Spogli & Co. and 1,994,194 shares
    of common stock issuable with respect to options granted to
    directors and executive officers that are exercisable within
    60 days of November 30, 2003.                                                                                                                                                                                                                                                                         
|    
|(13) | Includes 6,471,103 shares held of record by
    FS Equity Partners III, 259,980 shares held of record by
    FS Equity Partners International and 786,532 shares held of
    record by FS Equity Partners IV.                                                                                                                                                                                                                                                                                                                                            
|    
|(14) | This information is included in reliance upon a
    Schedule 13G filed by Wellington Management Company, LLP
    (WMC) with the SEC on February 12, 2003
    relating to shares of common stock owned as of December 31,
    2002. WMC is the beneficial owner of 1,741,500 shares of common
    stock and has shared voting power with respect to 1,254,400 of
    the shares and shared dispositive power with respect to all
    1,741,500 shares. The address of Wellington Management Company
    is 75 State Street, Boston, Massachusetts 02109.
|    
|(15) | Represents 2,239,985 shares of common stock
    beneficially owned by Neuberger Berman, Inc. (NB
    Inc.), and Neuberger Berman, LLC (NB LLC),
    Neuberger Berman Management, Inc. (NBM) and
    Neuberger Berman Genesis Portfolio (NBGP),
    affiliates of NB Inc., with whom NB Inc. is deemed to form
    a group for Schedule 13G reporting purposes.
    NB Inc. has sole voting                                                                                                                                                     

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|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | power with respect to 3,100 shares, shared voting
    power with respect to 1,665,100 shares and shared
    dispositive power with respect to all 2,239,985 shares. NB
    LLC has shared dispositive power with respect to all
    2,239,985 shares. NBM has shared dispositive power with
    respect to 1,665,100 shares. NBGP has shared voting and
    dispositive power with respect to 1,607,000 shares. This
    information is included in reliance upon a Schedule 13G
    filed by NB Inc., NB LLC, NBM and NBGP with the SEC on
    February 13, 2003 relating to shares of common stock owned
    as of December 31, 2002. The address of NB Inc. is 605
    Third Ave., New York, New York 10158-3698.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    
|(16) | Represents shares of common stock beneficially
    owned by Investors Management Corporation (IMC), and
    A Few Valuable Businesses Partnership (FVB), Capital
    Partner Investments Partnership (CPI), Team Capital
    Limited Partnership (TC), Worthy Companies
    Partnership (WC), Value Limited Partnership
    (VLP), Wealth Building Limited Partnership
    (WB), Capital Strengthening Limited Partnership
    (CS), Financial Ascent Limited Partnership
    (FA), Golden Family Limited Partnership
    (GF), John M. Day (JD), Maynard Capital
    Partners, L.L.C. (MC), James Maynard
    (JM), John Amendola (JA), Gene T. Aman
    (GTA), and Andrew Logan (AL), affiliates
    of IMC (the IMC Group), with whom IMC is deemed to
    form a group for Schedule 13G reporting
    purposes. IMC has shared voting and dispositive power with
    respect to 1,703,909 shares, FVB has sole voting and
    dispositive power with respect to 187,996 shares, CPI has
    sole voting and dispositive power with respect to
    734,567 shares, TC has sole voting and dispositive power
    with respect to 68,984 shares, WC has sole voting and
    dispositive power with respect to 254,100 shares, VLP has
    sole voting and dispositive power with respect to
    63,488 shares, WB has sole voting and dispositive power
    with respect to 93,933 shares, CS has sole voting and
    dispositive power with respect to 25,606 shares, FA has
    sole voting and dispositive power with respect to
    249,980 shares, GF has sole voting and dispositive power
    with respect to 25,255 shares, JD has sole voting and
    dispositive power with respect to 22,175 shares and shared
    voting and dispositive power with respect to
    1,703,909 shares, MC has sole voting and dispositive power
    with respect to 1,703,909 shares, JM has shared voting and
    dispositive power with respect to 1,703,909 shares, JA has
    sole voting and dispositive power with respect to
    275 shares, GA has sole voting and dispositive power with
    respect to 2,200 shares and AL has sole voting and
    dispositive power with respect to 50 shares. This
    information is included in reliance upon a Schedule 13G
    filed by IMC and the IMC Group with the SEC on February 10,
    2003 relating to shares of common stock reported as owned as of
    December 31, 2002. The address of IMC is 5151 Glenwood
    Avenue, Raleigh, North Carolina 27612.
|    
|(17) | Represents 1,765,848 shares of common stock
    beneficially owned by Duke Buchan, III
    (Mr. Buchan), Hunter Global Associates L.L.C.
    (Hunter L.L.C), Hunter Global Investors L.P.
    (Hunter L.P.), Hunter Global Investors Fund I L.P.
    (Hunter Fund I L.P.), and Hunter Global Investors
    Fund II L.P. (Hunter Fund II L.P.), affiliates of
    Mr. Buchan, with whom Mr. Buchan is deemed to form a
    group for Schedule 13G reporting purposes.
    Mr. Buchan has shared voting and dispositive power with
    respect to 1,765,848 shares. Hunter L.L.C has shared voting and
    dispositive power with respect to 717,017 shares. Hunter
    L.P. has shared voting and dispositive power with respect to
    1,765,848 shares. Hunter Fund I L.P. has shared voting
    and dispositive power with respect to 667,421 shares.
    Hunter Fund II L.P. has shared voting and dispositive power with
    respect to 49,596 shares. This information is included in
    reliance upon a Schedule 13G filed by Mr. Buchan on
    August 4, 2003. The address of the Buchan Group is
    350 Park Avenue, 11th Floor, New York, New York 10022.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    
|(18) | Represents shares of common stock beneficially
    owned by Strong Capital Management, Inc. (SCM), a
    registered investment advisor, and Richard S. Strong
    (RS), the Chairman of the Board of SCM. RS and SCM
    have shared voting and dispositive power with respect to
    3,370,070 shares. Harbour Holdings Ltd, advised by a
    subsidiary of SCM, owns 1,855,156 shares or 6.5%. The remaining
    shares are owned by various other accounts for which SCM acts as
    the investment advisor. This information is included in reliance
    upon a Schedule 13G filed by SCM and RS with the SEC on
    September 9, 2003 relating to shares of common stock
    reported as owned as of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | August 3, 2003. The address of SCM and RS is
    100 Heritage Reserve, Menomonee Falls, Wisconsin 53051.

Equity Compensation Plan Information

The following table gives information about our
common stock that may be issued upon the exercise of options,
warrants and rights under all of our existing equity
compensation plans as of December 29, 2002, including the
1992 Stock Option Plan, the 1996 Nonqualified Stock Option Plan,
the 1996 Nonqualified Performance Stock Option Plan 
Executive, the 1996 Nonqualified Performance Stock Option
Plan  General, the 1998 Substitute Nonqualified Stock
Option Plan and the 2002 Incentive Stock Plan

|                                                                |                                                                 |                      |           |                   |  |                         |       |       |  |  |           |           |    
|--------------------------------------------------------------- | --------------------------------------------------------------- | -------------------- | --------- | ----------------- |  | ----------------------- | ----- | ----- |  |  | --------- | --------- | ---
|                                                                |                                                                 | Number of Securities |           | Weighted-average  |  | Number of Securities   
|                                                                |                                                                 | to be Issued Upon    |           | Exercise Price of |  | Remaining Available for
|                                                                |                                                                 | Exercise of          |           | Outstanding       |  | Future Issuance Under  
|                                                                |                                                                 | Outstanding Options, |           | Options, Warrants |  | Equity Compensation    
|                                                                |                                                                 | Warrants and Rights  |           | and Rights        |  | Plans                  
|Plan Category                                                   |                                                                 | (a)                  |           | (b)               |  | (c)                    
|                                                                |                                                                 |                      |           |                   |  |                        
|Equity compensation plans approved by security
    holders:     |                                                                 |                      |           |                   |  |                         |       |       |  |  |           |          
|                                                                | 1992 Stock Option Plan                                          |                      |           | 817,929           |  |                         | $     | 0.12  |  |  |           | 18,771    | (1)
|                                                                | 1996 Nonqualified Stock Option Plan                             |                      |           | 2,276,301         |  |                         | $     | 19.95 |  |  |           | 1,234,833 | (1)
|                                                                | 1996 Nonqualified Performance Stock Option
    Plan  Executive |                      |           | 944,228           |  |                         | $     | 9.37  |  |  |           | 0         | (1)
|                                                                | 1996 Nonqualified Performance Stock Option
    Plan  General   |                      |           | 94,956            |  |                         | $     | 5.26  |  |  |           | 0         | (1)
|                                                                | 2002 Incentive Stock Plan                                       |                      |           | 0                 |  |                         | $     | 0     |  |  |           | 4,500,000 | (1)
|Equity compensation plans not approved by
    security holders: |                                                                 |                      |           |                   |  |                         |       |       |  |  |           |          
|                                                                | 1998 Substitute Nonqualified Stock Option Plan                  |                      |           | 2,266             |  |                         | $     | 10.13 |  |  |           | 13,806    | (1)
|                                                                |                                                                 |                      |           |                   |  |                         |       |       |  |  |           |          
|Total                                                           |                                                                 |                      | 4,135,680 |                   |  | $                       | 13.27 |       |  |  | 5,767,410 |          
|                                                                |                                                                 |                      |           |                   |  |                         |       |       |  |  |           |          



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On November 13, 2002, the Board of Directors
    approved a resolution to prohibit future grants of options under
    the 1992 Stock Option Plan, the 1996 Nonqualified Stock Option
    Plan, the 1996 Nonqualified Performance Stock Option
    Plan-Executive, the 1996 Nonqualified Performance Stock Option
    Plan- General and the Substitute Nonqualified Stock Option Plan.
    All future option grants will be granted pursuant to the 2002
    Incentive Stock Plan.

69



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|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS

Related Party Transactions

In 1996, we loaned to Messrs. Belatti,
Holbrook, Wilkins and Ms. Moddelmog approximately
$2.0 million, $1.0 million, $22,000 and $52,000 in
order to pay personal withholding income tax liabilities
incurred as a result of executive compensation awards earned in
1995 and that we paid using shares of our common stock. In 1997,
we loaned to Messrs. Belatti and Holbrook an additional
$94,000 and $45,000 related to these tax liabilities. Each
person issued to us a full recourse promissory note for the
amount borrowed. Each note bears simple interest at a rate of
6.25% per annum. Principal and interest on each note is due and
payable on December 31, 2003. The notes are secured by
shares of common stock owned by these individuals. During 2002,
the largest aggregate amount due from Messrs. Belatti,
Holbrook, Wilkins and Ms. Moddelmog under these notes was
$2,946,079, $1,459,898, $31,192 and $73,615. As of
December 15, 2003, Mr. Belatti and Ms. Moddelmog
had repaid their notes and the outstanding principal balance
plus accrued interest due from Messrs. Holbrook and Wilkins
under their notes was $1,458,156 and $32,504.

In October 1998, we sold 1,863,802 shares of our
common stock to a number of existing shareholders and option
holders at a purchase price of $11.625 per share.
Messrs. Belatti, Holbrook, Wilkins and Luther purchased
86,022, 8,603, 10,000 and 3,334 shares of common stock for
a purchase price of approximately $1.0 million, $100,000,
$116,000 and $39,000. Messrs. Belatti, Holbrook, Wilkins
and Luther borrowed from us $750,000, $75,000, $87,000 and
$29,000 to finance the purchase of a portion of these shares.
Each person issued to us a full recourse promissory note for the
amount borrowed. Each note bears simple interest at a rate of
7.0% per annum. Principal and interest on each note is due and
payable on December 31, 2005. The notes are secured by
shares of common stock owned by these individuals. During 2002,
the largest aggregate amount due from Messrs. Belatti,
Holbrook, Wilkins and Luther under these notes was $972,377,
$97,231, $113,037 and $37,268. As of November 30, 2003, the
outstanding principal balance plus accrued interest due from
Messrs. Belatti, Holbrook, Wilkins and Luther under their
notes was $1,020,419, $102,034, $118,621 and $39,109.

In June 1999, Mr. Wilkins purchased
21,334 shares of common stock from one of our former
employees. We loaned Mr. Wilkins approximately $181,000 to
purchase a portion of these shares. Mr. Wilkins issued to
us a full recourse promissory note for the amount borrowed. The
note bears simple interest at a rate of 7.0% per annum, and
principal and interest is due and payable on December 31,
2005. The note is secured by shares of common stock owned by
Mr. Wilkins. During 2002, the largest aggregate amount due
from Mr. Wilkins on this note was $225,741, and as of
November 30, 2003, the outstanding principal balance plus
accrued interest due on the note was $237,334.

In October 1999, Mr. Wilkins purchased
14,627 shares of common stock from one of our former
employees. We loaned Mr. Wilkins approximately $135,000 to
purchase a portion of the shares. Mr. Wilkins issued to us
a full recourse promissory note for the amount borrowed. The
note bears simple interest at a rate of 7.0% per annum.
Principal and interest is due and payable on December 31,
2005. The note is secured by shares of common stock owned by
Mr. Wilkins. During 2002, the largest aggregate amount due
from Mr. Wilkins on this note was $165,736, and as of
November 30, 2003, the outstanding principal balance plus
accrued interest due from Mr. Wilkins under this note was
$174,384.

In November 2002, we repurchased 838,637 shares
of our common stock, at a purchase price of $21.65 per share,
from an equity fund managed by one of our directors. The
repurchase was at the market price and was as part of our share
repurchase program discussed in Item 7 and in Note 15
of our Consolidated Financial Statements. This transaction was
approved by an independent committee of our board of directors.

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|         |                                           
|-------- | ------------------------------------------
|Item 14. | PRINCIPAL ACCOUNTANT FEES AND
    SERVICES

Fees Paid to Independent Auditors



| |           
| | ----------
| | Audit Fees

KPMG billed us aggregate fees and expenses of
approximately $8,000,000 for our annual audit for 2002, reaudits
of 2001 and 2000, the review of financial statements filed on
Forms 10-Q in 2002, and assistance with a registration
statement.

Andersen billed us aggregate fees in the amount
of $314,900 for our annual audit for 2001.



| |                   
| | ------------------
| | Audit-Related Fees

KPMG did not perform any audit-related services
for us in 2002.

During 2001, Andersen billed us fees of
approximately $790,000 for audit-related services, principally
in connection with our initial public offering and subsequent
secondary offering.



| |         
| | --------
| | Tax Fees

KPMG billed us approximately $418,000 for tax
services in 2002. These fees were principally related to a tax
depreciation project, escheat compliance review and various
other tax consulting matters. We also paid approximately
$338,000 to Andersen. These fees were for a sales and use tax
audit and various lesser matters.

Andersen billed us approximately $343,171 for tax
services in 2001. These fees were principally related to state
tax consulting and restructuring matters.

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PART IV.






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
    REPORTS ON FORM 8-K

(a) Financial Statements

The following consolidated financial statements
appear beginning on Page F-1 of the report:

|                                                                                                    |  |       |     | 
|--------------------------------------------------------------------------------------------------- |  | ----- | --- | 
|                                                                                                    |  | Pages
|                                                                                                    |  |      
|Report of Independent Auditors                                                                      |  |       | F-1 | 
|Consolidated Balance Sheets as of
    December 29, 2002 and December 30, 2001                       |  |       | F-2 | 
|Consolidated Statements of Operations for Fiscal
    Years 2002, 2001 and 2000                      |  |       | F-3 | 
|Consolidated Statements of Changes in
    Shareholders Equity for Fiscal Years 2002, 2001 and 2000 |  |       | F-4 | 
|Consolidated Statements of Cash Flows for Fiscal
    Years 2002, 2001 and 2000                      |  |       | F-5 | 
|Notes to Consolidated Financial Statements                                                          |  |       | F-6 | 

We have omitted all other schedules because the
conditions requiring their filing do not exist or because the
required information appears in our Consolidated Financial
Statements, including the notes to those statements.



|    |                            
|--- | ---------------------------
|(b) | Current Reports on Form 8-K

We filed a Current Report on Form 8-K on
March 25, 2003, to disclose our announcement regarding the
restatement of our earnings for 2001 and the first three
quarters of 2002.

We filed a Current Report on Form 8-K on
April 3, 2003, to disclose our key business drivers for the
first three periods in 2003.

We filed a Current Report on Form 8-K on
April 16, 2003, to announce we had entered into a Stock
Purchase Agreement pursuant to which we would sell the
continental U.S. and Canadian operations of our Seattle
Coffee Company subsidiary to Starbucks. Copies of the Stock
Purchase Agreement, dated as of April 15, 2003, and our
press release announcing the sale were included in the filing.

We filed a Current Report on Form 8-K on
April 29, 2003, to announce the resignation of Gerald
Wilkins, our Executive Vice President and Chief Financial
Officer, and the hiring of Mel Hope as our Vice
President  Finance. A copy of our press release was
included in the filing.

We furnished a Current Report on Form 8-K on
June 3, 2003, to announce non-GAAP financial information
about our results of operations for the first quarter ended
April 20, 2003.

We filed a Current Report on Form 8-K on
June 9, 2003, to announce the postponement of first quarter
2003 earnings results.

We filed a Current Report on Form 8-K on
July 17, 2003, to update the status of: (1) our
ongoing efforts to restate of our prior year financial
statements; (2) our plan for filing our Annual Report on
Form 10-K for fiscal year 2002; and (3) the trading of
our common stock on the Nasdaq National Market.

We filed a Current Report on Form 8-K on
July 18, 2003, to announce that on July 14, 2003 we
completed the sale of the continental U.S. and Canadian
operations of our Seattle Coffee Company subsidiary to Starbucks.

We filed a Current Report on Form 8-K on
July 25, 2003, to announce that our Audit Committee had
begun an investigation into certain matters arising from the
audits of our financial statements.

We filed a Current Report on Form 8-K on
July 29, 2003, to update the status of the listing of our
common stock on the Nasdaq National Market.

72



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We filed a Current Report on Form 8-K on
August 1, 2003, to announce second quarter 2003 operating
performance results and to provide an update on key measures and
other business matters.

We filed a Current Report on Form 8-K on
August 11, 2003, to announce that the independent counsel
to the Audit Committee of our Board of Directors had delivered
to the Nasdaq Listing Qualifications Panel a report on its
investigation into certain accounting issues, as requested by
the Listing Qualifications Panel.

We filed a Current Report on Form 8-K on
August 20, 2003, to announce that the Nasdaq Listing
Qualifications Panel had notified us that our common stock would
be delisted from the Nasdaq National Market as of the opening of
business on Monday, August 18, 2003.

We filed a Current Report on Form 8-K on
August 22, 2003, to announce that the lenders under our
2002 Credit Facility had agreed to an amendment under which the
filing deadlines for our Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q for each of the first three
quarters of 2003 had been extended.

We filed a Current Report on Form 8-K on
September 23, 2003, to provide a mid-quarter business
update for third quarter 2003 and key business drivers for
periods 8 and 9 of 2003.

We filed a Current Report on Form 8-K on
October 31, 2003, to announce that the lenders
participating in our Credit Facility had agreed to an amendment
under which the filing deadlines of our Annual Report on
Form 10-K for 2002 and our Quarterly Reports on
Form 10-Q for each of the first three quarters of 2003 had
been extended. We also announced that our third quarter 2003
business review would be released after the market close on
Tuesday, November 4, 2003.

We filed a Current Report on Form 8-K on
November 12, 2003, to provide quarterly information for
2003 for total domestic comparable store sales, new unit
openings, new commitments and unit count.

(c) Exhibits

|        |         |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | ------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 2.1(h)  |             |  | Stock Purchase Agreement between AFC Enterprises,
    Inc. and Starbucks, dated as of April 15, 2003.                                                                                                                                                                                                                                                                                                                                            
|        | 3.1(c)  |             |  | Articles of Incorporation of AFC Enterprises,
    Inc., as amended, dated June 24, 2002.                                                                                                                                                                                                                                                                                                                                                         
|        | 3.2(c)  |             |  | Amended and Restated Bylaws of AFC Enterprises,
    Inc.                                                                                                                                                                                                                                                                                                                                                                                         
|        | 4.1(e)  |             |  | Form of registrants common stock
    certificate.                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10.1(a) |             |  | Stockholders Agreement dated April 11, 1996
    (the 1996 Stockholders Agreement) among FS Equity
    Partners III, L.P. and FS Equity Partners
    International, L.P., 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
    Shareholders) and AFC Enterprises, Inc.
|        | 10.2(a) |             |  | Amendment No. 1 to the 1996
    Stockholders Agreement dated as of May 1, 1996 by and
    among the Shareholders and PENMAN Private Equity and Mezzanine
    Fund, L.P.                                                                                                                                                                                                                                                                         
|        | 10.3(e) |             |  | Form of Popeyes Development Agreement, as amended.                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10.4(e) |             |  | Form of Popeyes Franchise Agreement.                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10.5(e) |             |  | Form of Churchs Development Agreement, as
    amended.                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10.6(e) |             |  | Form of Churchs Franchise Agreement.                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10.7(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., as amended to date.                                                                                                                                                                                             
|        | 10.8(a) |             |  | Supply Agreement dated March 21, 1989
    between New Orleans Spice Company, Inc. and Biscuit Investments,
    Inc.                                                                                                                                                                                                                                                                                                                              

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|        |          |             |  |                                                                                                                                                                                                     
|------- | -------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 10.9(a)  |             |  | Recipe Royalty Agreement dated March 21,
    1989 by and among Alvin C. Copeland, New Orleans Spice
    Company, Inc. and Biscuit Investments, Inc.                                                 
|        | 10.10(a) |             |  | Licensing Agreement dated March 11, 1976
    between King Features Syndicate Division of The Hearst
    Corporation and A. Copeland Enterprises, Inc.                                               
|        | 10.11(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.
|        | 10.12(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.      
|        | 10.13(a) |             |  | License Agreement dated December 19, 1985 by
    and between King Features Syndicate, Inc., The Hearst
    Corporation, Popeyes, Inc. and A. Copeland Enterprises, Inc.                             
|        | 10.14(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.                            
|        | 10.15(b) |             |  | Amendment dated January 1, 2002 by and
    between Hearst Holdings, Inc., King Features Syndicate Division
    and AFC Enterprises, Inc.                                                            
|        | 10.16(a) |             |  | Employment Agreement dated as of December 4,
    1995 between AFC and Samuel N. Frankel, as amended through
    February 8, 2001.*                                                                  
|        | 10.17(a) |             |  | 1992 Stock Option Plan of AFC, effective as of
    November 5, 1992, as amended to date.*                                                                                                           
|        | 10.18(a) |             |  | 1996 Nonqualified Performance Stock Option
    Plan  Executive of AFC, effective as of
    April 11, 1996.*                                                                                        
|        | 10.19(a) |             |  | 1996 Nonqualified Performance Stock Option
    Plan  General of AFC, effective as of April 11,
    1996.*                                                                                          
|        | 10.20(a) |             |  | 1996 Nonqualified Stock Option Plan of AFC,
    effective as of April 11, 1996.*                                                                                                                    
|        | 10.21(a) |             |  | Form of Nonqualified Stock Option
    Agreement  General between AFC and stock option
    participants.*                                                                                           
|        | 10.22(a) |             |  | Form of Nonqualified Stock Option
    Agreement  Executive between AFC and certain key
    executives.*                                                                                            
|        | 10.23(a) |             |  | 1996 Employee Stock Bonus Plan 
    Executive of AFC effective as of April 11, 1996.*                                                                                                              
|        | 10.24(a) |             |  | 1996 Employee Stock Bonus Plan 
    General of AFC effective as of April 11, 1996.*                                                                                                                
|        | 10.25(a) |             |  | Form of Stock Bonus Agreement 
    Executive between AFC and certain executive officers.*                                                                                                          
|        | 10.26(a) |             |  | Form of Stock Bonus Agreement  General
    between AFC and certain executive officers.*                                                                                                            
|        | 10.27(a) |             |  | Form of Secured Promissory Note issued by certain
    members of management.                                                                                                                        
|        | 10.28(a) |             |  | Form of Stock Pledge Agreement between AFC and
    certain members of management.                                                                                                                   
|        | 10.29(a) |             |  | AFC 1994 Supplemental Benefit Plan for Executive
    Officers dated May 9, 1994.*                                                                                                                   
|        | 10.30(a) |             |  | AFC 1994 Supplemental Benefit Plan for Senior and
    Executive Staff Officer dated April 19, 1994.*                                                                                                
|        | 10.31(a) |             |  | AFC 1994 Supplemental Benefit Plan for Senior
    Officers/ General Manager dated May 9, 1994.*                                                                                                     
|        | 10.32(a) |             |  | AFC 1994 Supplemental Benefit Plan for Designated
    Officers dated May 9, 1994.*                                                                                                                  
|        | 10.33(a) |             |  | Settlement Agreement between Alvin C.
    Copeland, Diversified Foods and Seasonings, Inc., Flavorite
    Laboratories, Inc. and AFC dated May 29, 1997.                                            
|        | 10.34(f) |             |  | Shareholder Agreement by and among AFC Franchise
    Acquisition Corp. and other signatories dated as of
    August 13, 1998.                                                                       
|        | 10.35(b) |             |  | AFC Deferred Compensation Plan dated as of
    January 1, 1998 and First Amendment to Deferred
    Compensation Plan dated as of December 31, 1998.*                                                
|        | 10.36(d) |             |  | AFC Enterprises, Inc. 1999-2003 Long-Term
    Employee Success Plan, effective January 1, 1999.*                                                                                                    

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|        |           |             |  |                                                                                                                                                                                                                                            
|------- | --------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |            
|Number  |           | Description
|        |           |            
|        | 10.37(e) |             |  | Supply Agreement dated October 5, 1998
    between Churchs Operators Purchasing Association, Inc. and
    Cagles, Inc. (Cagles 92), as
    amended.                                                                                  
|        | 10.38(e) |             |  | Supply Agreement dated October 5, 1998
    between AFC d/b/a Popeyes Chicken and Biscuits and Cagles,
    Inc. as amended.                                                                                                                
|        | 10.39(e) |             |  | Supply Agreement dated April 1, 1999 between
    Churchs Operators Purchasing Association, Inc. and Tyson
    Foods, Inc, as amended.                                                                                                     
|        | 10.40(e)  |             |  | Stockholders Agreement dated as of March 18,
    1998 among FS Equity Partners III, L.P., FS Equity
    Partners International, L.P., the new shareholders identified
    therein and AFC.                                                 
|        | 10.41(e)  |             |  | Form of Cinnabon Development Agreement.                                                                                                                                                                                                    
|        | 10.42(e)  |             |  | Form of Cinnabon Franchise Agreement.                                                                                                                                                                                                      
|        | 10.43(e)  |             |  | Form of Seattles Best Coffee Development
    Agreement, as amended.                                                                                                                                                                       
|        | 10.44(e)  |             |  | Form of Seattles Best Coffee Franchise
    Agreement.                                                                                                                                                                                     
|        | 10.45(a)  |             |  | Indemnification Agreement dated April 11,
    1996 by and between AFC and Ronald P. Spogli.*                                                                                                                                               
|        | 10.46(a)  |             |  | Indemnification Agreement dated April 11,
    1996 by and between AFC and John M. Roth.*                                                                                                                                                   
|        | 10.47(a)  |             |  | Indemnification Agreement dated May 1, 1996
    by and between AFC and Kelvin J. Pennington.*                                                                                                                                              
|        | 10.48(a)  |             |  | Indemnification Agreement dated April 11,
    1996 by and between AFC and Matt L. Figel.*                                                                                                                                                  
|        | 10.49(a)  |             |  | Indemnification Agreement dated April 11,
    1996 by and between AFC and Frank J. Belatti.*                                                                                                                                               
|        | 10.50(e)  |             |  | First Amendment to the Amended and Restated
    Credit Agreement dated as of October 1, 1999 by and among
    AFC, the Syndication Agent, the Lenders, CIBC and the Subsidiary
    Guarantors listed thereto.                              
|        | 10.51(e)  |             |  | Employment Agreement dated as of December 8,
    2000 between AFC and Frank J. Belatti.*                                                                                                                                                   
|        | 10.52(e)  |             |  | Employment Agreement dated as of December 8,
    2000 between AFC and Dick R. Holbrook.*                                                                                                                                                   
|        | 10.53(e)  |             |  | Employment Agreement dated as of December 8,
    2000 between AFC and Gerald J. Wilkins.*                                                                                                                                                  
|        | 10.54(e)  |             |  | Employment Agreement dated as of December 8,
    2000 between AFC and Hala Moddelmog.*                                                                                                                                                     
|        | 10.55(e)  |             |  | Employment Agreement dated as of December 8,
    2000 between AFC and Jon Luther, as amended.*                                                                                                                                             
|        | 10.56(e)  |             |  | Amendment No. 3 to the 1996 Stockholders
    Agreement dated as of February 8, 2001 by and among AFC and
    the other signatories thereto.                                                                                                
|        | 10.57(e)  |             |  | Second Amendment to Deferred Compensation Plan
    dated as of July 24, 2000.*                                                                                                                                                             
|        | 10.58(e)  |             |  | Substitute Nonqualified Stock Option Plan,
    effective March 17, 1998.*                                                                                                                                                                  
|        | 10.59(e)  |             |  | Second Amendment to Amended and Restated Credit
    Agreement dated as of February 6, 2001 by and among AFC,
    the Syndication Agent, the Lenders, CIBC, the Subsidiary
    Guarantors listed thereto, and the other signatories thereto.
|        | 10.60(e)  |             |  | First Amendment to Employment Agreement dated
    February 8, 2001 between AFC and
    Frank J. Belatti.*                                                                                                                                  
|        | 10.61(e)  |             |  | Fourth Amendment to Employment Agreement dated as
    of February 9, 2001 between AFC and Samuel N. Frankel.*                                                                                                                              
|        | 10.62(e)  |             |  | First Amendment to Employment Agreement dated
    February 8, 2001 between AFC and Dick R. Holbrook.*                                                                                                                                      
|        | 10.63(e)  |             |  | First Amendment to Employment Agreement dated
    February 8, 2001 between AFC and Gerald J. Wilkins.*                                                                                                                                     
|        | 10.64(e)  |             |  | First Amendment to Employment Agreement dated
    February 8, 2001 between AFC and Hala Moddelmog.*                                                                                                                                        
|        | 10.65(e)  |             |  | Amendment to Second Cagles, Inc. Agreement dated
    February 23, 2001 between Supply Management Services, Inc.
    and Cagles, Inc.                                                                                                       

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|        |          |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- | -------- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 10.66(f) |             |  | Second Amendment to Employment Agreement dated
    August 31, 2001 between AFC and Frank J. Belatti.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10.67(f) |             |  | Second Amendment to Employment Agreement dated
    August 31, 2001 between AFC and Dick R. Holbrook.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10.68(f) |             |  | Second Amendment to Employment Agreement dated
    August 31, 2001 between AFC and Gerald J. Wilkins.*                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10.69(f) |             |  | Second Amendment to Employment Agreement dated
    August 31, 2001 between AFC and Hala Moddelmog.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.70(f) |             |  | Second Amendment to Employment Agreement dated
    August 31, 2001 between AFC and Jon Luther.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10.71(f) |             |  | Indemnification Agreement dated May 16, 2001
    by and between AFC and Gerald J. Wilkins.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10.72(f) |             |  | Indemnification Agreement dated May 16, 2001
    by and between AFC and Victor Arias Jr.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10.73(f) |             |  | Indemnification Agreement dated May 16, 2001
    by and between AFC and Carolyn Hogan Byrd.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10.74(f) |             |  | Indemnification Agreement dated May 16, 2001
    by and between AFC and R. William Ide, III.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10.75(h) |             |  | Credit Agreement dated as of May 23, 2002
    among AFC Enterprises, Inc., as borrower, and the Lenders Party
    thereto, J.P. Morgan Chase Bank, as Administrative Agent,
    J.P. Morgan Chase Bank, as Administrative Agent, J.P.
    Morgan Securities, Inc., as Joint Bookrunner and Co-Lead
    Arranger, Credit Suisse First Boston, as Joint Bookrunner and
    Co-Lead Arranger, Credit Lyonnais New York Branch, as
    Co-Documentation Agent, Fleet National Bank, Inc., as
    Co-Documentation Agent and SunTrust Bank, as Co-Documentation
    Agent.
|        | 10.76(g) |             |  | AFC Enterprises, Inc. Employee Stock Purchase
    Plan.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10.77(g) |             |  | AFC Enterprises, Inc. 2002 Incentive Stock Plan.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.78(g) |             |  | AFC Enterprises, Inc. Annual Executive Bonus
    Program.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10.79    |             |  | Consulting Agreement, dated May 27, 2003,
    between AFC and Gerald Wilkins.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10.80    |             |  | First Amendment to Employment Agreement dated as
    of December 4, 1995 between AFC Enterprises, Inc. and
    Samuel N. Frankel.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.81    |             |  | Second Amendment to Employment Agreement dated as
    of December 4, 1995 between AFC Enterprises, Inc. and
    Samuel N. Frankel.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10.82    |             |  | Third Amendment to Employment Agreement dated as
    of December 4, 1995 between AFC Enterprises, Inc. and
    Samuel N. Frankel.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 11.1**   |             |  | Statement regarding computation of per share
    earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 21.1     |             |  | Subsidiaries of AFC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 23.1     |             |  | Consent of Independent Auditors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 31.1     |             |  | Certification Pursuant to Rule 13a-14(a), as
    Adopted Pursuant to Rule 13a-14(a), as Adopted Pursuant
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 31.2     |             |  | Certification Pursuant to Rule 13a-14(a), as
    Adopted Pursuant to Rule 13a-14(a), as Adopted Pursuant
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 32.1     |             |  | Certification of Chief Executive Officer,
    pursuant to 18 U.S.C Section 1350, as adopted pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 32.2     |             |  | Certification of Chief Financial Officer,
    pursuant to 18 U.S.C Section 1350, as adopted pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                           



---



|  |                                                                               
|- | ------------------------------------------------------------------------------
| | Certain portions of this exhibit have been
    granted confidential treatment.



|   |                                                                                                                                                                       
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Management contract, compensatory plan or
    arrangement required to be filed as an exhibit.                                                                         
|  
|** | Data required by SFAS No. 128,
    Earnings per Share, is provided in the notes to the
    consolidated financial statements in this Annual Report on
    Form 10-K.

76



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##### Table of Contents





|    |                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Filed as an exhibit to the Registration Statement
    of AFC on Form S-4 (Registration No. 333-29731) on
    June 20, 1997 and incorporated by reference herein.    
|   
|(b) | Filed as an exhibit to the Form 10-K of AFC
    for the year ended December 27, 1998 on March 29, 1999 and
    incorporated by reference herein.                    
|   
|(c) | Filed as an exhibit to the Form 10-Q of AFC
    for the quarter ended July 14, 2002, on August 14, 2002 and
    incorporated by reference herein.                   
|   
|(d) | Filed as an exhibit to the Form 10-Q of AFC
    for the quarter ended June 13, 1999 on July 28, 1999 and
    incorporated by reference herein.                      
|   
|(e) | Filed as an exhibit to the Registration Statement
    of AFC on Form S-1 (Registration No. 333-52608) on
    December 22, 2000 and incorporated by reference herein.
|   
|(f) | Filed as an exhibit to the Registration Statement
    of AFC on Form S-1 (Registration No. 333-73182) on
    November 13, 2001 and incorporated by reference herein.
|   
|(g) | Filed as an exhibit to the Proxy Statement and
    Notice of 2002 Annual Shareholders Meeting of AFC on
    April 12, 2002 and incorporated by reference herein.    
|   
|(h) | Filed as an exhibit to the Form 8-K of AFC
    filed April 16, 2003 and incorporated by reference herein.                                                           

77



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##### Table of Contents






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 on the 15th
day of December 2003.



| |                      
| | ---------------------
| | AFC ENTERPRISES, INC.



| |     |                     
| | --- | --------------------
| | By: | /s/ FRANK J. BELATTI

| |                          
| | -------------------------
| |                          
| | Frank J. Belatti         
| | Chairman of the Board and
| | Chief Executive Officer  



| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

|                                             |  |                                                                                                                                                  |  |                   |  | 
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- |  | 
|                                             |  |                                                                                                                                                  |  |                  
|Signature                                    |  | Title(s)                                                                                                                                         |  | Date             
|                                             |  |                                                                                                                                                  |  |                  
|                                            
|/s/ FRANK J. BELATTIFrank J. Belatti         |  | Chairman of the Board, Chief Executive Officer
    and Chief Financial Officer(Principal Executive Officer and Principal Accounting
    Officer) |  | December 15, 2003
|                                            
|/s/ DICK R. HOLBROOKDick R. Holbrook         |  | President, Chief Operating Officer
    and Director                                                                                              |  | December 15, 2003
|                                            
|/s/ VICTOR ARIAS, JR.Victor Arias, Jr.       |  | Director                                                                                                                                         |  | December 15, 2003
|                                            
|/s/ CAROLYN H. BYRDCarolyn H. Byrd           |  | Director                                                                                                                                         |  | December 15, 2003
|                                            
|/s/ R. WILLIAM IDE, IIIR. William Ide, III   |  | Director                                                                                                                                         |  | December 15, 2003
|                                            
|/s/ KELVIN J. PENNINGTONKelvin J. Pennington |  | Director                                                                                                                                         |  | December 15, 2003
|                                            
|/s/ JOHN M. ROTHJohn M. Roth                 |  | Director                                                                                                                                         |  | December 15, 2003
|                                            
|/s/ RONALD P. SPOGLIRonald P. Spogli         |  | Director                                                                                                                                         |  | December 15, 2003
|                                            
|/s/ PETER STARRETTPeter Starrett             |  | Director                                                                                                                                         |  | December 15, 2003

78



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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders

AFC Enterprises, Inc.:


We have audited the consolidated balance sheets
of AFC Enterprises, Inc. and subsidiaries (the
Company) as of December 29, 2002 and
December 30, 2001, and the related consolidated statements
of operations, changes in shareholders equity, and cash
flows for each of the years in the three-year period ended
December 29, 2002. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit 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 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of AFC Enterprises, Inc. and
subsidiaries as of December 29, 2002 and December 30,
2001, and the results of their operations and their cash flows
for each of the years in the three-year period ended
December 29, 2002, in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 2 to the accompanying
consolidated financial statements, effective December 31,
2001, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets.

As discussed in Note 23 to the accompanying
consolidated financial statements, the Companys
consolidated balance sheet as of December 30, 2001, and the
related consolidated statements of operations, changes in
shareholders equity, and cash flows for the years ended
December 30, 2001 and December 31, 2000, which were
audited by other independent auditors who have ceased
operations, have been restated.



| |         
| | --------
| | KPMG LLP

Atlanta, Georgia

December 15, 2003


F-1



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##### Table of Contents



AFC ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

As of December 29, 2002 and
December 30, 2001


(In millions, except share data)


|                                         |                                                                                                                                                                                          |                                            |   |               |       |  |   |       |       | 
|---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------------- | ----- |  | - | ----- | ----- | 
|                                         |                                                                                                                                                                                          | 2002                                       |   | 2001         
|                                         |                                                                                                                                                                                          |                                            |   |              
|                                         |                                                                                                                                                                                          |                                            |   | (As Restated)
|ASSETS                                   |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|Current assets:                          |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|                                         | Cash and cash equivalents                                                                                                                                                                |                                            | $ | 9.6           |       |  | $ | 5.1   |      
|                                         | Accounts and current notes receivable, net                                                                                                                                               |                                            |   | 36.2          |       |  |   | 27.7  |      
|                                         | Inventories                                                                                                                                                                              |                                            |   | 14.9          |       |  |   | 15.9  |      
|                                         | Prepaid income taxes                                                                                                                                                                     |                                            |   | 20.6          |       |  |   | 12.2  |      
|                                         | Other current assets                                                                                                                                                                     |                                            |   | 14.5          |       |  |   | 13.6  |      
|                                         |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|                                         |                                                                                                                                                                                          | Total current assets                       |   |               | 95.8  |  |   |       | 74.5  | 
|                                         |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|Long-term assets:                        |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|                                         | Property and equipment, net                                                                                                                                                              |                                            |   | 213.8         |       |  |   | 238.2 |      
|                                         | Goodwill                                                                                                                                                                                 |                                            |   | 27.9          |       |  |   | 67.0  |      
|                                         | Trademarks and other intangible assets, net                                                                                                                                              |                                            |   | 115.4         |       |  |   | 114.8 |      
|                                         | Other long-term assets, net                                                                                                                                                              |                                            |   | 34.4          |       |  |   | 30.8  |      
|                                         |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|                                         |                                                                                                                                                                                          | Total long-term assets                     |   |               | 391.5 |  |   |       | 450.8 | 
|                                         |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|                                         |                                                                                                                                                                                          | Total assets                               |   | $             | 487.3 |  |   | $     | 525.3 | 
|                                         |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|LIABILITIES AND SHAREHOLDERS
    EQUITY |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|Current liabilities:                     |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|                                         | Accounts payable                                                                                                                                                                         |                                            | $ | 58.0          |       |  | $ | 59.0  |      
|                                         | Accrued liabilities                                                                                                                                                                      |                                            |   | 19.1          |       |  |   | 17.8  |      
|                                         | Current debt maturities                                                                                                                                                                  |                                            |   | 17.6          |       |  |   | 33.7  |      
|                                         |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|                                         |                                                                                                                                                                                          | Total current liabilities                  |   |               | 94.7  |  |   |       | 110.5 | 
|                                         |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|Long-term liabilities:                   |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|                                         | Long-term debt                                                                                                                                                                           |                                            |   | 209.0         |       |  |   | 175.8 |      
|                                         | Deferred credits and other long-term liabilities                                                                                                                                         |                                            |   | 73.8          |       |  |   | 51.7  |      
|                                         |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|                                         |                                                                                                                                                                                          | Total long-term liabilities                |   |               | 282.8 |  |   |       | 227.5 | 
|                                         |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|                                         |                                                                                                                                                                                          | Total liabilities                          |   |               | 377.5 |  |   |       | 338.0 | 
|                                         |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|Commitments and contingencies(Note 13)   |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|Shareholders equity:                    |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|                                         | Preferred stock ($.01 par value; 2,500,000 shares
    authorized; 0 issued and outstanding)                                                                                              |                                            |   |              |       |  |   |      |      
|                                         | Common stock ($.01 par value; 150,000,000 shares
    authorized; 27,478,744 and 30,441,887 shares issued and
    outstanding at the end of fiscal years 2002 and 2001,
    respectively) |                                            |   | 0.3           |       |  |   | 0.3   |      
|                                         | Capital in excess of par value                                                                                                                                                           |                                            |   | 144.7         |       |  |   | 212.1 |      
|                                         | Notes receivable from officers, including accrued
    interest                                                                                                                           |                                            |   | (6.1          | )     |  |   | (7.7  | )    
|                                         | Accumulated losses                                                                                                                                                                       |                                            |   | (29.1         | )     |  |   | (17.4 | )    
|                                         |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|                                         |                                                                                                                                                                                          | Total shareholders equity                 |   |               | 109.8 |  |   |       | 187.3 | 
|                                         |                                                                                                                                                                                          |                                            |   |               |       |  |   |      
|                                         |                                                                                                                                                                                          | Total liabilities and shareholders equity |   | $             | 487.3 |  |   | $     | 525.3 | 
|                                         |                                                                                                                                                                                          |                                            |   |               |       |  |   |      

See accompanying notes to consolidated financial
statements.

F-2



---



##### Table of Contents



AFC ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

For Fiscal Years 2002, 2001 and 2000


(In millions, except per share data)


|                                                     |                                                             |                |       |               |       |               |      |       |       |   |      |       |       | 
|---------------------------------------------------- | ----------------------------------------------------------- | -------------- | ----- | ------------- | ----- | ------------- | ---- | ----- | ----- | - | ---- | ----- | ----- | 
|                                                     |                                                             | 2002           |       | 2001          |       | 2000         
|                                                     |                                                             |                |       |               |       |              
|                                                     |                                                             |                |       | (As Restated) |       | (As Restated)
|Revenues:                                            |                                                             |                |       |               |       |               |      |       |       |   |      |      
|                                                     | Sales by company-operated restaurants                       |                | $     | 413.3         |       |               | $    | 507.0 |       |   | $    | 567.4 |      
|                                                     | Franchise revenues                                          |                |       | 111.3         |       |               |      | 101.1 |       |   |      | 88.7  |      
|                                                     | Wholesale revenues                                          |                |       | 69.5          |       |               |      | 61.1  |       |   |      | 55.9  |      
|                                                     | Other revenues                                              |                |       | 25.5          |       |               |      | 18.0  |       |   |      | 11.2  |      
|                                                     |                                                             |                |       |               |       |               |      |       |       |   |      |      
|                                                     |                                                             | Total revenues |       |               | 619.6 |               |      |       | 687.2 |   |      |       | 723.2 | 
|                                                     |                                                             |                |       |               |       |               |      |       |       |   |      |      
|Expenses:                                            |                                                             |                |       |               |       |               |      |       |       |   |      |      
|                                                     | Restaurant employee, occupancy and other expenses           |                |       | 218.3         |       |               |      | 260.1 |       |   |      | 299.1 |      
|                                                     | Restaurant food, beverages and packaging                    |                |       | 116.9         |       |               |      | 147.1 |       |   |      | 159.0 |      
|                                                     | General and administrative expenses                         |                |       | 110.4         |       |               |      | 116.0 |       |   |      | 103.3 |      
|                                                     | Wholesale cost of sales and operating expenses              |                |       | 56.1          |       |               |      | 54.3  |       |   |      | 46.3  |      
|                                                     | Depreciation and amortization                               |                |       | 29.6          |       |               |      | 40.3  |       |   |      | 41.2  |      
|                                                     | Impairment charges and other (Note 18)                      |                |       | 49.6          |       |               |      | 15.5  |       |   |      | 7.0   |      
|                                                     |                                                             |                |       |               |       |               |      |       |       |   |      |      
|                                                     |                                                             | Total expenses |       |               | 580.9 |               |      |       | 633.3 |   |      |       | 655.9 | 
|                                                     |                                                             |                |       |               |       |               |      |       |       |   |      |      
|                                                    
|Operating profit                                     |                                                             |                | 38.7  |               |       |               | 53.9 |       |       |   | 67.3 |      
|                                                     | Interest expense, net                                       |                |       | 22.6          |       |               |      | 24.6  |       |   |      | 33.3  |      
|                                                     |                                                             |                |       |               |       |               |      |       |       |   |      |      
|Income before income taxes and accounting
    change |                                                             |                | 16.1  |               |       |               | 29.3 |       |       |   | 34.0 |      
|                                                     | Income tax expense                                          |                |       | 16.0          |       |               |      | 13.7  |       |   |      | 15.7  |      
|                                                     |                                                             |                |       |               |       |               |      |       |       |   |      |      
|Income before accounting change                      |                                                             |                | 0.1   |               |       |               | 15.6 |       |       |   | 18.3 |      
|                                                     | Loss from the cumulative effect of an accounting
    change |                |       | (11.8         | )     |               |      |      |       |   |      |      |      
|                                                     |                                                             |                |       |               |       |               |      |       |       |   |      |      
|Net (loss) income                                    |                                                             | $              | (11.7 | )             |       | $             | 15.6 |       |       | $ | 18.3 |      
|                                                     |                                                             |                |       |               |       |               |      |       |       |   |      |      
|Basic (loss) earnings per common
    share:          |                                                             |                |       |               |       |               |      |       |       |   |      |      
|                                                     | Income before accounting change                             |                | $     |              |       |               | $    | 0.53  |       |   | $    | 0.70  |      
|                                                     | Loss from the cumulative effect of an accounting
    change |                |       | (0.39         | )     |               |      |      |       |   |      |      |      
|                                                     |                                                             |                |       |               |       |               |      |       |       |   |      |      
|                                                     | Net (loss) income                                           |                | $     | (0.39         | )     |               | $    | 0.53  |       |   | $    | 0.70  |      
|                                                     |                                                             |                |       |               |       |               |      |       |       |   |      |      
|Diluted (loss) earnings per common
    share:        |                                                             |                |       |               |       |               |      |       |       |   |      |      
|                                                     | Income before accounting change                             |                | $     |              |       |               | $    | 0.50  |       |   | $    | 0.64  |      
|                                                     | Loss from the cumulative effect of an accounting
    change |                |       | (0.37         | )     |               |      |      |       |   |      |      |      
|                                                     |                                                             |                |       |               |       |               |      |       |       |   |      |      
|                                                     | Net (loss) income                                           |                | $     | (0.37         | )     |               | $    | 0.50  |       |   | $    | 0.64  |      
|                                                     |                                                             |                |       |               |       |               |      |       |       |   |      |      

See accompanying notes to consolidated financial
statements.

F-3



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##### Table of Contents



AFC ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY

For Fiscal Years 2002, 2001 and 2000


(In millions, except share data)


|                                               |                                                 |              |            |            |   |         |     |            |  |             |       |       |   |   |      |      |   |   |       |       |   |   |       |       |  
|---------------------------------------------- | ----------------------------------------------- | ------------ | ---------- | ---------- | - | ------- | --- | ---------- |  | ----------- | ----- | ----- | - | - | ---- | ---- | - | - | ----- | ----- | - | - | ----- | ----- | -
|                                               |                                                 |              |            | Capital    |   |         |     |            |  |            
|                                               |                                                 | Common Stock |            | in         |   |         |     |            |  |            
|                                               |                                                 |              |            | Excess     |   | Officer |     |            |  |            
|                                               |                                                 | Number of    |            |            |   | of Par  |     | Notes      |  | Accumulated |       |      
|                                               |                                                 | Shares       |            | Amount     |   | Value   |     | Receivable |  | Losses      |       | Total
|                                               |                                                 |              |            |            |   |         |     |            |  |             |       |      
|Balance at December 26, 1999
    (As Restated) |                                                 |              | 26,295,673 |            |   | $       | 0.3 |            |  | $           | 153.4 |       |   | $ | (7.0 | )    |   | $ | (51.3 | )     |   | $ | 95.4  |      
|                                               | Issuance of common stock under option plans     |              |            | 56,044     |   |         |     |           |  |             |       | 2.2   |   |   |      |     |   |   |       |      |   |   |       | 2.2   |  
|                                               | Repurchase and cancellation of shares           |              |            | (12,238    | ) |         |     |           |  |             |       | (0.1  | ) |   |      |     |   |   |       |      |   |   |       | (0.1  | )
|                                               | Notes receivable additions, net of discount     |              |            |           |   |         |     |           |  |             |       |      |   |   |      | (0.2 | ) |   |       |      |   |   |       | (0.2  | )
|                                               | Interest receivable                             |              |            |           |   |         |     |           |  |             |       |      |   |   |      | (0.4 | ) |   |       |      |   |   |       | (0.4  | )
|                                               | Amortization of discount                        |              |            |           |   |         |     |           |  |             |       |      |   |   |      | (0.1 | ) |   |       |      |   |   |       | (0.1  | )
|                                               | Net income (As Restated)                        |              |            |           |   |         |     |           |  |             |       |      |   |   |      |     |   |   |       | 18.3  |   |   |       | 18.3  |  
|                                               |                                                 |              |            |            |   |         |     |            |  |             |       |       |   |   |      |      |   |   |       |       |   |   |       |      
|Balance at December 31, 2000
    (As Restated) |                                                 |              | 26,339,479 |            |   |         | 0.3 |            |  |             | 155.5 |       |   |   | (7.7 | )    |   |   | (33.0 | )     |   |   | 115.1 |      
|                                               | Issuance of common stock, net of offering costs |              |            | 3,136,328  |   |         |     |           |  |             |       | 46.0  |   |   |      |     |   |   |       |      |   |   |       | 46.0  |  
|                                               | Issuance of common stock under option plans     |              |            | 991,860    |   |         |     |           |  |             |       | 10.9  |   |   |      |     |   |   |       |      |   |   |       | 10.9  |  
|                                               | Repurchase and cancellation of shares           |              |            | (25,780    | ) |         |     |           |  |             |       | (0.3  | ) |   |      | 0.3  |   |   |       |      |   |   |       |      |  
|                                               | Notes and interest receivable payments          |              |            |           |   |         |     |           |  |             |       |      |   |   |      | 0.3  |   |   |       |      |   |   |       | 0.3   |  
|                                               | Interest receivable                             |              |            |           |   |         |     |           |  |             |       |      |   |   |      | (0.4 | ) |   |       |      |   |   |       | (0.4  | )
|                                               | Amortization of discount                        |              |            |           |   |         |     |           |  |             |       |      |   |   |      | (0.2 | ) |   |       |      |   |   |       | (0.2  | )
|                                               | Net income (As Restated)                        |              |            |           |   |         |     |           |  |             |       |      |   |   |      |     |   |   |       | 15.6  |   |   |       | 15.6  |  
|                                               |                                                 |              |            |            |   |         |     |            |  |             |       |       |   |   |      |      |   |   |       |       |   |   |       |      
|Balance at December 30, 2001
    (As Restated) |                                                 |              | 30,441,887 |            |   |         | 0.3 |            |  |             | 212.1 |       |   |   | (7.7 | )    |   |   | (17.4 | )     |   |   | 187.3 |      
|                                               | Issuance of common stock, net of offering costs |              |            | 19,365     |   |         |     |           |  |             |       | 0.3   |   |   |      |     |   |   |       |      |   |   |       | 0.3   |  
|                                               | Issuance of common stock under option plans     |              |            | 710,455    |   |         |     |           |  |             |       | 10.2  |   |   |      |     |   |   |       |      |   |   |       | 10.2  |  
|                                               | Repurchase and cancellation of shares           |              |            | (3,692,963 | ) |         |     |           |  |             |       | (77.9 | ) |   |      |     |   |   |       |      |   |   |       | (77.9 | )
|                                               | Notes and interest receivable payments          |              |            |           |   |         |     |           |  |             |       |      |   |   |      | 2.1  |   |   |       |      |   |   |       | 2.1   |  
|                                               | Interest receivable                             |              |            |           |   |         |     |           |  |             |       |      |   |   |      | (0.3 | ) |   |       |      |   |   |       | (0.3  | )
|                                               | Amortization of discount                        |              |            |           |   |         |     |           |  |             |       |      |   |   |      | (0.2 | ) |   |       |      |   |   |       | (0.2  | )
|                                               | Net loss                                        |              |            |           |   |         |     |           |  |             |       |      |   |   |      |     |   |   |       | (11.7 | ) |   |       | (11.7 | )
|                                               |                                                 |              |            |            |   |         |     |            |  |             |       |       |   |   |      |      |   |   |       |       |   |   |       |      
|Balance at December 29, 2002                   |                                                 |              | 27,478,744 |            |   | $       | 0.3 |            |  | $           | 144.7 |       |   | $ | (6.1 | )    |   | $ | (29.1 | )     |   | $ | 109.8 |      
|                                               |                                                 |              |            |            |   |         |     |            |  |             |       |       |   |   |      |      |   |   |       |       |   |   |       |      

See accompanying notes to consolidated financial
statements.

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##### Table of Contents



AFC ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

For Fiscal Years 2002, 2001 and 2000


(In millions)


|                                                                                             |                                                            |                                                  |                                           |               |      |               |       |      |      |       |       |      |       |       |  
|-------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------------------------ | ----------------------------------------- | ------------- | ---- | ------------- | ----- | ---- | ---- | ----- | ----- | ---- | ----- | ----- | -
|                                                                                             |                                                            | 2002                                             |                                           | 2001          |      | 2000         
|                                                                                             |                                                            |                                                  |                                           |               |      |              
|                                                                                             |                                                            |                                                  |                                           | (As Restated) |      | (As Restated)
|Cash flows provided by (used in) operating
    activities:                                   |                                                            |                                                  |                                           |               |      |               |       |      |      |       |       |     
|Net income                                                                                   |                                                            | $                                                | (11.7                                     | )             |      | $             | 15.6  |      |      | $     | 18.3  |     
|Adjustments to reconcile net (loss) income
    to net cash provided by operating activities: |                                                            |                                                  |                                           |               |      |               |       |      |      |       |       |     
|                                                                                             | Depreciation and amortization                              |                                                  |                                           | 29.6          |      |               |       | 40.3 |      |       |       | 41.2 |      
|                                                                                             | Impairment and other write-downs of non-current
    assets |                                                  |                                           | 44.6          |      |               |       | 13.5 |      |       |       | 7.5  |      
|                                                                                             | Cumulative effect of an accounting change                  |                                                  |                                           | 11.8          |      |               |       |     |      |       |       |     |      
|                                                                                             | Deferred income taxes                                      |                                                  |                                           | 12.9          |      |               |       | (1.6 | )    |       |       | 6.8  |      
|                                                                                             | Non-cash interest, net                                     |                                                  |                                           | 3.8           |      |               |       | 1.6  |      |       |       | 1.6  |      
|                                                                                             | Net loss (gain) on sale of assets                          |                                                  |                                           | 4.0           |      |               |       | 1.3  |      |       |       | (6.4 | )    
|                                                                                             | Provision for credit losses                                |                                                  |                                           | 2.1           |      |               |       | 1.3  |      |       |       | 1.2  |      
|                                                                                             | Compensatory expense for stock options                     |                                                  |                                           | 0.3           |      |               |       | 0.4  |      |       |       | 1.8  |      
|                                                                                             | Change in operating assets and liabilities:                |                                                  |                                           |               |      |               |       |      |      |       |       |      |      
|                                                                                             |                                                            | Accounts receivable                              |                                           |               | (9.6 | )             |       |      | (8.0 | )     |       |      | (0.6  | )    
|                                                                                             |                                                            | Prepaid income taxes                             |                                           |               | (8.4 | )             |       |      | (9.5 | )     |       |      | (1.8  | )    
|                                                                                             |                                                            | Inventories and other operating assets           |                                           |               | (3.4 | )             |       |      | (2.3 | )     |       |      | 1.6   |      
|                                                                                             |                                                            | Accounts payable and other operating liabilities |                                           |               | 17.8 |               |       |      | 4.8  |       |       |      | (11.3 | )    
|                                                                                             |                                                            |                                                  |                                           |               |      |               |       |      |      |       |       |     
|                                                                                             |                                                            |                                                  | Net cash provided by operating activities |               |      | 93.8          |       |      |      | 57.4  |       |      |       | 59.9  |  
|                                                                                             |                                                            |                                                  |                                           |               |      |               |       |      |      |       |       |     
|Cash flows provided by (used in) investing
    activities:                                   |                                                            |                                                  |                                           |               |      |               |       |      |      |       |       |     
|Capital expenditures                                                                         |                                                            |                                                  | (49.7                                     | )             |      |               | (58.0 | )    |      |       | (50.0 | )   
|Proceeds from dispositions of property and
    equipment                                     |                                                            |                                                  | 35.4                                      |               |      |               | 39.9  |      |      |       | 28.9  |     
|Other, net                                                                                   |                                                            |                                                  | 0.7                                       |               |      |               | 0.6   |      |      |       | 1.2   |     
|                                                                                             |                                                            |                                                  |                                           |               |      |               |       |      |      |       |       |     
|                                                                                             |                                                            |                                                  | Net cash used in investing activities     |               |      | (13.6         | )     |      |      | (17.5 | )     |      |       | (19.9 | )
|                                                                                             |                                                            |                                                  |                                           |               |      |               |       |      |      |       |       |     
|Cash flows provided by (used in) financing
    activities:                                   |                                                            |                                                  |                                           |               |      |               |       |      |      |       |       |     
|Proceeds from 2002 Credit Facility                                                           |                                                            |                                                  | 250.0                                     |               |      |               |      |      |      |       |      |     
|Principal and premium payments  Senior
    Subordinated Notes                               |                                                            |                                                  | (133.4                                    | )             |      |               | (24.3 | )    |      |       | (16.9 | )   
|Principal payments  1997 Credit
    Facility                                                |                                                            |                                                  | (78.7                                     | )             |      |               | (79.9 | )    |      |       | (12.6 | )   
|Principal payments  2002 Credit
    Facility                                                |                                                            |                                                  | (27.1                                     | )             |      |               |      |      |      |       |      |     
|Principal payments  capital lease
    obligations                                           |                                                            |                                                  | (0.3                                      | )             |      |               | (2.0  | )    |      |       | (4.6  | )   
|Net (repayments) borrowings 
    Southtrust Line of Credit                                  |                                                            |                                                  | (1.7                                      | )             |      |               | 1.7   |      |      |       |      |     
|Issuance of common stock, net                                                                |                                                            |                                                  | 0.3                                       |               |      |               | 46.0  |      |      |       |      |     
|Stock repurchases                                                                            |                                                            |                                                  | (77.9                                     | )             |      |               |      |      |      |       | (0.1  | )   
|Increase in bank overdrafts, net                                                             |                                                            |                                                  | (7.8                                      | )             |      |               | 4.4   |      |      |       | (2.6  | )   
|Debt issuance costs                                                                          |                                                            |                                                  | (4.9                                      | )             |      |               |      |      |      |       | (0.1  | )   
|Proceeds from exercise of employee stock options
    and other, net                          |                                                            |                                                  | 5.8                                       |               |      |               | 4.1   |      |      |       | (3.5  | )   
|                                                                                             |                                                            |                                                  |                                           |               |      |               |       |      |      |       |       |     
|                                                                                             |                                                            |                                                  | Net cash used in financing activities     |               |      | (75.7         | )     |      |      | (50.0 | )     |      |       | (40.4 | )
|                                                                                             |                                                            |                                                  |                                           |               |      |               |       |      |      |       |       |     
|Net increase in cash and cash equivalents                                                    |                                                            |                                                  | 4.5                                       |               |      |               | (10.1 | )    |      |       | (0.4  | )   
|Cash and cash equivalents at beginning of period                                             |                                                            |                                                  | 5.1                                       |               |      |               | 15.2  |      |      |       | 15.6  |     
|                                                                                             |                                                            |                                                  |                                           |               |      |               |       |      |      |       |       |     
|Cash and cash equivalents at end of period                                                   |                                                            | $                                                | 9.6                                       |               |      | $             | 5.1   |      |      | $     | 15.2  |     
|                                                                                             |                                                            |                                                  |                                           |               |      |               |       |      |      |       |       |     

See accompanying notes to consolidated financial
statements.

F-5



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##### Table of Contents



AFC ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

For Fiscal Years 2002, 2001 and 2000


(in millions, except per share data)


Note  1 Description of
Business

During fiscal years 2002, 2001 and 2000, AFC
Enterprises, Inc. and subsidiaries (AFC or the
Company) developed, operated and franchised quick-service
restaurants, bakeries and cafes (generally referred to as
QSRs or units throughout these notes)
under the trade names Popeyes® Chicken & Biscuits
(Popeyes), Churchs Chicken
(Churchs), Cinnabon®
(Cinnabon), Seattles Best Coffee®
(SBC) and Torrefazione Italia® Coffee
(TI). The Company also operated wholesale coffee and
bakery businesses.

Of AFCs company-operated QSRs, the majority
are located in the southern and southwestern United States. The
Companys international franchisees operate in Canada,
Mexico, Puerto Rico, Korea and various countries throughout
South America, Asia and Europe.

During 2002, 2001 and 2000, the Company had a
subsidiary, the Seattle Coffee Company (Seattle
Coffee), which was the holding company for its SBC and
TI brands. As discussed in Note 24, on July 14,
2003, the Company sold Seattle Coffee. Because these operations
were not held for sale at December 29, 2002, the Company
has classified them as a component of continuing operations in
the accompanying consolidated financial statements.



|         |                                               
|-------- | ----------------------------------------------
|Note  2 | Summary of Significant Accounting
    Policies

Restatement of Prior Years Financial
Information.As discussed in
Note 23, the Companys consolidated balance sheet as
of December 30, 2001 and its consolidated statements of
operations, cash flows and changes in shareholders equity
for 2001 and 2000 have been restated from amounts previously
reported to correct certain accounting errors. All information
presented in these notes reflects the effects of the restatement.

Principles of Consolidation.The consolidated financial
statements include the accounts of AFC Enterprises, Inc. and its
wholly-owned subsidiaries. All significant intercompany balances
and transactions are eliminated in consolidation.

Use of Estimates.The preparation of consolidated
financial statements in conformity with generally accepted
accounting principles requires the Companys 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 each reporting period. Actual
results could differ from those estimates.

Reclassifications.In the accompanying consolidated
financial statements and in these notes, certain prior year
amounts have been reclassified to conform to the current
years presentation. These reclassifications had no effect
on previously reported net income.

Foreign Currency Transactions.Substantially all of the
Companys foreign-sourced revenues (principally royalties
from international franchisees and coffee sales to international
customers) are recorded in U.S. dollars. The aggregate
effects of any exchange gains or losses upon settlement are
included in the accompanying consolidated statements of
operations as a component of general and administrative
expenses and were net losses of $0.1 million,
$0.2 million and $0.4 million in 2002, 2001 and 2000,
respectively.

Fiscal Year.The Companys fiscal year
ends on the last Sunday in December. The 2002 and 2001 fiscal
years consisted of 52 weeks each, while the 2000 fiscal
year consisted of 53 weeks.

F-6



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Cash and Cash Equivalents.The Company considers all money
market investment instruments and certificates of deposit with
original maturities of three months or less to be cash
equivalents. Under the terms of the Companys bank
agreements, outstanding checks in excess of the cash balances in
the Companys primary disbursement accounts create a bank
overdraft liability. As of December 29, 2002 and
December 30, 2001 such overdrafts were approximately
$6.5 million and $14.3 million, respectively and were
included in accounts payable in the accompanying
consolidated balance sheets.

Supplemental
Cash Flow Information.

|                                                                              |  |               |      |      |  |      |      |  |  |   |      | 
|----------------------------------------------------------------------------- |  | ------------- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                                                              |  | 2002          |      | 2001 |  | 2000
|                                                                              |  |               |      |      |  |     
|                                                                              |  |              
|                                                                              |  | (In millions)
|Interest paid, net of amounts capitalized                                     |  | $             | 21.2 |      |  | $    | 25.0 |  |  | $ | 33.5 | 
|Income taxes paid, net of refunds                                             |  |               | 7.2  |      |  |      | 21.7 |  |  |   | 9.0  | 
|Notes received in conjunction with dispositions
    of property and equipment |  |               | 4.4  |      |  |      | 3.6  |  |  |   | 4.6  | 
|Notes received related to past due franchise
    revenues                     |  |               | 0.1  |      |  |      |     |  |  |   |     | 
|Change in assets under contractual agreement                                  |  |               |     |      |  |      | 0.3  |  |  |   | 8.0  | 

Accounts Receivable,
Net.At
December 29, 2002 and December 30, 2001, accounts
receivable, net were $34.6 million and $26.9 million,
respectively. Accounts receivable consist primarily of amounts
due from franchisees related to royalties, rents and other
miscellaneous items. Accounts receivable also includes amounts
related to the sale of food products to supermarkets and other
foodservice retailers. The accounts receivable balance is stated
net of an allowance for doubtful accounts. During 2002, 2001 and
2000, changes in the allowance for doubtful accounts were as
follows:

|                           |  |               |      |      |  |      |      |   |  |   |      |  
|-------------------------- |  | ------------- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                           |  | 2002          |      | 2001 |  | 2000
|                           |  |               |      |      |  |     
|                           |  |              
|                           |  | (In millions)
|Balance, beginning of year |  | $             | 2.6  |      |  | $    | 2.0  |   |  | $ | 2.2  |  
|Provisions                 |  |               | 1.8  |      |  |      | 1.3  |   |  |   | 1.3  |  
|Recoveries and other       |  |               |     |      |  |      | 0.1  |   |  |   | (0.1 | )
|Write-offs                 |  |               | (1.1 | )    |  |      | (0.8 | ) |  |   | (1.4 | )
|                           |  |               |      |      |  |      |      |   |  |   |      |  
|Balance, end of year       |  | $             | 3.3  |      |  | $    | 2.6  |   |  | $ | 2.0  |  
|                           |  |               |      |      |  |      |      |   |  |   |      |  

Notes Receivable, Net.At December 29, 2002 and
December 30, 2001, notes receivables, net were
approximately $13.7 million and $10.8 million,
respectively, of which $1.6 million and $0.8 million,
respectively, was current. At December 29, 2002, interest
rates on approximately $0.5 million of the notes were
indexed to the prime rate and the remaining notes had fixed
interest rates that ranged from 6.5% to 10.25%.

Notes receivable consist primarily of
consideration received in conjunction with the sale of Company
assets in three distinct transactions: the sale of 35
Churchs company-operated restaurants to a franchisee in
2002; the sale of 24 Popeyes company-operated restaurants
to a franchisee in 2001; and the sale of an equipment
manufacturing operation in 2000 (see Note 23). Notes
receivable also include notes from franchisees to finance
certain past due franchise revenues, rents and interest. See
Note 21 for a discussion of notes receivable from officers
which are included as a component of shareholders equity
in the accompanying consolidated balance sheets.

F-7



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


The notes receivable balance is stated net of
allowances for uncollectibility. During 2002, 2001 and 2000,
changes in the allowance for uncollectible notes were as follows:

|                           |  |               |     |      |  |      |     |  |  |   |      |  
|-------------------------- |  | ------------- | --- | ---- |  | ---- | --- |  |  | - | ---- | -
|                           |  | 2002          |     | 2001 |  | 2000
|                           |  |               |     |      |  |     
|                           |  |              
|                           |  | (In millions)
|Balance, beginning of year |  | $             | 0.2 |      |  | $    | 0.2 |  |  | $ | 0.4  |  
|Provisions                 |  |               | 0.3 |      |  |      |    |  |  |   | (0.1 | )
|Write-offs                 |  |               |    |      |  |      |    |  |  |   | (0.1 | )
|                           |  |               |     |      |  |      |     |  |  |   |      |  
|Balance, end of year       |  | $             | 0.5 |      |  | $    | 0.2 |  |  | $ | 0.2  |  
|                           |  |               |     |      |  |      |     |  |  |   |      |  

Inventories.Inventories are stated at the lower of
cost (determined on a first-in, first-out basis) or net
realizable value.

Property and
Equipment.Property and equipment is stated at
cost, including capitalized interest and other costs incurred
during the construction period for certain assets. During 2002,
2001 and 2000, interest capitalized was approximately
$0.3 million, $0.3 million and $0.3 million,
respectively. Other capitalized costs include personnel expenses
related to employees directly involved in the Companys
development of a new QSR or refurbishment of an older one.

Provision for depreciation is made using the
straight-line method over the estimated useful lives of the
depreciable assets: 5-35 years for buildings;
2-15 years for equipment; and in the case of leasehold
improvements and capital lease assets, the lesser of the
economic life of the asset or the lease term (generally
3-20 years). Depreciation expense for 2002, 2001 and 2000,
including that related to property and equipment held under
capital leases, was approximately $29.3 million,
$30.9 million and $31.5 million, respectively.

The Company evaluates property and equipment for
impairment on an annual basis (during the fourth quarter of each
year) or when circumstances arise indicating that a particular
asset may be impaired. For property and equipment at
company-operated QSRs, the Company performs its annual
impairment evaluation on a site-by-site basis. The Company
evaluates QSRs using a two-year history of operating
losses as its primary indicator of potential impairment.
Based on the best information available, the Company writes down
an impaired QSR to its estimated fair market value, which
becomes its new cost basis. The Company generally measures the
estimated fair market value by discounting estimated future cash
flows. In addition, when the Company decides to close a QSR, it
is reviewed for impairment and depreciable lives are adjusted.
The impairment evaluation is based on the estimated cash flows
from continuing use through the expected disposal date and the
expected terminal value.

Assets Under Contractual
Agreement.During 2000, AFC transferred certain
long-lived assets to a company owned by a former AFC employee in
exchange for shares of preferred stock of that company.
Concurrent with the transfer of assets, which consisted of
restaurant equipment for twelve Popeyes restaurants, that
company became a Popeyes franchisee.

During 2001, AFC transferred two restaurants to a
former employee with the right to repurchase the assets under
certain circumstances. Concurrent with the transfer of assets,
the Company entered into a franchise agreement and a management
agreement to operate the stores for the franchisee.

Because the risks of ownership had not passed to
the buyer, the Company did not remove the above assets from its
books and records. The Company has classified these assets as
Assets Under Contractual

F-8



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Agreement in the accompanying consolidated
balance sheets. As of December 29, 2002 and
December 30, 2001 the carrying values of these assets were
as follows:

|                            |  |               |     |      |  |   |     | 
|--------------------------- |  | ------------- | --- | ---- |  | - | --- | 
|                            |  | 2002          |     | 2001
|                            |  |               |     |     
|                            |  |              
|                            |  | (In millions)
|Property and equipment, net |  | $             | 2.7 |      |  | $ | 2.7 | 
|Goodwill, net               |  |               | 5.6 |      |  |   | 5.6 | 
|                            |  |               |     |      |  |   |     | 
|                            |  | $             | 8.3 |      |  | $ | 8.3 | 
|                            |  |               |     |      |  |   |     | 

The results of operations and cash flows
associated with these assets are not included in the
accompanying consolidated financial statements. The Company
reviews the operations associated with these assets, and any
loss incurred in the operations are considered in the valuation
of the assets.

Derivative Financial
Instruments.Our use of derivative
instruments is generally limited to foreign currency contracts
on the Korean Won which we enter into with financial
institutions. We account for derivative financial instruments in
accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS 133). SFAS 133 requires that all
derivative instruments be recorded on the Consolidated Balance
Sheet at fair value. The accounting for changes in the fair
value (i.e., gains or losses) of a derivative instrument is
dependent upon whether the derivative has been designated and
qualifies as part of a hedging relationship. For derivative
instruments not designated as hedging instruments, the gain or
loss is recognized in the results of operations immediately. The
Company currently does not designate any of its derivative
financial instruments as hedging instruments and, accordingly,
all gains and losses are included in its statements of
operations.

Goodwill and Other Intangible Assets.Goodwill arises from business
combinations accounted for by the purchase method and is the
excess of the cost of an acquired business over the fair value
of assets acquired (including identifiable intangible assets)
and liabilities assumed. The Companys other intangible
assets include trademarks, trade names and franchise value.

In 2002, the Company adopted
SFAS No. 142, Goodwill and Other Intangible Assets(SFAS 142) and, at that time, discontinued
its prior practice of amortizing goodwill and other
indefinite-lived intangible assets. These assets are now being
accounted for by the impairment-only approach. The
Companys finite-lived intangible assets continue to be
amortized on a straight-line basis. Prior to the adoption of
SFAS 142, the estimated useful lives were 20-40 years for
goodwill; 20-40 years for trademarks, trade names and
franchise value; and 3-20 years for other intangible assets.

Amortization expense associated with goodwill and
other intangible assets for 2002, 2001 and 2000 was
approximately $0.3 million, $9.4 million and
$9.7 million, respectively. Application of
SFAS 142s non-amortization provisions in 2001 and
2000 would have increased net income by approximately
$6.2 million and $6.4 million, respectively. In 2001,
basic and diluted earnings per common share would have increased
by $0.21 and $0.20, respectively. In 2000, basic and diluted
earnings per common share would have increased by $0.24 and
$0.22, respectively.

The Company evaluates goodwill and other
indefinite-lived assets for impairment on an annual basis
(during the fourth quarter of each year) or when circumstances
arise indicating that a particular asset may be impaired. In
accordance with the requirements of SFAS 142, the Company
assigns goodwill to its reporting units for purposes of its
impairment evaluation. The Companys reporting units are
its business segments. The impairment evaluation is conducted
using a two-step process. In the first step, the Company
compares the carrying value of each reporting unit to its
estimated fair value. The Company estimates the fair value of
the reporting unit using a discounted cash flow model or market
price, if available. The operating assumptions used in the
discounted cash flow model are generally consistent with the past

F-9



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


performance of each reporting unit and other
intangible assets and are also consistent with the projections
and assumptions that are used in current operating plans. Such
assumptions are subject to change as a result of changing
economic and competitive conditions. If the fair value of the
reporting units net assets is determined to be less than
the carrying value, a second step is performed. In the second
step, the Company determines the level of impairment by
comparing the implied fair value of the reporting units
goodwill (a process that assigns the estimated fair value of the
reporting unit to its assets in a manner similar to a purchase
price allocation) to its carrying value. If the estimated fair
value is less than the carrying value, an impairment charge is
recorded for the difference. Prior to the adoption of
SFAS 121 the Company accounted for impairment of its
long-lived assets under SFAS No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed ofand accounted for its intangible assets under
APB Opinion No. 17, Intangible Assets.

In conjunction with the adoption of
SFAS 142, the Company reassessed the useful lives and the
classification of its finite-lived intangible assets and
determined that no revisions were necessary. Estimated
amortization expense associated with the Companys
finite-lived intangible assets for 2003 through 2007 is
$0.3 million, $0.3 million, $0.2 million, $0.2
million and $0.2 million, respectively. The weighted
average amortization period for these assets is 13 years.

Debt Issuance
Costs.Costs
incurred in establishing new debt facilities are capitalized and
then amortized, utilizing a method that approximates the
effective interest method. In the Companys consolidated
statements of operations, these costs are included as a
component of interest expense, net. During 2002,
2001 and 2000, the Company amortized debt issuance costs of
approximately $1.1 million, $1.6 million and
$1.6 million, respectively.

In conjunction with the early extinguishment of
debt, the Company wrote-off additional debt issuance costs of
$3.1 million, $0.5 million and $0.5 million in
2002, 2001 and 2000, respectively. During 2002, the Company
adopted SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. As a result, these write-offs are
included as a component of interest expense, net in
the accompanying consolidated statements of operations. In prior
years, such items had been treated as extraordinary losses.

Reverse Stock Split.On February 7, 2001, the
Company affected a two-for-three reverse stock split of its
common shares. In the accompanying consolidated financial
statements and related notes, all share and per share amounts
prior to the record date of the stock split have been adjusted
to reflect the stock split.

Advertising Funds.The Company maintains cooperative
advertising funds that receive contributions from the Company
and the franchisees of its various brands, based upon a
percentage of QSR sales. These funds are used exclusively for
brand advertising. For 2002, 2001 and 2000, total contributions
to these funds, by the Company and its franchisees, were
$85.6 million, $84.3 million and $78.3 million,
respectively.

In the Companys consolidated financial
statements, contributions received from franchisees related to
these funds and the associated expenses of the funds are
accounted for using the agency method. The balance sheet
components of the funds are consolidated by line item in the
Companys consolidated balance sheets with the exception of
cash, which is restricted as to use and included as a component
of other current assets and the net funds
balance which is included in the Companys consolidated
balance sheets as a component of accounts payable.
At December 29, 2002 and December 30, 2001, the net
funds balance was $2.4 million and $2.3 million,
respectively.

The Companys contributions to the
advertising funds are fully reflected in the Companys
consolidated statements of operations as a component of
restaurant employee, occupancy and other

F-10



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


expenses. Such contributions and the
Companys other advertising costs are expensed as incurred.
In 2002, 2001 and 2000, these costs totaled approximately
$31.5 million, $36.9 million and $44.1 million,
respectively.

Revenue Recognition  Sales by
Company-Operated Restaurants.Revenue from the sale of food and
beverage products at company-operated QSRs is recognized upon
delivery.

Revenue Recognition  Franchise
Operations.Revenue from
franchising activities is recognized based on the terms of the
underlying agreements.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Franchise Agreements.In general, the Companys
    franchise agreements provide for the payment of a one-time fee
    associated with the opening of a new QSR and an ongoing royalty
    based on a percentage of sales. These agreements also require
    contributions by the franchisee (and the Company) to an
    advertising fund, as discussed below.                                                                                                                                                  
|
| | Development Agreements.In general, the Companys
    development agreements provide for the development of a
    specified number of QSRs within a defined geographic territory
    in accordance with a schedule of opening dates. Development
    schedules generally cover three to five years and typically have
    benchmarks for the number of QSRs to be opened at six to twelve
    month intervals. Development agreement payments are made when
    the agreement is executed and are nonrefundable.

Initial franchise fees and development fees are
recorded as deferred franchise revenue when received and are
recognized as revenue when the QSRs covered by the fees are
opened or all material services or conditions relating to the
fees have been substantially performed or satisfied by the
Company. The Company recognizes royalty revenues as earned.

Revenue Recognition  Wholesale
Transactions.Revenue from the
Companys wholesale operations is recognized upon delivery,
based upon the terms of each sale. Revenues include amounts
billed for shipping and handling costs. Costs of shipping and
handling are included in wholesale cost of sales.

Other Revenues.Other revenues are principally
composed of rental income associated with properties leased or
sub-leased to franchisees and other fees associated with unit
conversions. Rental revenues are recognized on the straight-line
basis over the lease term. Fees associated with unit conversions
are recognized when all material services or conditions relating
to the fees have been substantively performed or satisfied by
the Company.

Slotting Fees.Slotting fees are paid to grocery
stores to obtain favorable shelf positioning for the
Companys wholesale products. Fees paid pursuant to a
written contract are deferred and amortized over the term of the
contract as a reduction of wholesale revenues. All other fees of
this nature are charged against wholesale revenues as incurred.

Gains and Losses Associated With Unit
Conversions.In the normal course
of business, AFC sells the assets of company-operated QSRs to
existing or new franchisees. These transactions are referred to
as unit conversions.

The Company defers gains on unit conversions when
the Company has continuing involvement in the assets sold beyond
the customary franchisor role. The Companys continuing
involvement generally includes seller financing or the leasing
of real estate to the franchisee. Deferred gains are recognized
over the remaining term of the continuing involvement. Losses
are recognized immediately. For unit conversions, the
computation of gains or losses also includes an allocation of
goodwill if the underlying unit was acquired through a
transaction accounted for by the purchase method.

F-11



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


During 2002, 2001 and 2000, gains and losses
associated with unit conversions, were as follows.

|                               |  |               |      |      |  |      |      |   |  |   |     | 
|------------------------------ |  | ------------- | ---- | ---- |  | ---- | ---- | - |  | - | --- | 
|                               |  | 2002          |      | 2001 |  | 2000
|                               |  |               |      |      |  |     
|                               |  |              
|                               |  | (In millions)
|(Losses) gains recognized, net |  | $             | (4.0 | )    |  | $    | (1.3 | ) |  | $ | 6.4 | 
|Gains deferred                 |  |               | 10.3 |      |  |      | 6.4  |   |  |   | 2.9 | 

In addition, during 2002, 2001 and 2000, the
Company recognized approximately $8.0 million,
$4.9 million and $1.8 million in fees associated with
these unit conversions. These fees are a component of
other revenues in the accompanying consolidated
statements of operations.

Research and Development.Research and development costs are
expensed as incurred. For 2002, 2001 and 2000, such costs were
approximately $2.1 million, $2.1 million and
$2.2 million, respectively.

Stock-Based Employee Compensation.The Company accounts for stock
options issued to employees under the intrinsic value method.
Had the Companys stock option plans been accounted for
under the fair value method, the Companys net income would
have been reduced to the following pro forma amounts:

|                                                                                                                                           |  |                      |       |      |  |      |      |   |  |   |      |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------- | ----- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                                                                                                                           |  | 2002                 |       | 2001 |  | 2000
|                                                                                                                                           |  |                      |       |      |  |     
|                                                                                                                                           |  |                     
|                                                                                                                                           |  | (In millions, except
|                                                                                                                                           |  | per share amounts)  
|Net (loss) income as reported                                                                                                              |  | $                    | (11.7 | )    |  | $    | 15.6 |   |  | $ | 18.3 |  
|Incremental stock-based employee compensation
    expense determined under fair value method for all awards net of
    related tax effects |  |                      | (2.4  | )    |  |      | (1.0 | ) |  |   | (0.1 | )
|                                                                                                                                           |  |                      |       |      |  |      |      |   |  |   |      |  
|Pro forma net (loss) income                                                                                                                |  | $                    | (14.1 | )    |  | $    | 14.6 |   |  | $ | 18.2 |  
|                                                                                                                                           |  |                      |       |      |  |      |      |   |  |   |      |  
|Basic (loss) earnings per share                                                                                                            |  |                      |       |      |  |      |      |   |  |   |      |  
|As reported                                                                                                                                |  | $                    | (0.39 | )    |  | $    | 0.53 |   |  | $ | 0.70 |  
|Pro forma                                                                                                                                  |  |                      | (0.47 | )    |  |      | 0.49 |   |  |   | 0.69 |  
|Diluted (loss) earnings per share                                                                                                          |  |                      |       |      |  |      |      |   |  |   |      |  
|As reported                                                                                                                                |  | $                    | (0.37 | )    |  | $    | 0.50 |   |  | $ | 0.64 |  
|Pro forma                                                                                                                                  |  |                      | (0.45 | )    |  |      | 0.46 |   |  |   | 0.63 |  

The fair value of each option in 2002 and 2001 is
estimated on the date of grant using the Black-Scholes option
pricing model. The following weighted-average assumptions are
used for grants:

|                                               |  |      |      |      |  |  |      |  
|---------------------------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                                               |  | 2002 |      | 2001
|                                               |  |      |      |     
|Approximate risk-free interest rate percentage |  |      | 2.8  | %    |  |  | 4.4  | %
|Expected dividend yield percentage             |  |      | 0.0  | %    |  |  | 0.0  | %
|Expected lives (in years)                      |  |      | 4.0  |      |  |  | 4.6  |  
|Expected volatility percentage                 |  |      | 46.4 | %    |  |  | 35.0 | %

The fair value of each option in 2000 was
estimated on the date of grant using the minimum
value method, as permitted by SFAS 123 prior to the
Companys initial public offering in 2001, with the
following weighted-average assumptions used for 2000 grants:
risk-free interest rates ranging from approximately 4.5% to
6.7%; expected lives of approximately 10 years and
7 years for the 1996 Nonqualified Performance Stock Option
Plan and the 1996 Nonqualified Stock Option Plan, respectively.

Income Taxes.Income taxes are accounted for
under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and

F-12



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that
includes the enactment date.

Recent Accounting Pronouncements That The
Company Has Not Yet Adopted.In
May 2003, the Financial Accounting Standards Board (the
FASB) issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity(SFAS 150). SFAS 150
establishes standards for how an issuer classifies and measures
three classes of freestanding financial instruments with
characteristics of both liabilities and equity. It requires that
an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances).
SFAS 150 was effective for financial instruments entered
into or modified after May 31, 2003, and otherwise was
effective at the beginning of the first interim period beginning
after June 15, 2003. The Company has not entered into or
modified any financial instruments within the scope of
SFAS 150 since May 31, 2003, nor does it currently
hold any significant financial instruments within its scope.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement on Derivative Instruments and Hedging
Activities(SFAS 149). SFAS 149 amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts and hedging activities. SFAS 149 is
effective for contracts entered into or modified after
June 30, 2003. The Company believes adoption of
SFAS 149 will not have a material effect on its financial
position or its results of operations.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51 (FIN 46).
FIN 46 addresses the consolidation of entities whose equity
holders have either (a) not provided sufficient equity at
risk to allow the entity to finance its own activities or
(b) do not possess certain characteristics of a controlling
financial interest. FIN 46 requires the consolidation of
these entities, known as variable interest entities
(VIEs), by the primary beneficiary of the entity.
The primary beneficiary is the entity, if any, that is subject
to a majority of the risk of loss from the VIEs
activities, entitled to receive a majority of the VIEs
residual returns, or both. FIN 46 applies immediately to
variable interest in VIEs created or obtained after
January 31, 2003. As amended by FASB Staff Position
(FSP) No. FIN 46-6, FIN 46 is
effective for variable interests in a VIE created before
February 1, 2003 at the end of the first interim or annual
period ending after December 15, 2003 (the end of fiscal
2003, December 27, 2003, for the Company). FIN 46
requires certain disclosures in financial statements issued
after January 31, 2003, if it is reasonably possible that
the Company will consolidate or disclose information about
variable interest entities when FIN 46 becomes effective.

As discussed in Note 13, the Company has
guaranteed franchisee loan and lease obligations of
approximately $1.5 million and has provided an additional
$1 million in guarantees under a loan program for
franchisees to purchase or develop new units.

Also as discussed in Note 13, the Company
and its franchisees own a purchasing cooperative, SMS, for the
purpose of purchasing certain restaurant products. The
Companys equity ownership is generally proportional to the
percentage ownership of the QSRs it owns in relation to the
total QSRs that participate in SMS. The Company is continuing to
evaluate whether this cooperative is a VIE under the provisions
of FIN 46, and if so, whether the Company is the primary
beneficiary. The Company does not currently believe
consolidation of this cooperative will be required as a result
of the adoption of FIN 46.

As of the date of this filing, the Company
understands the FASB is in the process of modifying and/or
clarifying certain provisions of FIN 46. Additionally,
certain FSPs relating to FIN 46 are being deliberated.
These modifications and FSPs, when finalized, could impact the
Companys analysis of the

F-13



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


applicability of FIN 46 to entities that are
franchisees of the Companys brands. The Company is aware
of certain interpretations by some parties of the provisions of
FIN 46, given its continuing evolution, which could have
applicability when certain conditions exist that are not
representative of a typical franchise relationship. These
conditions include the franchisor possessing an equity interest
in, or providing significant levels of, financial support to a
franchisee. Except as discussed in Assets Under
Contractual Agreement we do not possess ownership
interests in our franchisees.

Additionally, we generally do not provide
financial support to the franchisee in our typical franchise
relationship. While the Company continues to monitor and analyze
developments regarding FIN 46 that would impact its
applicability to franchise relationships, at this time the
Company does not believe that the required consolidation of
franchise entities, if any, would materially impact the
Companys consolidated financial statements.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an Amendment of FASB Statement No. 123(SFAS
148). SFAS 148 provides alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS 123
requiring more prominent disclosures in both annual and interim
financial statements about the effect of the method used on
reported results. Regardless of whether, when or how a company
adopts the fair value based method of accounting, SFAS 148
prescribes a specific tabular format and requires disclosure in
the Summary of Significant Accounting Policies or
its equivalent. The Company has adopted the disclosure
requirements of SFAS 148.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others(FIN 45).
FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. FIN 45 does
not prescribe a specific approach for subsequently measuring the
guarantors recognized liability over the term of the
related guarantee. The initial recognition and initial
measurement provisions of this Interpretation are applicable on
a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are
effective for financial statements of interim or annual periods
after December 15, 2002. As it relates to the
Companys loan guarantee programs (Note 13), the
Company has complied with the disclosure requirements of
FIN 45. As it concerns the recognition provisions of
FIN 45, the Company does not believe that their adoption,
in the first quarter of 2003, will have a material effect on the
Companys financial position or its results of operations.

In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities(SFAS 146). The Statement
supercedes Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS 146 requires the
fair value of a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred
as opposed to the date of an entitys commitment to an exit
plan. The provisions of SFAS 146 are effective for exit or
disposal activities initiated after December 31, 2002, with
early application encouraged. The Company believes adoption of
SFAS 146 will not have a material effect on its financial
position or its results of operations.

In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations(SFAS 143).SFAS 143 addresses
financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets that result
from the acquisition, construction, development and/or

F-14



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


the normal operation of a long-lived asset,
except for certain obligations of leases and the associated
asset retirement costs. It is effective for fiscal years
beginning after June 15, 2002. SFAS 143 requires that
the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. SFAS 143
will be adopted in the first quarter of 2003. The Company
believes the effect of adopting SFAS 143 will result in a
charge of less than $1.0 million to its consolidated
results of operation.

Note  3 Inventories

|                                                                 |  |               |      |      |  |   |      | 
|---------------------------------------------------------------- |  | ------------- | ---- | ---- |  | - | ---- | 
|                                                                 |  | 2002          |      | 2001
|                                                                 |  |               |      |     
|                                                                 |  |              
|                                                                 |  | (In millions)
|Food and beverage items, preparation and
    packaging materials |  | $             | 14.1 |      |  | $ | 14.6 | 
|Equipment, promotional and other                                 |  |               | 0.8  |      |  |   | 1.3  | 
|                                                                 |  |               |      |      |  |   |      | 
|                                                                 |  | $             | 14.9 |      |  | $ | 15.9 | 
|                                                                 |  |               |      |      |  |   |      | 

Note  4 Other Current
Assets

|                      |  |               |      |      |  |   |      | 
|--------------------- |  | ------------- | ---- | ---- |  | - | ---- | 
|                      |  | 2002          |      | 2001
|                      |  |               |      |     
|                      |  |              
|                      |  | (In millions)
|Restricted cash       |  | $             | 6.8  |      |  | $ | 7.4  | 
|Prepaid rentals       |  |               | 3.1  |      |  |   | 2.9  | 
|Prepaid advertising   |  |               | 1.8  |      |  |   | 1.0  | 
|Deferred income taxes |  |               | 1.3  |      |  |   | 1.1  | 
|Other                 |  |               | 1.5  |      |  |   | 1.2  | 
|                      |  |               |      |      |  |   |      | 
|                      |  | $             | 14.5 |      |  | $ | 13.6 | 
|                      |  |               |      |      |  |   |      | 

Amounts classified as restricted cash
relate to the cooperative advertising funds the Company
maintains for its franchisees (Note 2).

Note  5 Property and
Equipment, Net

|                              |  |               |        |      |  |   |        |  
|----------------------------- |  | ------------- | ------ | ---- |  | - | ------ | -
|                              |  | 2002          |        | 2001
|                              |  |               |        |     
|                              |  |              
|                              |  | (In millions)
|Land                          |  | $             | 41.1   |      |  | $ | 41.7   |  
|Buildings and improvements    |  |               | 143.2  |      |  |   | 167.5  |  
|Equipment                     |  |               | 165.9  |      |  |   | 179.3  |  
|Properties held for sale      |  |               | 0.7    |      |  |   | 1.0    |  
|                              |  |               |        |      |  |   |        |  
|                              |  |               | 350.9  |      |  |   | 389.5  |  
|Less accumulated depreciation |  |               | (137.1 | )    |  |   | (151.3 | )
|                              |  |               |        |      |  |   |        |  
|                              |  | $             | 213.8  |      |  | $ | 238.2  |  
|                              |  |               |        |      |  |   |        |  

Included in property and equipment, net at
December 29, 2002 and December 30, 2001 are capital lease
assets with a gross book value of $15.0 million and
$21.9 million, respectively and accumulated amortization of
$6.8 million and $8.8 million, respectively.

F-15



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Note  6 Goodwill

|                                        |  |               |       |      |  |   |      |  
|--------------------------------------- |  | ------------- | ----- | ---- |  | - | ---- | -
|                                        |  | 2002          |       | 2001
|                                        |  |               |       |     
|                                        |  |              
|                                        |  | (In millions)
|Balance, beginning of year              |  | $             | 67.0  |      |  | $ | 76.6 |  
|Impairments (Note 18)                   |  |               | (26.0 | )    |  |   | (3.6 | )
|Adoption of SFAS 142                    |  |               | (11.8 | )    |  |   |     |  
|Allocated to the sale of QSRs and other |  |               | (1.3  | )    |  |   | (3.9 | )
|Amortization expense                    |  |               |      |      |  |   | (2.1 | )
|                                        |  |               |       |      |  |   |      |  
|Balance, end of year                    |  | $             | 27.9  |      |  | $ | 67.0 |  
|                                        |  |               |       |      |  |   |      |  

In the first quarter of 2002, the Company adopted
SFAS 142 and thereupon recorded an impairment of goodwill
totaling $11.8 million. In the fourth quarter of 2002, the
Company recorded a $26.0 million impairment charge arising
from its annual assessment of goodwill. Both of these charges
were associated with the Companys coffee segment. These
charges were made necessary by consecutive years of
deteriorating operations and cash flow projections indicating a
decline in value. In determining the extent of the fourth
quarter 2002 impairment charge, the Company considered the terms
of the sale agreement discussed in Note 24.

Of the $27.9 million of goodwill at
December 29, 2002, approximately $10.6 million relates to
the Companys chicken segment, approximately $11.7 million
relates to the Companys bakery segment and the remaining
$5.6 million relates to the Companys coffee segment.

While historical operating losses in the
Companys bakery segment indicate potential goodwill
impairment, at December 29, 2002, based upon its annual
assessment of goodwill, the Companys management concluded
that there was no impairment at that time. If the bakery segment
continues to experience operating losses and managements
assessment of future trends change in an adverse direction, an
impairment may be warranted.

At December 30, 2001, immediately prior to
the Companys adoption of SFAS 142, accumulated
amortization associated with the Companys goodwill
balances was $9.5 million.

Note  7 Trademarks and Other
Intangible Assets, Net

|                                 |                            |               |       |       |   |   |       |       |  
|-------------------------------- | -------------------------- | ------------- | ----- | ----- | - | - | ----- | ----- | -
|                                 |                            | 2002          |       | 2001 
|                                 |                            |               |       |      
|                                 |                            |              
|                                 |                            | (In millions)
|Non-amortized intangible assets: |                            |               |       |       |   |   |       |      
|                                 | Trademarks and trade names |               | $     | 110.9 |   |   | $     | 110.9 |  
|                                 | Other                      |               |       | 2.4   |   |   |       | 1.9   |  
|                                 |                            |               |       |       |   |   |       |      
|                                 |                            |               | 113.3 |       |   |   | 112.8 |      
|Amortizable intangible assets:   |                            |               |       |       |   |   |       |      
|                                 | Franchise value            |               |       | 2.2   |   |   |       | 1.9   |  
|                                 | Other intangible assets    |               |       | 1.0   |   |   |       | 1.0   |  
|                                 | Accumulated amortization   |               |       | (1.1  | ) |   |       | (0.9  | )
|                                 |                            |               |       |       |   |   |       |      
|                                 |                            | $             | 115.4 |       |   | $ | 114.8 |      
|                                 |                            |               |       |       |   |   |       |      

Amounts assigned to trademarks and trade names
arose from the allocation of reorganization value (when the
Company emerged from bankruptcy in 1992) and from the allocation
of purchase price on

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


acquisitions (primarily related to the Cinnabon
and Seattle Coffee acquisitions). Of the $110.9 million of
trademarks and trade names at December 29, 2002,
approximately $59.7 million relates to the Companys
chicken segment, approximately $41.2 million relates to the
Companys bakery segment and the remaining
$10.0 million relates to the Companys coffee segment.
See Note 24 concerning the July 14, 2003 divestiture of
Seattle Coffee.

Note  8 Other Long-Term
Assets, Net

|                                   |  |               |      |      |  |   |      | 
|---------------------------------- |  | ------------- | ---- | ---- |  | - | ---- | 
|                                   |  | 2002          |      | 2001
|                                   |  |               |      |     
|                                   |  |              
|                                   |  | (In millions)
|Non-current notes receivable, net  |  | $             | 12.1 |      |  | $ | 10.0 | 
|Assets under contractual agreement |  |               | 8.3  |      |  |   | 8.3  | 
|Debt issuance costs                |  |               | 4.4  |      |  |   | 3.7  | 
|Deferred slotting fees             |  |               | 4.4  |      |  |   | 2.4  | 
|Other                              |  |               | 5.2  |      |  |   | 6.4  | 
|                                   |  |               |      |      |  |   |      | 
|                                   |  | $             | 34.4 |      |  | $ | 30.8 | 
|                                   |  |               |      |      |  |   |      | 

Note  9 Accrued
Liabilities

|                                       |  |               |      |      |  |   |      | 
|-------------------------------------- |  | ------------- | ---- | ---- |  | - | ---- | 
|                                       |  | 2002          |      | 2001
|                                       |  |               |      |     
|                                       |  |              
|                                       |  | (In millions)
|Accrued employee benefits              |  | $             | 4.6  |      |  | $ | 4.8  | 
|Accrued wages, bonuses and commissions |  |               | 3.4  |      |  |   | 4.8  | 
|Accrued insurance                      |  |               | 2.9  |      |  |   | 1.1  | 
|Accrued property taxes                 |  |               | 2.4  |      |  |   | 1.4  | 
|Accrued legal                          |  |               | 2.1  |      |  |   | 0.5  | 
|Other                                  |  |               | 3.7  |      |  |   | 5.2  | 
|                                       |  |               |      |      |  |   |      | 
|                                       |  | $             | 19.1 |      |  | $ | 17.8 | 
|                                       |  |               |      |      |  |   |      | 

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Note-10     Long-Term
Debt and Other Borrowings

|                                    |                           |               |       |      |  |   |       |      | 
|----------------------------------- | ------------------------- | ------------- | ----- | ---- |  | - | ----- | ---- | 
|                                    |                           | 2002          |       | 2001
|                                    |                           |               |       |     
|                                    |                           |              
|                                    |                           | (In millions)
|2002 Credit Facility:               |                           |               |       |      |  |   |       |     
|                                    | Revolving credit facility |               | $     | 50.0 |  |   | $     |     | 
|                                    | Tranche A term loan       |               |       | 73.1 |  |   |       |     | 
|                                    | Tranche B term loan       |               |       | 99.8 |  |   |       |     | 
|1997 Credit Facility:               |                           |               |       |      |  |   |       |     
|                                    | Tranche A term loan       |               |       |     |  |   |       | 17.0 | 
|                                    | Tranche B term loan       |               |       |     |  |   |       | 51.7 | 
|                                    | Acquisition Facility      |               |       |     |  |   |       | 10.0 | 
|Senior Subordinated Notes           |                           |               |      |      |  |   | 126.9 |     
|Capital lease obligations (Note 11) |                           |               | 1.5   |      |  |   | 2.0   |     
|Southtrust Line of Credit           |                           |               |      |      |  |   | 1.7   |     
|Other notes                         |                           |               | 2.2   |      |  |   | 0.2   |     
|                                    |                           |               |       |      |  |   |       |     
|                                    |                           |               | 226.6 |      |  |   | 209.5 |     
|Less current portion                |                           |               | (17.6 | )    |  |   | (33.7 | )   
|                                    |                           |               |       |      |  |   |       |     
|                                    |                           | $             | 209.0 |      |  | $ | 175.8 |     
|                                    |                           |               |       |      |  |   |       |     

2002 Credit
Facility.On May 23, 2002,
the Company entered into a new bank credit facility (the
2002 Credit Facility) with J.P. Morgan Chase, Credit
Suisse First Boston and certain other lenders, which consists of
a $75.0 million, five-year revolving credit facility, a
$75.0 million, five-year Tranche A term loan and a
$125.0 million, seven-year Tranche B term loan.

Under the terms of the revolving credit facility,
the Company may also obtain short-term borrowings and letters of
credit up to the amount of unused borrowings under that
facility. As of December 29, 2002, there was
$50.0 million in outstanding borrowings under the revolving
credit facility and $6.8 million of outstanding letters of
credit, leaving amounts available for short-term borrowings and
additional letters of credit of $18.2 million. The
revolving credit facility is due in full without installments in
May 2007.

At closing, the Company drew the entire
$125.0 million Tranche B term loan to refinance its 1997
Credit Facility of approximately $62.6 million and invested
the excess in highly rated short-term investments. In June 2002,
the Company drew the entire $75.0 million Tranche A term
loan and used the proceeds, along with the excess from the
Tranche B term loan, to redeem its Senior Subordinated Notes.

On August 9, 2002, the Company made an
optional prepayment of $25.0 million on the Tranche B term loan
using cash from operations.

The term loans and the revolving credit facility
bear interest at LIBOR plus an applicable margin based on
certain financial leverage ratios, which may fluctuate because
of changes in these ratios. As of December 29, 2002, the
margins were 2.0% for the revolving credit facility and the
Tranche A term loan and 2.25% for the Tranche B term loan. On
July 14, 2003, the start of the Companys third
quarter for 2003, these margins changed to 2.25% for the
revolving credit facility and the Tranche A term loan and 2.50%
for the Tranche B term loan due to an amendment to the 2002
Credit Facility. On August 22, 2003, these margins changed
to 2.75% for the revolving credit facility and the
Tranche A term loan and 3.00% for the Tranche B term
loan due to an amendment to the 2002 Credit Facility. The
Company also

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


pays a quarterly commitment fee of 0.125% (0.5%
annual rate divided by 4) on the unused portions of the Tranche
A term loan and the revolving credit facility.

As of December 29, 2002, Tranche A principal
was payable in quarterly installments ranging from
$1.8 million to $5.3 million beginning September 2002
and maturing in May 2007. As of December 29, 2002, Tranche
B principal was payable in quarterly installments ranging from
$0.2 million to $22.4 million beginning September 2002
and maturing in May 2009. For both the Tranche A and Tranche B
term loans, interest is paid in one, two, three or six-month
periods.

In addition to the scheduled installments
associated with the Tranche A and Tranche B term loans, at the
end of each year, the Company is subject to mandatory
prepayments in those situations when consolidated cash flows for
the year, as defined pursuant to the terms of the facility,
exceed specified amounts. Amounts reflected in current
maturities on long-term debt consider prepayments associated
with this provision. In addition, prepayments are due from the
proceeds of certain qualifying sales, including the sale of the
capital stock of a subsidiary of the Company. Whenever any
prepayment is made, subsequent installments are ratably reduced.

The 2002 Credit Facility is secured by a first
priority security interest in substantially all of the
Companys assets. The Companys subsidiaries are
required to guarantee its obligations under the 2002 Credit
Facility. In connection with the 2002 Credit Facility, the
Company incurred approximately $4.9 million in debt
issuance costs, which were capitalized and are being amortized
over the life of the 2002 Credit Facility.

The 2002 Credit Facility contains financial and
other covenants, including covenants requiring the Company to
maintain various financial ratios, limiting its ability to incur
additional indebtedness, restricting the amount of capital
expenditures that may be incurred, restricting the payment of
cash dividends and limiting the amount of debt which can be
loaned to the Companys franchisees or guaranteed on their
behalf. This facility also limits the Companys ability to
engage in mergers or acquisitions, sell certain assets,
repurchase its stock and enter into certain lease transactions.

See Note 24 for a discussion of amendments made
to the 2002 Credit Facility subsequent to December 29, 2002.

1997 Credit
Facility.Pursuant to the terms of
the Companys Senior Secured Credit Facility, as amended
(1997 Credit Facility), the Company was provided
with a $50.0 million term loan (Tranche A), a
$75 million term loan (Tranche B), a
$25.0 million revolving credit facility and a
$100.0 million facility to be used for acquisitions
(Acquisition Facility). Various financial
institutions funded the Companys Tranche A and Tranche B
loans, some of which were shareholders of the Company. Interest
rates associated with the 1997 Credit Facility were, at the
Companys election, either (i) a defined base rate
plus a defined margin or (ii) LIBOR plus a defined margin,
subject to reduction based on the achievement of certain
financial leverage ratios. Additionally, the Company paid fees
associated with unused portions of the revolving credit facility
and the Acquisition Facility, and fronting and other fees and
charges associated with its letters of credit.

In 2001, the Company made prepayments of
$20.0 million and $62.0 million related to the Tranche
B loan and the Acquisition Facility, respectively,
$46.0 million of which was funded using net proceeds from
the Companys initial public offering and the remainder
with proceeds from operations. In 2002, the Company retired the
Tranche A and Tranche B loans with proceeds from the 2002 Credit
Facility. In 2002, the Company repaid the $10.0 million
outstanding balance of the Acquisition Facility with proceeds
from operations, retiring that arrangement as well. The
revolving portion of the 1997 Credit Facility, which had no
outstanding balance at December 30, 2001, was also retired
during 2002. In conjunction with the

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


retirement of these loans, the Company wrote-off
unamortized debt issuance costs, which are a component of
interest expense, net in the accompanying
consolidated statements of operations.

Senior Subordinated Notes.In May 1997, the Company completed
a debt offering of $175.0 million of Senior Subordinated
Notes bearing interest at 10.25% per annum. During 2000, the
Company repurchased $17.0 million of the Senior
Subordinated Notes at a net discount of $0.1 million. The
Company funded these repurchases with proceeds from the 1997
Credit Facility and cash from operations. During 2001, the
Company repurchased $23.1 million of the Senior
Subordinated Notes at a premium of $1.2 million. The Company
funded these repurchases with proceeds from the sale of
company-operated units to franchisees, cash from operations and
the Companys 1997 Credit Facility. During 2002, the
Company exercised a call provision and repurchased the remaining
notes with a carrying value of $126.9 million at a premium
of $6.5 million. The Company funded this repurchase with
proceeds from the 2002 Credit Facility. In connection with the
2002, 2001 and 2000 repurchases, the Company wrote-off an
allocable portion of its unamortized debt issue costs in each
year. The premiums, discounts and the write-offs of unamortized
debt issue costs are a component of interest expense,
net in the accompanying consolidated statements of
operations and resulted in losses from extinguishment of debt of
$9.6 million in 2002, $1.7 million in 2001 and
$0.4 million in 2000.

Southtrust Line of Credit.During 2002 and 2001, the Company
had an agreement with Southtrust Bank consisting of a
$5.0 million revolving line of credit, renewable each year
on May 30. The monthly interest payments were based on
LIBOR plus an applicable margin. As of December 29, 2002,
the margin was 1.125%. The Company also paid a quarterly
commitment fee of 0.5% on the unused portion of this line of
credit. On March 31, 2003, the Company and Southtrust
agreed to terminate this facility.

Future Debt Maturities.Excluding capital lease
obligations, at December 29, 2002, aggregate future debt
maturities were as follows:

|           |  |               |       | 
|---------- |  | ------------- | ----- | 
|           |  | (In millions)
|2003       |  | $             | 17.6  | 
|2004       |  |               | 12.7  | 
|2005       |  |               | 16.3  | 
|2006       |  |               | 25.5  | 
|2007       |  |               | 61.6  | 
|Thereafter |  |               | 91.4  | 
|           |  |               |       | 
|           |  | $             | 225.1 | 
|           |  |               |       | 

F-20



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Note  11 Leases

At December 29, 2002, future minimum
payments under capital and non-cancelable operating leases were
as follows:

|                                                 |  |               |      |           |  |   |       | 
|------------------------------------------------ |  | ------------- | ---- | --------- |  | - | ----- | 
|                                                 |  | Capital       |      | Operating
|                                                 |  | Leases        |      | Leases   
|                                                 |  |               |      |          
|                                                 |  |              
|                                                 |  | (In millions)
|2003                                             |  | $             | 0.2  |           |  | $ | 29.7  | 
|2004                                             |  |               | 0.2  |           |  |   | 26.6  | 
|2005                                             |  |               | 0.2  |           |  |   | 22.7  | 
|2006                                             |  |               | 0.2  |           |  |   | 18.8  | 
|2007                                             |  |               | 0.3  |           |  |   | 15.8  | 
|Thereafter                                       |  |               | 1.7  |           |  |   | 50.1  | 
|                                                 |  |               |      |           |  |   |       | 
|Future minimum lease payments                    |  |               | 2.8  |           |  | $ | 163.7 | 
|                                                 |  |               |      |           |  |   |       | 
|Less amounts representing interest               |  |               | (1.3 | )         |  |   |       | 
|                                                 |  |               |      |           |  |   |       | 
|Total obligations under capital leases (Note 10) |  | $             | 1.5  |           |  |   |       | 
|                                                 |  |               |      |           |  |   |       | 

In 2002, 2001 and 2000, rental expense was
approximately $35.2 million, $34.7 million and
$34.8 million, respectively, including percentage rentals
of $0.9 million, $1.0 million and $0.9 million,
respectively.

The Company leases certain restaurant properties
and sub-leases other restaurant properties to franchisees. At
December 29, 2002, the aggregate gross book value and the
net book value of such properties was approximately
$40.8 million and $27.7 million, respectively. Rental
income from these leases and sub-leases was approximately
$17.3 million, $12.4 million and $9.2 million in 2002,
2001 and 2000, respectively. At December 29, 2002, future
minimum rental income associated with these leases and
sub-leases, for each of the next five years, is approximately
$15.7 million, $14.4 million, $12.6 million,
$11.1 million and $9.5 million, respectively.

Note  12 Deferred Credits and
Other Long-Term Liabilities

|                                                 |  |               |      |      |  |   |      | 
|------------------------------------------------ |  | ------------- | ---- | ---- |  | - | ---- | 
|                                                 |  | 2002          |      | 2001
|                                                 |  |               |      |     
|                                                 |  |              
|                                                 |  | (In millions)
|Deferred gain on unit conversions                |  | $             | 19.1 |      |  | $ | 9.5  | 
|Deferred income taxes                            |  |               | 18.2 |      |  |   | 5.1  | 
|Deferred franchise revenues                      |  |               | 12.4 |      |  |   | 11.8 | 
|Deferred rentals                                 |  |               | 8.1  |      |  |   | 7.7  | 
|Executive retirement arrangements                |  |               | 4.6  |      |  |   | 4.8  | 
|Future lease obligations  closed
    facilities |  |               | 3.1  |      |  |   | 4.0  | 
|Other                                            |  |               | 8.3  |      |  |   | 8.8  | 
|                                                 |  |               |      |      |  |   |      | 
|                                                 |  | $             | 73.8 |      |  | $ | 51.7 | 
|                                                 |  |               |      |      |  |   |      | 

Note  13 Commitments and
Contingencies

Supply Contracts.Supplies are generally provided to
AFCs franchised and company-operated QSRs, pursuant to
supply agreements negotiated by Supply Management Services, Inc.
(SMS), a not-for-

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


profit purchasing cooperative. The Company and
its Popeyes, Churchs and Cinnabon franchisees hold
ownership interests in SMS in proportion to the number of QSRs
they own. At December 29, 2002, the Company owned
approximately 16.5% of SMS and held three of its eleven board
seats. For its part, the Company does not guarantee the
operations, indebtedness, or the contracts entered into by SMS.
The operations of SMS are not included in the consolidated
financial statements and the investment is accounted for using
the cost method.

Generally, SMS does not commit itself, the
Company, or the Companys franchisees to any purchase
volumes for on-going menu items. Occasionally, though, for
limited time offer programs, volume commitments are obtained for
each operator including AFC. AFC had less than $0.5 million
of such purchase commitments outstanding at December 29,
2002. The Company experienced no losses with respect to these
contracts.

The principal raw material for the Companys
Popeyes and Churchs systems is fresh chicken, representing
approximately half of their restaurant food, beverages and
packaging costs. Company-operated and franchised
restaurants purchase their chicken from suppliers who service
AFC and its franchisees from various plant locations. These
costs are significantly affected by increases in the cost of
fresh chicken, which can result from a number of factors,
including increases in the cost of grain, disease, declining
market supply of fast-food sized chickens and other factors that
affect availability.

The Company has entered into long-term purchase
agreements with its beverage suppliers. The range of marketing
rebates and the dollar volume of purchases vary according to the
Companys demand for beverage syrup and fluctuations in the
market rates for beverage syrup.

Within the Companys coffee segment, the
principal raw material is green coffee beans. Seattle Coffee
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 five
years. Seattle Coffee always takes physical delivery of the
coffee beans. As of December 29, 2002, Seattle Coffee had
commitments to purchase green coffee beans at a total cost of
approximately $39.5 million through December 2007. Seattle
Coffees green coffee bean purchase commitments were
transferred in connection with the July 14, 2003 sale of
Seattle Coffee (Note 24).

Through May 31, 2005, the Company has an
arrangement with a supplier to purchase equipment. At
December 29, 2002, approximately $2.8 million of
targeted purchases under the agreement were outstanding;
approximately $1.1 million relating to each of the calendar
years 2003 and 2004 and the remainder relating to 2005. If the
purchase targets are not met, a 30% penalty is due. The Company
expects to make equipment purchases in excess of the targets and
believes that it will not be subject to the penalties.

Formula and Supply Agreements With Former
Owner.The Company has a formula
licensing agreement with Alvin C. Copeland, the founder of
Popeyes and the present owner of Diversified Foods and
Seasonings, Inc. (Diversified). Under this
agreement, the Company has the worldwide exclusive rights to the
Popeyes spicy fried chicken recipe and certain other ingredients
used in Popeyes products. The agreement provides that the
Company pay Mr. Copeland approximately $3.1 million
annually until March 2029. During 2002, 2001 and 2000, the
Company expensed approximately $3.1 million,
$3.0 million and $3.1 million, respectively, under
this agreement. The Company also has a supply agreement with
Diversified through which the Company purchases certain
proprietary spices and other products made exclusively by
Diversified.

King Features Agreements.The Company has several agreements
with the King Features Syndicate Division (King
Features) of Hearst Holdings, Inc. Prior to 2002, the
Company had the exclusive license to use the image and likeness
of the cartoon character Popeye (and certain
companion characters such

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


as Olive Oyl) in connection with the
operations of Popeyes restaurants worldwide. The Company was
obligated to pay King Features a royalty of one-tenth of one
percent (0.1%) on the first $1.0 billion of Popeyes
cumulative annual system-wide sales and one-twentieth of one
percent (0.05%) on the next $2.0 billion of such annual
sales. Under the agreement, total annual royalties were capped
at $2.0 million per year.

On January 1, 2002 an amendment was made to
these agreements limiting the exclusive license to use the image
and likeness of the cartoon character Popeye in the
United States. Popeyes locations outside the United States
continue to have the exclusive use of the image and likeness of
the cartoon character Popeye (and certain companion
characters such as Olive Oyl). Under the amendment,
the Company is obligated to pay King Features a royalty of
$0.9 million annually, as adjusted for fluctuations in the
Consumer Price Index, plus twenty percent of the Companys
gross revenues from the sales of the Popeye products
sold through retail outlets outside of the Popeyes restaurant
system. These agreements extend through June 30, 2010.

In 2002, 2001 and 2000 payments made to King
Features were $0.9 million, $1.2 million and
$1.1 million, respectively. Payments are made from a
cooperative advertising fund (Note 2) associated with the
Popeyes brand.

Accounting and Tax Functions Outsourcing.Effective September 3, 2002,
the Company entered into an agreement with Deloitte &
Touche, LLP (D&T) under which D&T provides
certain accounting and tax functions. Under the terms of the
agreement, as amended, the primary functions to be performed by
D&T include transaction processing in the sales, payroll,
accounts receivable, accounts payable, fixed assets, and sales
and property taxes areas. The services performed by D&T are
essentially those services formerly performed by the
Companys San Antonio Management Services Center. Virtually
all of AFCs former employees in the San Antonio Management
Services Center transitioned to employment positions with
D&T. The contract expires December 31, 2009, unless
terminated earlier in accordance with the agreement.

The contract includes a fixed annual fee of
$1.2 million plus a variable fee based upon the number of
company-operated QSRs and the number of franchised QSRs. At
December 29, 2002, future minimum payments under this
contract, including the variable rates applied to the
Companys and its franchisees QSR count at
December 29, 2002, are as follows:

|           |  |               |      | 
|---------- |  | ------------- | ---- | 
|           |  | (In millions)
|2003       |  | $             | 4.3  | 
|2004       |  |               | 4.3  | 
|2005       |  |               | 4.5  | 
|2006       |  |               | 4.6  | 
|2007       |  |               | 4.8  | 
|Thereafter |  |               | 10.2 | 
|           |  |               |      | 
|           |  | $             | 32.7 | 
|           |  |               |      | 

During 2002 the Company expensed
$1.5 million under this agreement.

Information Technology
Outsourcing  D&T.The Company has an information
technology outsourcing contract with D&T. The contract was
entered into during 2002, became effective on January 1,

F-23



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


2003 and extends through December 31, 2009.
At December 29, 2002, the future minimum payments under
this contract were as follows:

|           |  |               |      | 
|---------- |  | ------------- | ---- | 
|           |  | (In millions)
|           |  |              
|2003       |  | $             | 2.7  | 
|2004       |  |               | 2.8  | 
|2005       |  |               | 2.9  | 
|2006       |  |               | 3.1  | 
|2007       |  |               | 3.2  | 
|Thereafter |  |               | 6.7  | 
|           |  |               |      | 
|           |  | $             | 21.4 | 
|           |  |               |      | 

Employment Agreements.The Company has employment
agreements (effective January 2001) with five senior executives
which provide for annual base salaries ranging from $250,000 to
$575,000, subject to annual adjustment by the Board of
Directors, an annual incentive bonus, 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 generally terminate in 2004 or 2005,
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 in certain cases be entitled to, among other
things, up to two times his base annual salary and up to two
times the bonus payable to the individual for the fiscal year in
which such termination occurs. Under the agreements, upon a
change of control of the Company and a significant reduction in
the executives responsibilities or duties, the executive
may terminate his employment and would be entitled to receive
the same severance pay he would have received had his employment
been terminated without cause.

AFC Loan Guarantee Programs.In March 1999, the Company
implemented a program to assist qualified current and
prospective franchisees in obtaining the financing needed to
purchase or develop franchised units at competitive rates. Under
the program, the Company guarantees up to 20% of the loan amount
and has a maximum aggregate liability for the entire pool of
$1.0 million. Such guarantees typically extend for a
three-year period. As of December 29, 2002, approximately
$8.8 million was borrowed under this program, of which the
Company was contingently liable for $1.0 million in the
event of default.

In November 2002, the Company implemented a
second loan guarantee program to provide qualified franchisees
with financing to fund new construction, re-imaging and facility
upgrades. The duration of this program is five to
seven years. Under its terms, the Company provides a first
loss guarantee to a participating lending institution in an
aggregate amount not to exceed ten percent of the sum of the
original funded principal balances of all program loans. As of
December 29, 2002, there were no outstanding borrowings
under this program.

These loan guarantees have not been recorded as
an obligation in the Companys consolidated balance sheets.
The Company does not expect any material loss to result from
these guarantees because it does not believe that performance,
upon its part, will be required.

Other Commitments.The Company has guaranteed certain
loans and lease obligations of approximately $1.5 million
and $0.4 million as of December 29, 2002 and
December 30, 2001, respectively. $1.4 million of these
guarantees arose in 2002 in connection with the sale of
company-operated QSRs to franchisees. The remainder relate to
the Companys supply relationship with Diversified.

F-24



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


These guarantees extend for periods as long as
eight years after the date of the agreements. These
guarantees have not been recorded as an obligation in the
Companys consolidated balance sheets. The Company does not
expect any material loss to result from these guarantees because
it does not believe that performance, upon its part, will be
required.

Litigation.The Company is involved in several
matters relating to its announcement on March 24, 2003
indicating it would restate its financial statements for fiscal
year 2001 and the first three quarters of 2002 and its
announcement on April 22, 2003 indicating that it would
also restate its financial statements for fiscal year 2000. See
Notes 23 and 25 for more information concerning the restatement
of the Companys financial statements.

On March 25, 2003, plaintiffs filed the
first of eight securities class action lawsuits in the United
States District Court for the Northern District of Georgia
against AFC and several of its present and former officers.
These actions all purport to be brought on behalf of a class of
purchasers of the Companys common stock during the period
from March 2, 2001 through and including March 24,
2003 (the Class Period). The complaints all
allege claims under the federal securities laws, specifically
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. The complaints
generally allege that the defendants knowingly or recklessly
made false or misleading statements during the Class Period
concerning its financial condition and that its financial
statements did not present its true financial condition and were
not presented in accordance with generally accepted accounting
principles. The complaints seek certification as a class action,
unspecified compensatory damages, attorneys fees and
costs, and other relief.

By order dated May 21, 2003, the district
court consolidated the eight lawsuits into one consolidated
action. The Company expects that the plaintiffs will file a
consolidated amended complaint in early 2004, to which the
Company will respond in lieu of responding to the individual
complaints.

On June 5, 2003, a shareholder claiming to
be acting on behalf of AFC filed a shareholder derivative suit
in the United States District Court for the Northern District of
Georgia against certain current and former members of the
Companys board of directors and the Companys largest
shareholder. On July 24, 2003, a different shareholder
filed a substantially identical lawsuit in the same court
against the same defendants. By order dated September 23,
2003, the District Court consolidated the two lawsuits into one
consolidated action. On November 24, 2003, the plantiffs filed a
consolidated amended complaint that added as defendants three
additional current or former officers of AFC and two other large
shareholders of AFC. The consolidated complaint alleges, among
other things, that the director defendants breached their
fiduciary duties by permitting AFC to issue financial statements
that were materially in error. The lawsuit seeks, on behalf of
AFC, unspecified compensatory damages, disgorgement or
forfeiture of certain bonuses and options earned by certain
defendants, disgorgement of profits earned through alleged
insider selling by certain defendants, recovery of
attorneys fees and costs, and other relief.

On August 7, 2003, a shareholder claiming to
be acting on behalf of AFC filed a shareholder derivative suit
in Gwinnett County Superior Court, State of Georgia, against
certain current and former members of the Companys board
of directors. The complaint alleges that the defendants breached
their fiduciary duties by permitting AFC to issue financial
statements that were materially in error and by failing to
maintain adequate internal accounting controls. The lawsuit
seeks, on behalf of AFC, unspecified compensatory damages,
attorneys fees, and other relief.

On May 15, 2003, a plaintiff filed a
securities class action lawsuit in Fulton County Superior Court,
State of Georgia, against AFC and certain current and former
members of the Companys board of directors on behalf of a
class of purchasers of the Companys common stock in
or traceable to AFCs December 2001 $161 million
public offering of common stock. The lawsuit asserts claims under

F-25



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Sections 11 and 15 of the Securities Act of
1933 (1933 Act). The complaint alleges that the
registration statement filed in connection with the offering was
false or misleading because it included financial statements
issued by the Company that were materially in error. The
complaint seeks certification as a class action, compensatory
damages, attorneys fees and costs, and other relief. The
plaintiff claims that as a result of AFCs announcement
that it was restating its financial statements for fiscal year
2001 (and at the time of the complaint, were examining restating
its financial statements for fiscal year 2000), AFC will be
absolutely liable under the 1933 Act for all recoverable damages
sustained by the putative class. On July 20, 2003, the
defendants removed the action to the United States District
Court for the Northern District of Georgia. The plaintiff filed
a motion to remand the case to state court. The defendants
opposed the motion to remand. On November 25, 2003, the
federal district court entered an order granting the motion to
remand, certifying the order for appellate review and staying
the remand pending the completion of appellate proceedings. On
December 10, 2003, the defendants filed a petition in the
United States Court of Appeals for the Eleventh Circuit for
permission to appeal from the district courts order. The
parties have agreed that the defendants will not be required to
respond to the complaint until after the issue of remand is
decided.

On April 30, 2003, the Company received an
informal, nonpublic inquiry from the SEC requesting voluntary
production of documents and other information. The requests for
documents and information relate primarily to the Companys
announcement on March 24, 2003 indicating it would restate
its financial statements for fiscal year 2001 and the first
three quarters of 2002. The SEC is also investigating whether
the disclosure of certain financial information in November 2002
was in compliance with SEC Regulation FD. The Company
intends to cooperate with the SEC in these inquiries.

AFC has purchased directors and officers
liability (D&O) insurance that may provide
coverage for some or all of these matters. The Company has given
notice to its D&O insurers of the claims described above,
and the insurers have responded by requesting additional
information and by reserving their rights under the policies,
including the rights to deny coverage under various policy
exclusions or to rescind the policies in question as a result of
AFCs announced restatement of its financial statements.
There is risk that the D&O insurers will rescind the
policies; that some or all of the claims will not be covered by
such policies; or that, even if covered, AFCs ultimate
liability will exceed the available insurance.

The lawsuits against AFC described above present
material and significant risk to the Company. Although the
Company believes that it has meritorious defenses to the claims
of liability or for damages in these actions, it is unable at
this time to predict the outcome of these actions or reasonably
estimate a range of damages. The amount of a settlement of, or
judgment on, one or more of these claims or other potential
claims relating to the same events could substantially exceed
the limits of the Companys D&O insurance. The ultimate
resolution of these matters could have a material adverse impact
on the Companys financial results, financial condition and
liquidity.

The Company is a defendant in various legal
proceedings arising in the ordinary course of business,
including claims resulting from slip and fall
accidents, employment-related claims, claims from guests or
employees alleging illness, injury or other food quality, health
or operational concerns and claims related to franchise matters.
The Company has established reserves to provide for the defense
and settlement of such matters and it believes their ultimate
resolution will not have a material adverse effect on its
financial condition or its results of operations.

Insurance Programs.The Company carries property,
general liability, business interruption, crime, directors and
officers liability, employment practices liability,
environmental and workers compensation insurance policies
(except for workers compensation in the State of Texas,
where the Company is self-insured against such liabilities)
which it believes are customary for businesses of its size and
type.

F-26



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Pursuant to the terms of their franchise
agreements, the Companys franchisees are also required to
maintain certain types and levels of insurance coverage,
including commercial general liability insurance, workers
compensation insurance, all risk property and automobile
insurance.

The Company has established reserves (Note 9)
with respect to the programs described above based on the
estimated total losses the Company will experience. At
December 29, 2002, the Companys insurance reserves
were partially collateralized by letters of credit and/or cash
deposits of $6.1 million.

Environmental Matters.The Company is 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.
However, approximately 125 of the Companys owned and/or
leased properties are known or suspected to have been used by
prior owners or operators as retail gas stations and a few of
these properties may have been used for other environmentally
sensitive purposes. Many of these properties previously
contained underground storage tanks (USTs) and some
of these properties may currently contain abandoned USTs. It is
possible that petroleum products and other contaminants may have
been released at these properties into the soil or groundwater.
Under applicable federal and state environmental laws, 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 well as any other
environmental conditions at its properties that are unrelated to
USTs. In 2000, after an analysis of the Companys property
portfolio and an initial assessment of its properties, including
testing of soil and groundwater at a representative sample of
its facilities, the Company obtained insurance coverage that it
believes is adequate to cover any potential environmental
remediation liabilities. The Company is currently not subject to
any administrative or court order requiring remediation at any
of its properties.

Foreign Operations.For each of 2002, 2001 and 2000,
foreign operations represented less than 1% of sales by
company-operated restaurants; approximately 17% of franchise
revenues; and approximately 10%, 15% and 13%, respectively, of
wholesale revenues. Aggregated, foreign-sourced revenues for
2002, 2001 and 2000 represented 4.4%, 4.1% and 3.3% of total
revenues, respectively. At December 29, 2002, approximately
$3.8 million of the Companys accounts receivable were
denominated in foreign currencies.

Due to its international operations, the Company
is exposed to risks from changes in international economic
conditions and changes in foreign currency rates. On a limited
basis, the Company has entered into foreign currency agreements
with respect to the Korean Won to reduce its foreign currency
risks associated with royalty streams from franchised operations
in Korea. Net losses incurred by the Company during 2002, 2001
and 2000 related to these agreements were not significant to the
Companys financial position or its results of operations.

Significant Franchisee.One domestic franchisee accounted
for approximately 8%, 8% and 6% of the Companys royalty
revenues in 2002, 2001 and 2000, respectively.

Note  14 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 Company believes the fair
value of its cash and cash equivalents, accounts receivable,
inventories, prepaid income taxes, other current assets,
accounts payable and accrued expenses approximates carrying
value.

F-27



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Long-term notes receivable.The Company believes the fair
value of its long-term notes receivable approximates the
carrying value, as the respective interest rates are
commensurate with the credit and interest rate risks involved.

Notes receivable from officers.The carrying value of the
Companys notes receivable from officers, including accrued
interest and unamortized discounts was $6.1 million and
$7.7 million at December 29, 2002 and
December 30, 2001, respectively. The terms of these notes
are presented at Note 21. Because the interest rates on these
notes are not substantially different from prevailing market
rates at December 29, 2002 and December 30, 2001, the
Company believes their carrying value is a reasonable
approximation of fair value.

Long-term debt.The Company believes the fair
value of its 2002 Credit Facility and its 1997 Credit Facility
approximates their carrying values, as management believes the
floating rate interest and other terms are commensurate with the
credit and interest rate risks involved.

The fair value of the Companys Senior
Subordinated Notes, as of December 30, 2001, was based on quoted
market prices. Their carrying amount and fair value as of
December 30, 2001 were $126.9 million and
$133.2 million, respectively. These notes were redeemed in
2002.

Note  15 Common
Stock

Initial Public Offering.On March 2, 2001, the Company
sold, pursuant to an underwritten public offering, 3,136,328
shares (including 11,328 in over-allotment shares) of its common
stock at a price of $17.00 per share and received approximately
$46.0 million in net cash proceeds after deducting
approximately $7.3 million in underwriting commissions,
offering expenses and other miscellaneous costs.

Secondary Public Offering.On December 6, 2001, the
Company completed a secondary public offering of 8,050,000
shares (including 1,050,000 in over-allotment shares) of common
stock at a price of $23.00 per share. All of the shares of
common stock were offered by selling shareholders. The Company
did not receive any of the proceeds from the shares of common
stock sold by the selling shareholders. Offering expenses and
other associated miscellaneous costs to the Company were
approximately $0.4 million.

Share Repurchase Program.On July 22, 2002, the
Companys board of directors approved a share repurchase
program of up to $50.0 million, effective as of such date.
On October 7, 2002, the Companys board of directors
approved a $50.0 million increase to the program. The
program, which is open-ended, allows the Company to repurchase
shares of the Companys common stock from time to time. As
of December 29, 2002, the Company has repurchased 3,692,963
shares of common stock for approximately $77.9 million
under this program.

Dividends.During 2002, 2001 and 2000, the
Company did not declare nor did it pay any cash or stock
dividends. As amended, the 2002 Credit Facility restricts the
extent to which the Company or any of its subsidiaries may
declare or pay a cash dividend.

Note  16 Stock Option
Plans

The 1992 Stock Option Plan.The 1992 Nonqualified Stock Option
Plan authorizes the issuance of options to purchase
approximately 1.2 million shares of the Companys
common stock. The per share exercise price is $0.12. The
outstanding options allow certain officers of the Company to
purchase 0.8 million shares of common stock. If not
exercised, the options expire 15 years after the date of
issuance. As of December 29, 2002, all of the outstanding
options were exercisable. As of December 29, 2002, the
weighted-average remaining contractual life of these options is
4.2 years.

F-28



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


The 1996 Nonqualified Performance Stock
Option Plan.In April 1996, the
Company created the 1996 Nonqualified Performance Stock Option
Plan. This plan authorizes the issuance of options to purchase
approximately 1.6 million shares of the Companys common
stock. Exercise prices range from $4.98 to $11.63 per share. The
options outstanding allow certain employees of the Company to
purchase approximately 1.0 million shares of common stock.
Vesting was based upon the Company achieving annual levels of
earnings before interest, taxes, depreciation and amortization
over fiscal year periods beginning with fiscal year 1996 through
1998. From 1999 through 2001, vesting was based on earnings. If
not exercised, the options expire ten years from the date of
issuance. Under this plan, compensation expense was recorded
over the service period. During 2001 and 2000, the Company
recorded approximately $0.3 million and $1.6 million,
respectively, in compensation expense. No compensation expense
was recorded under this plan during 2002. As of
December 29, 2002, all of the outstanding options were
exercisable, the weighted-average remaining contractual life was
4.9 years and the weighted-average exercise price was $8.99
per share.

The 1996 Nonqualified Stock Option Plan.In April 1996, the Company created
the 1996 Nonqualified Stock Option Plan. This plan authorizes
the issuance of approximately 4.1 million options. In 2000,
the Company granted 0.5 million options at prices ranging
from $13.13 to $15.00 per share. The Company granted
approximately 0.9 million options in 2001 at exercise
prices ranging from $15.00 to $22.75 per share. In 2002, the
Company granted 1.0 million options at prices ranging from
$24.82 to $32.48 per share. The grants in 2000, 2001 and 2002
were all at prices which approximated the fair market value of
the Companys common stock at the date of grant. The
options currently granted and outstanding allow certain
employees of the Company to purchase approximately
2.3 million shares of common stock, which vest at 25% per
year. If not exercised, the options expire seven years from the
date of issuance. During 2002, 2001 and 2000 the Company
recognized approximately $0.3 million, $0.1 million
and $0.1 million in compensation expense from modifications
to specific individual grants. As of December 29, 2002, the
weighted-average remaining contractual life of the unexercised
options was 4.6 years, the weighted-average exercise price
per share was $19.95 and 0.6 million options were
exercisable.

The 1998 Substitute Nonqualified Stock
Option Plan.In connection with
the Seattle Coffee acquisition in March 1998, the Company
created the Substitute Nonqualified Stock Option Plan. This plan
authorizes the issuance of approximately 0.3 million
options at exercise prices that range from $5.87 to $10.13 per
share. The Company issued approximately 0.3 million options at
the closing date of the acquisition. The options vested upon
issuance by the Company and expire October 31, 2007. As of
December 29, 2002, the weighted-average remaining contractual
life of the unexercised options was 4.8 years, the
weighted-average exercise price per share was $10.13 and 2,266
options were exercisable.

Warrants.In
connection with the Seattle Coffee acquisition, the Company
authorized the issuance of approximately 115,000 warrants
to the former Seattle Coffee shareholders to purchase AFC common
stock at per share prices ranging from $5.87 to $9.00. All
unexercised warrants expired during 2001. The fair value of
these warrants was added to the goodwill resulting from the
acquisition.

The 2002 Incentive Stock Option Plan.In February 2002, the Company
created the 2002 Incentive Stock Option Plan. This plan
authorizes the issuance of 4.5 million options. In 2002,
the Company did not grant any options under this plan. Grants
will be, at a minimum, at prices which approximate the fair
market value of the Companys common stock at the date of
grant. If not exercised, the options expire ten years from the
date of issuance.

F-29



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


A Summary of Plan Activity.A summary of the status of the
Companys five stock option plans and warrants as of
December 31, 2000, December 30, 2001 and
December 29, 2002 and changes during the years is presented
in the table and narrative below:

|                                                                |  |                       |       |           |  |        |       |           |  |        |        |           |  |   |       |  |  |  |       |   |  |   |       | 
|--------------------------------------------------------------- |  | --------------------- | ----- | --------- |  | ------ | ----- | --------- |  | ------ | ------ | --------- |  | - | ----- |  |  |  | ----- | - |  | - | ----- | 
|                                                                |  |                       |       |           |  |       
|                                                                |  | 2002                  |       | 2001      |  | 2000  
|                                                                |  |                       |       |           |  |       
|                                                                |  |                       |       | Wtd Avg   |  |        |       | Wtd Avg   |  |        |        | Wtd Avg  
|                                                                |  | Shares                |       | Ex. Price |  | Shares |       | Ex. Price |  | Shares |        | Ex. Price
|                                                                |  |                       |       |           |  |        |       |           |  |        |        |          
|                                                                |  |                      
|                                                                |  | (Shares in thousands)
|Outstanding at beginning of year                                |  |                       | 3,986 |           |  | $      | 8.68  |           |  |        | 4,232  |           |  | $ | 6.57  |  |  |  | 4,030 |   |  | $ | 5.96  | 
|Granted options                                                 |  |                       | 1,014 |           |  |        | 28.01 |           |  |        | 854    |           |  |   | 17.16 |  |  |  | 455   |   |  |   | 13.19 | 
|Exercised options and warrants                                  |  |                       | (710  | )         |  |        | 6.58  |           |  |        | (1,000 | )         |  |   | 6.35  |  |  |  | (103  | ) |  |   | 5.46  | 
|Cancelled options and warrants                                  |  |                       | (154  | )         |  |        | 22.30 |           |  |        | (100   | )         |  |   | 15.40 |  |  |  | (150  | ) |  |   | 10.83 | 
|                                                                |  |                       |       |           |  |        |       |           |  |        |        |           |  |   |       |  |  |  |       |   |  |   |       | 
|Outstanding at end of year                                      |  |                       | 4,136 |           |  |        | 13.27 |           |  |        | 3,986  |           |  |   | 8.68  |  |  |  | 4,232 |   |  |   | 6.57  | 
|                                                                |  |                       |       |           |  |        |       |           |  |        |        |           |  |   |       |  |  |  |       |   |  |   |       | 
|Exercisable at end of year                                      |  |                       | 2,478 |           |  | $      | 6.95  |           |  |        | 2,754  |           |  | $ | 5.67  |  |  |  | 3,525 |   |  | $ | 5.43  | 
|Weighted average fair value of options and
    warrants granted |  |                       |       |           |  | $      | 6.28  |           |  |        |        |           |  | $ | 4.29  |  |  |  |       |   |  | $ | 3.82  | 

Options granted in 2002, 2001 and 2000 were at
prices that equaled the fair market price of the common stock at
the grant date.

Note  17 Other Employee
Benefit Plans

401(k) Savings
Plan.The Company maintains a
qualified retirement plan (Plan) under
Section 401(k) of the Internal Revenue Code of 1986, as
amended, for the benefit of employees meeting certain
eligibility requirements as outlined in the Plan document. All
Company employees are subject to the same contribution and
vesting schedules. Under the Plan, non-highly compensated
employees may contribute up to 20.0% of their eligible
compensation to the Plan on a pre-tax basis up to statutory
limitations. Highly compensated employees are limited to 4.0% of
their eligible compensation. The Company may make both voluntary
and matching contributions to the Plan. The Company expensed
approximately $0.5 million, $0.7 million and
$0.2 million during 2002, 2001 and 2000, respectively, for
its contributions to the Plan.

Deferred Compensation Plan.The Companys Deferred
Compensation Plan is an unfunded, nonqualified deferred
compensation plan that benefits certain designated key
management or highly compensated employees. Under this plan, an
employee may defer up to 50% of base salary and 100% of any
bonus award in increments of 1% on a pre-tax basis. The Company
may make both voluntary and matching contributions to the plan.
At December 29, 2002, the funds are invested in money
market funds and variable life insurance policies that have an
aggregate value of approximately $3.2 million. At
December 30, 2001, the funds were invested in variable life
insurance policies that had an aggregate cash surrender value of
approximately $1.5 million. All plan assets are subject to
the Companys creditors. The Company expensed approximately
$0.2 million, $0.1 million and less than
$0.1 million in 2002, 2001 and 2000, respectively, for its
contributions to the plan. As of December 29, 2002 and
December 30, 2001, the Companys liability under the
plan was $3.1 million and $2.4 million, respectively.

Long-Term Success Plan.Under the Long-Term Employee
Success Plan, if the Companys common stock is publicly
traded and the average stock price per share is at least $46.50
for a period of 20 consecutive trading days, or the
Companys earnings per share for any of the 2001, 2002 or
2003 is at least $3.375, bonuses become payable to all employees
hired before January 1, 2003 who have been actively
employed through the last day of the period in which the Company
attains either of these financial performance standards.
Employee payouts range from 10% to 110% of the individual
employees base

F-30



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


salary at the time either of the standards is
met. The percentage is based upon the individual employees
original date of hire, and can amount to as much as 110% for an
employee whose date of hire was prior to January 1, 1998.
The bonuses are payable in shares of the Companys common
stock or, to the extent an employee is eligible, deferred
compensation, and may be paid in cash if an employee elects to
receive a cash payment and the Companys board of directors
agrees to pay the bonus in cash. If neither of the financial
performance standards are achieved by December 28, 2003,
the plan and the obligation to make any payments under the plan
will terminate. As of December 29, 2002, AFC did not have a
liability recorded in its consolidated financial statements for
the bonus payout as it is not probable that the financial
performance targets discussed above will be met.

Executive Retirement and Benefit Plan.The Company has a nonqualified,
unfunded retirement, disability and death benefit plan for
certain executive officers. Annual retirement benefits are equal
to 30% of the executive officers average base compensation
for the five years preceding retirement plus health benefit
coverage and are payable in 120 equal monthly installments
following the executive officers retirement date. Death
benefits are up to five times the officers base
compensation at 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 $2.3 million and $2.1 million as of
December 29, 2002 and December 30, 2001, respectively.

The following table sets forth for the retirement
plan, the funded status and the amounts that are included in
other long-term liabilities in the accompanying balance sheets
as of December 29, 2002 and December 30, 2001:

|                                                                      |  |               |      |      |  |   |      |  
|--------------------------------------------------------------------- |  | ------------- | ---- | ---- |  | - | ---- | -
|                                                                      |  | 2002          |      | 2001
|                                                                      |  |               |      |     
|                                                                      |  |              
|                                                                      |  | (In millions)
|Actuarial present value of benefit obligation:                        |  |               |      |      |  |   |      |  
|Accumulated benefits obligation                                       |  | $             | 1.2  |      |  | $ | 1.2  |  
|                                                                      |  |               |      |      |  |   |      |  
|Projected benefit obligation                                          |  | $             | 1.6  |      |  | $ | 1.4  |  
|Plan assets at fair value                                             |  |               |     |      |  |   |     |  
|                                                                      |  |               |      |      |  |   |      |  
|Projected benefit obligations in excess of plan
    assets            |  |               | 1.6  |      |  |   | 1.4  |  
|Prior service cost not yet recognized in pension
    cost             |  |               | (0.3 | )    |  |   | (0.3 | )
|Unrecognized cumulative net gains and assumption
    change effects   |  |               | 1.0  |      |  |   | 1.0  |  
|                                                                      |  |               |      |      |  |   |      |  
|Plan liability before recognition of minimum
    liability adjustment |  |               | 2.3  |      |  |   | 2.1  |  
|Adjustment required to recognize minimum liability                    |  |               |     |      |  |   |     |  
|                                                                      |  |               |      |      |  |   |      |  
|Plan liability                                                        |  | $             | 2.3  |      |  | $ | 2.1  |  
|                                                                      |  |               |      |      |  |   |      |  

In both 2002 and 2001, benefits paid under the
plan were less than $0.1 million. Expense for the retirement
plan, for fiscal years 2002, 2001 and 2000, include the
following cost components:

|               |  |               |     |      |  |      |     |  |  |   |     | 
|-------------- |  | ------------- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|               |  | 2002          |     | 2001 |  | 2000
|               |  |               |     |      |  |     
|               |  |              
|               |  | (In millions)
|Service costs  |  | $             | 0.1 |      |  | $    | 0.1 |  |  | $ | 0.3 | 
|Interest costs |  |               | 0.1 |      |  |      | 0.1 |  |  |   | 0.2 | 
|               |  |               |     |      |  |      |     |  |  |   |     | 
|Plan expense   |  | $             | 0.2 |      |  | $    | 0.2 |  |  | $ | 0.5 | 
|               |  |               |     |      |  |      |     |  |  |   |     | 

F-31



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


The Companys assumptions used in
determining the plan cost and liabilities include a 7.0% per
annum discount rate and a 5% rate of salary progression in 2002
and a 7.5% per annum discount rate and a 5% rate of salary
progression in 2001 and 2000.

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 29, 2002 and December 30, 2001, was
approximately $0.6 million and $0.4 million,
respectively. The net periodic expense for the medical coverage
continuation plan for 2002 and 2000 was approximately
$0.3 million and $42,000, respectively. In 2001, the
Company recognized a $0.1 million benefit in the plan.

Employee Stock Purchase Program.On February 14, 2002 the
Companys board of directors approved an employee stock
purchase plan, the first offering of which was on July 15,
2002. This plan authorizes the issuance of 750,000 shares. As of
December 29, 2002 there are 730,635 shares available for
issuance under the plan. The plan allows eligible employees the
opportunity to purchase stock of the Company at a discount
during an offering period. Each approximate twelve month
offering period consists of two purchase periods of
approximately six months duration wherein the stock purchase
price on the last day of each purchase period is the lesser of
85% of the fair market value of a share of common stock of the
Company on the first day of the offering period or 85% of such
fair market value on the last day of the purchase period. During
2002, employees contributed approximately $0.4 million
under this program.

Note  18 Impairment Charges
and Other

|                                                           |  |               |      |      |  |      |      |  |  |   |      |  
|---------------------------------------------------------- |  | ------------- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | -
|                                                           |  | 2002          |      | 2001 |  | 2000
|                                                           |  |               |      |      |  |     
|                                                           |  |              
|                                                           |  | (In millions)
|Impairment and other write-downs of non-current
    assets |  | $             | 44.6 |      |  | $    | 13.5 |  |  | $ | 7.5  |  
|Unit closures and refurbishments                           |  |               | 1.0  |      |  |      | 0.7  |  |  |   | 5.9  |  
|Net loss (gain) on sale of assets                          |  |               | 4.0  |      |  |      | 1.3  |  |  |   | (6.4 | )
|                                                           |  |               |      |      |  |      |      |  |  |   |      |  
|                                                           |  | $             | 49.6 |      |  | $    | 15.5 |  |  | $ | 7.0  |  
|                                                           |  |               |      |      |  |      |      |  |  |   |      |  

For 2002, 2001 and 2000, included in the
impairment charges above are $26.0 million,
$3.6 million and $4.9 million, respectively,
associated with the impairment of goodwill.

Impairment charges by business segment were as
follows:

|          |  |               |      |      |  |      |      |  |  |   |     | 
|--------- |  | ------------- | ---- | ---- |  | ---- | ---- |  |  | - | --- | 
|          |  | 2002          |      | 2001 |  | 2000
|          |  |               |      |      |  |     
|          |  |              
|          |  | (In millions)
|Chicken   |  | $             | 6.0  |      |  | $    | 7.5  |  |  | $ | 6.1 | 
|Bakery    |  |               | 5.3  |      |  |      | 2.2  |  |  |   | 0.2 | 
|Coffee    |  |               | 33.3 |      |  |      | 3.1  |  |  |   | 0.7 | 
|Corporate |  |               |     |      |  |      | 0.7  |  |  |   | 0.5 | 
|          |  |               |      |      |  |      |      |  |  |   |     | 
|          |  | $             | 44.6 |      |  | $    | 13.5 |  |  | $ | 7.5 | 
|          |  |               |      |      |  |      |      |  |  |   |     | 

Unit closures and refurbishments includes the
accrual of future lease obligations on closed facilities and
other miscellaneous charges associated with the closing or the
re-imaging of company-operated QSRs. Under the Companys
current re-imaging program, the physical structures of its QSRs
are being modernized. This typically involves an interior and
exterior makeover of the QSR along with new logos, uniforms,
menu boards and menu items. During 2002, 2001 and 2000, related
write-downs of non-current assets from unit closures and
refurbishment activities were approximately $5.1 million,
$4.9 million and $7.2 million, respectively.

F-32



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Included in unit closures and
refurbishments are $0.1 million and $0.3 million of costs
in 2001 and 2000, respectively, related to two divested
businesses. Due to the immateriality of such amounts, they have
been presented as a component of continuing operations.

Note  19 Income
Taxes

Total income taxes for fiscal years 2002, 2001
and 2000, were allocated as follows:

|                                                                                                                                         |  |               |      |      |  |      |      |   |  |   |      |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                                                                                                                         |  | 2002          |      | 2001 |  | 2000
|                                                                                                                                         |  |               |      |      |  |     
|                                                                                                                                         |  |              
|                                                                                                                                         |  | (In millions)
|Income from continuing operations                                                                                                        |  | $             | 16.0 |      |  | $    | 13.7 |   |  | $ | 15.7 |  
|Cumulative effect of a change in accounting
    principle                                                                                |  |               |     |      |  |      |     |   |  |   |      |  
|Stockholders equity, for compensation
    expense for tax purposes in excess of amounts recognized for
    financial reporting purposes |  |               | (5.3 | )    |  |      | (4.1 | ) |  |   | (0.2 | )
|                                                                                                                                         |  |               |      |      |  |      |      |   |  |   |      |  
|Total                                                                                                                                    |  | $             | 10.7 |      |  | $    | 9.6  |   |  | $ | 15.5 |  
|                                                                                                                                         |  |               |      |      |  |      |      |   |  |   |      |  

The components of income tax expense included in
the statements of operations were as follows:

|                                       |         |               |      |      |  |      |      |      |   |   |      |     | 
|-------------------------------------- | ------- | ------------- | ---- | ---- |  | ---- | ---- | ---- | - | - | ---- | --- | 
|                                       |         | 2002          |      | 2001 |  | 2000
|                                       |         |               |      |      |  |     
|                                       |         |              
|                                       |         | (In millions)
|Current income tax expense:            |         |               |      |      |  |      |      |      |   |   |      |    
|                                       | Federal |               | $    | 1.0  |  |      | $    | 10.8 |   |   | $    | 4.4 | 
|                                       | Foreign |               |      | 2.1  |  |      |      | 2.3  |   |   |      | 2.4 | 
|                                       | State   |               |      |     |  |      |      | 2.2  |   |   |      | 2.1 | 
|                                       |         |               |      |      |  |      |      |      |   |   |      |    
|                                       |         |               | 3.1  |      |  |      | 15.3 |      |   |   | 8.9  |    
|Deferred income tax expense (benefit): |         |               |      |      |  |      |      |      |   |   |      |    
|                                       | Federal |               |      | 11.5 |  |      |      | (1.6 | ) |   |      | 6.4 | 
|                                       | Foreign |               |      |     |  |      |      |     |   |   |      |    | 
|                                       | State   |               |      | 1.4  |  |      |      |     |   |   |      | 0.4 | 
|                                       |         |               |      |      |  |      |      |      |   |   |      |    
|Income tax expense                     |         | $             | 16.0 |      |  | $    | 13.7 |      |   | $ | 15.7 |    
|                                       |         |               |      |      |  |      |      |      |   |   |      |    

Applicable foreign withholding taxes are
generally deducted from royalties and certain other revenues
collected from international franchisees. Foreign taxes withheld
are generally eligible for credit against the Companys
U.S. income tax liabilities.

A reconciliation of the Federal statutory income
tax rate to the Companys effective tax rate is as follows:

|                                    |  |      |       |      |  |      |      |   |  |  |      |  
|----------------------------------- |  | ---- | ----- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                    |  | 2002 |       | 2001 |  | 2000
|                                    |  |      |       |      |  |     
|Federal income tax rate             |  |      | 35.0  | %    |  |      | 35.0 | % |  |  | 35.0 | %
|State taxes, net of federal benefit |  |      | 21.9  |      |  |      | 4.9  |   |  |  | 4.8  |  
|Non-deductible goodwill             |  |      | 317.8 |      |  |      | 7.7  |   |  |  | 5.6  |  
|Non-deductible meals                |  |      | 4.6   |      |  |      | 0.9  |   |  |  | 0.8  |  
|Benefit of job tax credits          |  |      | (8.3  | )    |  |      | (2.5 | ) |  |  | (1.4 | )
|Other items, net                    |  |      | 1.6   |      |  |      | 0.8  |   |  |  | 1.4  |  
|                                    |  |      |       |      |  |      |      |   |  |  |      |  
|Effective income tax expense rate   |  |      | 372.6 | %    |  |      | 46.8 | % |  |  | 46.2 | %
|                                    |  |      |       |      |  |      |      |   |  |  |      |  

F-33



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and
deferred tax liabilities are presented below:

|                         |                                  |                                  |   |       |       |   |   |       |       |  
|------------------------ | -------------------------------- | -------------------------------- | - | ----- | ----- | - | - | ----- | ----- | -
|                         |                                  | 2002                             |   | 2001 
|                         |                                  |                                  |   |      
|Deferred tax assets:     |                                  |                                  |   |       |       |   |   |      
|                         | Deferred franchise fee revenue   |                                  | $ | 8.4   |       |   | $ | 7.4   |      
|                         | Deferred compensation            |                                  |   | 4.9   |       |   |   | 5.4   |      
|                         | Net operating loss carryforwards |                                  |   | 5.1   |       |   |   | 5.2   |      
|                         | Deferred rentals                 |                                  |   | 4.9   |       |   |   | 4.2   |      
|                         | Property, plant and equipment    |                                  |   |      |       |   |   | 4.1   |      
|                         | Insurance accruals               |                                  |   | 2.8   |       |   |   | 2.4   |      
|                         | Tax credit carryforwards         |                                  |   | 4.6   |       |   |   | 1.8   |      
|                         | Allowance for doubtful accounts  |                                  |   | 1.2   |       |   |   | 1.0   |      
|                         | Other accruals                   |                                  |   | 0.1   |       |   |   | 0.1   |      
|                         | Other assets                     |                                  |   | 5.5   |       |   |   | 6.0   |      
|                         |                                  |                                  |   |       |       |   |   |      
|                         |                                  | Total gross deferred tax assets  |   |       | 37.5  |   |   |       | 37.6  |  
|                         | Less valuation allowance         |                                  |   | (6.5  | )     |   |   | (6.5  | )    
|                         |                                  |                                  |   |       |       |   |   |      
|                         |                                  | Net deferred tax assets          |   | $     | 31.0  |   |   | $     | 31.1  |  
|                         |                                  |                                  |   |       |       |   |   |      
|Deferred tax liabilities |                                  |                                  |   |       |       |   |   |      
|                         | Franchise value and trademarks   |                                  | $ | (35.4 | )     |   | $ | (35.1 | )    
|                         | Property, plant and equipment    |                                  |   | (12.5 | )     |   |   |      |      
|                         |                                  |                                  |   |       |       |   |   |      
|                         |                                  | Total gross deferred liabilities |   |       | (47.9 | ) |   |       | (35.1 | )
|                         |                                  |                                  |   |       |       |   |   |      
|                         |                                  | Net deferred tax liability       |   | $     | (16.9 | ) |   | $     | (4.0  | )
|                         |                                  |                                  |   |       |       |   |   |      

At December 29, 2002 and December 30,
2001, the Company had U.S. Net Operating Losses
(NOLs) of $13.4 million expiring from 2010 to
2013 and tax credit carryforwards in the amounts of
$4.6 million expiring from 2003 to 2014. These NOLs and
$1.8 million of the tax credit carryforwards were acquired
in connection with the Cinnabon acquisition and are subject to
limitations under the Internal Revenue Code. Management has
determined that it is more likely than not that the deferred tax
assets attributable to certain acquired NOLs and tax credit
carryforwards previously described will not be realized and as
such has established a valuation allowance of $6.5 million.
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.

Included in accounts payable at December 29,
2002 and December 30, 2001 are current income taxes payable
in the amount of $7.2 million and $8.1 million,
respectively.

Any subsequently recognized tax benefits relating
to the valuation allowance for deferred tax assets as of
December 29, 2002 would be allocated to goodwill and other
non-current intangible assets.

F-34



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Note  20 Components of Earnings Per
Share Computation

|                                                                       |  |               |       |      |  |      |      |  |  |   |      | 
|---------------------------------------------------------------------- |  | ------------- | ----- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                                                       |  | 2002          |       | 2001 |  | 2000
|                                                                       |  |               |       |      |  |     
|                                                                       |  |              
|                                                                       |  | (In millions)
|Numerators for earning per share computation:                          |  |               |       |      |  |      |      |  |  |   |      | 
|Income (loss) before accounting change                                 |  | $             | 0.1   |      |  | $    | 15.6 |  |  | $ | 18.3 | 
|Accounting change  cumulative effect                                  |  |               | (11.8 | )    |  |      |     |  |  |   |     | 
|                                                                       |  |               |       |      |  |      |      |  |  |   |      | 
|Net (loss) income                                                      |  | $             | (11.7 | )    |  | $    | 15.6 |  |  | $ | 18.3 | 
|                                                                       |  |               |       |      |  |      |      |  |  |   |      | 
|                                                                      
|Denominator for basic earnings per
    share  weighted average shares |  |               | 30.0  |      |  |      | 29.5 |  |  |   | 26.3 | 
|Dilutive employee stock options and warrants                           |  |               | 1.5   |      |  |      | 1.8  |  |  |   | 2.4  | 
|                                                                       |  |               |       |      |  |      |      |  |  |   |      | 
|Denominator for diluted earnings per share                             |  |               | 31.5  |      |  |      | 31.3 |  |  |   | 28.7 | 
|                                                                       |  |               |       |      |  |      |      |  |  |   |      | 

Note  21 Related Party
Transactions

In April and May of 1996, the Company loaned
certain officers of the Company an aggregate of
$4.7 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, bear interest at 6.25% per annum and mature on
December 31, 2003. The notes are secured primarily by
shares of AFC common stock owned by the officers. During 2001,
three of these notes and the associated interest aggregating
approximately $0.1 million were satisfied by assigning to
the Company that portion of the pledged shares having a fair
market value equal to the pay-off amount. The full recourse note
receivable balances, net of any unamortized discounts, interest
receivable balances and payments as of December 29, 2002
and December 30, 2001 are included as a reduction to
shareholders equity in the accompanying consolidated
balance sheets and consolidated statements of shareholders
equity.

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 Cinnabon. During 1999, AFC loaned two officers of
the Company an aggregate of $0.4 million to pay for shares
of common stock offered by other departing officers. All the
individual notes have similar terms. Each full recourse note
bears interest at 7.0% per annum with principal and interest
payable at December 31, 2005. The notes are secured
primarily by the shares purchased by the employees. The note
receivable balances and interest receivable balances, net of
payments, as of December 30, 2001 and December 29,
2002 are included as a reduction to shareholders equity in
the accompanying consolidated balance sheets and consolidated
statements of shareholders equity.

In January 2000, the Company loaned a former AFC
employee $0.2 million to pay personal withholding tax
liabilities incurred as a result of exercising stock options.
The note bears interest at 7.0% per annum with principal and
interest payable on the first to occur of (i) two years
after the date of the note, or (ii) 90 days after the
effective date of an initial public offering of AFCs
common stock. The shares obtained from the option exercise
secured the note. During 2001, the former employee satisfied the
note and associated interest of approximately $0.2 million
by assigning to the Company that portion of the pledged shares
having a fair market value equal to the pay-off amount.

In November 2002, the Company repurchased 838,637
shares of its common stock, at a purchase price of $21.65 per
share, from an equity fund managed by one of the Companys
directors. The repurchase was at the market price and was
effected as part of the Companys share repurchase program
discussed at Note 15. This transaction was approved by an
independent committee of the Companys board of directors.

F-35



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Of the $6.1 million of notes receivable
(including accrued interest and unamortized discounts) due from
officers outstanding at December 29, 2002,
$4.4 million is due December 31, 2003 and the
remainder is due in 2005. The discounts are associated with the
notes issued in 1996 at below then prevailing market rates.

Note  22 Segment
Information

The Company operates exclusively in the
foodservice industry. The Companys reportable segments
combine Popeyes and Churchs operations to form its chicken
segment. The Companys bakery segment includes
Cinnabons operations. The Companys coffee segment
includes the operations of Seattles Best Coffee and
Torrefazione Italia. Inter-segment revenue is eliminated through
corporate revenue. The corporate revenues include rental income
from leasing and sub-leasing agreements with third parties.

|                              |  |                       |       |        |  |        |       |           |  |       |       |   |  |   |       |   |  |   |       |  
|----------------------------- |  | --------------------- | ----- | ------ |  | ------ | ----- | --------- |  | ----- | ----- | - |  | - | ----- | - |  | - | ----- | -
|                              |  | Chicken               |       | Bakery |  | Coffee |       | Corporate |  | Total
|                              |  |                       |       |        |  |        |       |           |  |      
|                              |  |                      
|                              |  | (Dollars in millions)
|2002                          |  |                       |       |        |  |        |       |           |  |       |       |   |  |   |       |   |  |   |       |  
|Total revenues                |  | $                     | 454.9 |        |  | $      | 65.7  |           |  | $     | 96.9  |   |  | $ | 2.1   |   |  | $ | 619.6 |  
|% of consolidated total       |  |                       | 73.4  | %      |  |        | 10.6  | %         |  |       | 15.6  | % |  |   | 0.4   | % |  |   | 100.0 | %
|Operating profit (loss)       |  | $                     | 108.1 |        |  | $      | (12.1 | )         |  | $     | (32.5 | ) |  | $ | (24.8 | ) |  | $ | 38.7  |  
|Depreciation and amortization |  |                       | 18.6  |        |  |        | 5.0   |           |  |       | 5.3   |   |  |   | 0.7   |   |  |   | 29.6  |  
|Capital expenditures          |  |                       | 30.1  |        |  |        | 3.9   |           |  |       | 6.7   |   |  |   | 9.0   |   |  |   | 49.7  |  
|Goodwill  year end           |  |                       | 10.6  |        |  |        | 11.7  |           |  |       | 5.6   |   |  |   |      |   |  |   | 27.9  |  
|Total assets  year end       |  |                       | 274.0 |        |  |        | 67.1  |           |  |       | 71.2  |   |  |   | 75.0  |   |  |   | 487.3 |  
|                             
|2001                          |  |                       |       |        |  |        |       |           |  |       |       |   |  |   |       |   |  |   |       |  
|Total revenues                |  | $                     | 514.8 |        |  | $      | 79.9  |           |  | $     | 90.9  |   |  | $ | 1.6   |   |  | $ | 687.2 |  
|% of consolidated total       |  |                       | 74.9  | %      |  |        | 11.6  | %         |  |       | 13.2  | % |  |   | 0.3   | % |  |   | 100.0 | %
|Operating profit (loss)       |  | $                     | 91.2  |        |  | $      | (3.4  | )         |  | $     | (12.2 | ) |  | $ | (21.7 | ) |  | $ | 53.9  |  
|Depreciation and amortization |  |                       | 27.6  |        |  |        | 7.1   |           |  |       | 4.8   |   |  |   | 0.8   |   |  |   | 40.3  |  
|Capital expenditures          |  |                       | 36.8  |        |  |        | 9.4   |           |  |       | 8.9   |   |  |   | 2.9   |   |  |   | 58.0  |  
|Goodwill  year end           |  |                       | 10.6  |        |  |        | 13.0  |           |  |       | 43.4  |   |  |   |      |   |  |   | 67.0  |  
|Total assets  year end       |  |                       | 275.9 |        |  |        | 81.5  |           |  |       | 107.9 |   |  |   | 60.0  |   |  |   | 525.3 |  
|                             
|2000                          |  |                       |       |        |  |        |       |           |  |       |       |   |  |   |       |   |  |   |       |  
|Total revenues                |  | $                     | 552.9 |        |  | $      | 82.9  |           |  | $     | 86.0  |   |  | $ | 1.4   |   |  | $ | 723.2 |  
|% of consolidated total       |  |                       | 76.4  | %      |  |        | 11.5  | %         |  |       | 11.9  | % |  |   | 0.2   | % |  |   | 100.0 | %
|Operating profit (loss)       |  | $                     | 86.7  |        |  | $      | (1.1  | )         |  | $     | (3.5  | ) |  | $ | (14.8 | ) |  | $ | 67.3  |  
|Depreciation and amortization |  |                       | 29.9  |        |  |        | 6.7   |           |  |       | 4.5   |   |  |   | 0.1   |   |  |   | 41.2  |  
|Capital expenditures          |  |                       | 29.7  |        |  |        | 10.2  |           |  |       | 6.0   |   |  |   | 4.1   |   |  |   | 50.0  |  
|Goodwill  year end           |  |                       | 14.2  |        |  |        | 17.1  |           |  |       | 45.3  |   |  |   |      |   |  |   | 76.6  |  
|Total assets  year end       |  |                       | 299.4 |        |  |        | 87.1  |           |  |       | 100.2 |   |  |   | 61.1  |   |  |   | 547.8 |  

F-36



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Note  23 Restatement of
Financial Statements

The Companys previously issued consolidated
balance sheet as of December 30, 2001 and consolidated
statements of operations, changes in shareholders equity,
and cash flows for the first three quarters of 2002 and for
fiscal years 2001 and 2000 have been restated to correct certain
accounting errors.

The aggregate effect of the restatement decreased
previously reported net income for fiscal years 2001 and 2000 by
$21.3 million and $9.2 million, respectively. The
aggregate effect of the restatement decreased previously
reported basic and diluted earnings per share by $0.73 and
$0.69, respectively, for 2001 and by $0.34 and $0.32,
respectively, for 2000. The restatement also affected years
prior to 2000, reducing shareholders equity at
December 26, 1999 by $5.4 million.

The matters giving rise to the restatement and
the effect of the corrections of those accounting errors on
previously reported earnings for fiscal years 2001 and 2000 were
as follows:

|                                             |          |                     |      |       |       |   |      |       |      |  
|-------------------------------------------- | -------- | ------------------- | ---- | ----- | ----- | - | ---- | ----- | ---- | -
|                                             |          |                    
|                                             |          | Effect of the      
|                                             |          | Corrections on     
|                                             |          | Previously Reported
|                                             |          | Earnings Increase  
|                                             |          | (Decrease)         
|                                             |          |                    
|Issue                                        |          | 2001                |      | 2000 
|                                             |          |                     |      |      
|                                             |          |                    
|                                             |          | (In millions)      
|Gains associated with unit conversions       |          | $                   | (8.9 | )     |       | $ | (3.5 | )    
|Impairment of long-lived assets              |          |                     | (8.4 | )     |       |   | (0.3 | )    
|Post-employment payments to a former officer |          |                     | (2.9 | )     |       |   |     |      
|Cinnabon purchase accounting                 |          |                     | (2.4 | )     |       |   | (1.5 | )    
|Inventory adjustments at Seattle Coffee      |          |                     | (1.8 | )     |       |   | (0.7 | )    
|Equipment placed at Seattle Coffee customers |          |                     | (1.4 | )     |       |   | (1.6 | )    
|Accrued liabilities                          |          |                     | (0.7 | )     |       |   | (1.0 | )    
|Capitalized interest                         |          |                     | (0.9 | )     |       |   | (0.4 | )    
|Business taxes and related professional fees |          |                     | (0.9 | )     |       |   | 0.2  |      
|Slotting fees at Seattle Coffee              |          |                     | (0.9 | )     |       |   | (0.1 | )    
|Beverage rebates                             |          |                     | (0.8 | )     |       |   | 0.3  |      
|Rent expense                                 |          |                     | (0.8 | )     |       |   | (1.0 | )    
|Sales allowances at Seattle Coffee           |          |                     | (0.6 | )     |       |   | (0.2 | )    
|Recognition of re-imaging costs              |          |                     | (0.6 | )     |       |   | 0.3  |      
|Future lease obligations  closed units      |          |                     | 0.8  |       |       |   | (1.3 | )    
|Advertising funds                            |          |                     | (0.4 | )     |       |   | (0.3 | )    
|Leasehold improvement  useful lives         |          |                     | (0.3 | )     |       |   | (0.1 | )    
|Legal accrual                                |          |                     |     |       |       |   | 1.5  |      
|Capitalized expenses                         |          |                     |     |       |       |   | (1.3 | )    
|Workers compensation accrual                |          |                     |     |       |       |   | (1.3 | )    
|Group medical insurance accrual              |          |                     |     |       |       |   | (1.0 | )    
|Other                                        |          |                     | 0.3  |       |       |   | 0.1  |      
|                                             |          |                     |      |       |       |   |      |      
|                                             | Subtotal |                     |      | (31.6 | )     |   |      | (13.2 | )   
|Income tax effect                            |          |                     | 10.3 |       |       |   | 4.0  |      
|                                             |          |                     |      |       |       |   |      |      
|                                             |          | Total               |      | $     | (21.3 | ) |      | $     | (9.2 | )
|                                             |          |                     |      |       |       |   |      |      

F-37



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Gains Associated With Unit Conversions.The Companys prior
accounting treatment regarding the sale of assets to a
franchisee in connection with a unit conversion was, in most
cases, to recognize gains immediately. The Company has
determined that a portion of such gains should have been
deferred in circumstances where the Company maintains some
continuing involvement with the assets beyond the customary
franchisor role. The calculation of the gain was also decreased
by the allocation of goodwill to each unit conversion. The
deferred amounts of these gains are being recognized as income
over the period of continuing involvement.

Impairment of Long-Lived Assets.The Companys prior
accounting treatment regarding impairment of long-lived assets
was to evaluate company-operated QSRs on a market basis. The
Company has determined that the evaluation should have been
performed on a site-by-site basis which is the lowest level of
identifiable cash flows as required by SFAS 121.
Accordingly the Company adjusted its long-lived asset impairment
charges (including an adjustment to record $3.0 million and
zero impairment of goodwill allocated to the individual units in
2001 and 2000, respectively) to reflect the evaluation on a
site-by-site basis.

Post-Employment Payments to a Former
Officer.Beginning in 2001, the
Company expensed certain post-employment payments to a former
officer as the payments were made over the term of the ten-year
agreement. The Company has determined that the entire obligation
to the former officer should have been recorded when the
agreement became effective, since no additional services were
required to be performed. Accordingly, the Company expensed the
entire obligation in 2001.

Cinnabon Purchase Accounting.In the 1998 acquisition of
Cinnabon, the Company accrued certain costs as acquisition costs
and recorded 100% of the purchase price in excess of the fair
value of the net assets acquired as goodwill. The Company has
determined that certain of the acquisition costs accrued should
have been expensed as incurred. In addition, the Company has
determined that the allocation of the purchase price to the fair
values of acquired bakeries and identifiable intangible assets
were understated. The Company has reversed certain costs
initially accrued in the acquisition and the expenses are
recorded in the Companys statements of operations as
incurred. The purchase price allocation has been adjusted for
the respective identifiable assets and the related depreciation
and amortization expenses have been adjusted in the statements
of operations.

Inventory Adjustments at Seattle Coffee.In the third quarter of 2002, the
Company identified errors relating to Seattle Coffees
inventory costing. The Company has determined that the
adjustments relate to 2001 and 2000 and, accordingly, has
reflected such adjustments in those years.

Equipment Placed at Seattle Coffee
Customers.Historically, Seattle
Coffee has placed certain equipment at customer locations, the
cost of which was capitalized. The Company determined that such
costs should have been recognized as marketing expenses.
Accordingly, the Company recorded adjustments to expense the
cost of such equipment in the periods it was placed in service.

Accrued
Liabilities.The Company corrected
accrual accounts for errors in computation and timing of expense
recognition. Accounts affected by these adjustments include
accruals for business insurance, employee relocations,
advertising, management bonuses and other miscellaneous
accounts. The Company made adjustments to record the associated
accruals based on correct computations and in the appropriate
periods.

Capitalized Interest.The Companys computation of
interest to be capitalized was based upon applying an interest
rate to a group of assets which included completed projects. As
a result, the Company determined the calculation should be
adjusted using only those assets where construction was in
progress and all other amounts were expensed as interest expense.

F-38



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Business Taxes and Related Professional
Fees.The Companys prior
accounting treatment was to accrue professional tax fees in the
Companys tax liability accounts. Adjustments were made to
reclassify these professional fees to general liability accounts
and expense business taxes and related professional fees as
incurred.

Slotting Fees at Seattle Coffee.Seattle Coffee capitalized amounts
paid to its wholesale customers for favorable shelf positioning
for its products and amortized the amounts over a two-year
period. The Company has determined that when the specified term
of the slotting agreement was not expressed in a written
contract, the payments made to customers should have been
expensed as sales discounts when incurred. Accordingly, the
Company has expensed these amounts in the periods incurred
unless an underlying written contract supports capitalization
and amortization over a specified term.

Beverage Rebates.The Companys prior
accounting treatment was to record rebates from beverage vendors
when received. The Company has determined that these rebates
should have been recorded in the periods earned. Accordingly,
adjustments have been made to recognize the rebates in the
periods earned.

Rent Expense.The Company recorded rent expense
on a straight-line basis over the initial lease term for certain
of its leases. The Company has determined that rent expense for
all leases should be calculated using the straight-line basis
over the lease term (inclusive of renewal options the Company
was reasonably expected to exercise). Accordingly, the Company
has adjusted rent expense during 2001 and 2000 to record rent
expense on the straight-line basis. The effect of this
adjustment on years prior to 2000 reduced shareholders
equity at December 26, 1999 by $3.8 million before
giving effect to income taxes.

Sales Allowances at Seattle Coffee.Seattle Coffee recorded certain
sales discounts and allowances that were offered to customers in
the period when such discounts were paid. The Company has
determined that such discounts and allowances should have been
estimated and accrued in the period of the associated sales.
Accordingly, the Company has adjusted its provisions for sales
allowances and returns to recognize the expense in the period
that the related revenue was earned.

Recognition of Re-imaging Costs.The Companys accounting
treatment for the recognition of reimaging costs was based upon
accruing those costs on the planned dates of the reimaging
activities. The Company determined that the reimaging costs
should have been recorded based upon the actual dates of the
reimaging activities. Accordingly, the Company adjusted the
reimaging costs to record the costs in the period incurred.

Future Lease Obligations  Closed
Units.The Company recorded lease
obligations associated with closed units net of anticipated
sublease rental income. The Company determined that the sublease
rental income was not reasonably supported. Accordingly, the
Company recalculated the estimated future lease obligation for
certain closed units using 100% of the remaining lease
obligation.

Advertising Funds.Historically, the Popeyes
and Churchs advertising funds were not consolidated in the
Companys financial statements. The Company determined that
these accounts should have been consolidated because the Company
has control of certain activities. Accordingly, the advertising
funds accounts have been consolidated in accordance with
SFAS 45, Accounting for Franchise Fee Revenue.
Contributions received from franchisees related to the funds and
the associated expenses of the funds are accounted for using the
agency method.

Leasehold Improvements  Useful
Lives.The Companys
depreciable lives used for leasehold improvements were based
upon the useful lives of the assets. The Company determined that
for certain leasehold improvements, the depreciable life was
longer than the remaining term of the associated lease.
Accordingly, the Company adjusted depreciation expense to
recognize the effect of reducing the depreciable life to the
lease term.

F-39



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Legal Accrual.The Company was under accrued for
legal reserves at the end of 1999 and made an adjustment to
increase the accrual in 2000. The Company has determined that
the adjustment should have been made in 1999 and, accordingly,
reflected the adjustment in the appropriate period.

Capitalized Expenses.The Company had capitalized
certain amounts including construction overhead costs and other
amounts which the Company determined should have been expensed
as incurred. Accordingly, the Company has made adjustments to
expense those items in the period the costs were incurred.

Workers Compensation Accrual.The Companys workers
compensation accrual at the end of 1999 was overstated and an
adjustment was made to decrease the accrual in 2000. The Company
has determined that the adjustment should have been made in
1999. Accordingly, the Company has reflected the adjustment in
the appropriate period.

Group Medical Insurance Accrual.The Companys group medical
insurance accrual at the end of 1999 was overstated and an
adjustment was made to decrease the accrual in 2000. The Company
has determined that the adjustment should have been made in
1999. Accordingly, the Company has reflected the adjustment in
the appropriate period.

Other.Other
adjustments were made, none of which were individually material.

Income Tax Effect.The income tax effect of the
restatement adjustments is calculated using the Companys
statutory income tax rates, adjusted for non-deductible items.

The following table compares previously reported
results of operations with restated amounts for fiscal years
2001 and 2000. See Note 25 for a comparison of previously
reported amounts and restated amounts by quarter. The notes to
the table describe where amounts presented below aggregate
amounts presented separately in the Companys Annual Report
on Form 10-K for 2001. In addition to the restatement
adjustments, the as restated columns include certain
reclassifications to conform to the 2002 statement

F-40



---



##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


of operations presentation. These
reclassifications have not been made to the as previously
reported columns. The reclassifications relate to gains
and losses and certain fees associated with unit conversions.

|                                                             |                |                |       |          |       |               |       |          |       |   |       |       |       |   |       |       |       | 
|------------------------------------------------------------ | -------------- | -------------- | ----- | -------- | ----- | ------------- | ----- | -------- | ----- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                                                             |                |                |       |         
|                                                             |                | 2001           |       | 2000    
|                                                             |                |                |       |         
|                                                             |                | As Previously  |       | As       |       | As Previously |       | As      
|                                                             |                | Reported       |       | Restated |       | Reported      |       | Restated
|                                                             |                |                |       |          |       |               |       |         
|                                                             |                |               
|                                                             |                | (In millions) 
|Revenues:                                                    |                |                |       |          |       |               |       |          |       |   |       |       |       |   |       |      
|Sales by company-operated restaurants                        |                | $              | 507.0 |          |       | $             | 507.0 |          |       | $ | 567.4 |       |       | $ | 567.4 |      
|Franchise revenues                                           |                |                | 106.3 |          |       |               | 101.1 |          |       |   | 90.4  |       |       |   | 88.7  |      
|Wholesale revenues                                           |                |                | 64.8  |          |       |               | 61.1  |          |       |   | 56.7  |       |       |   | 55.9  |      
|Other revenues                                               |                |                | 14.5  |          |       |               | 18.0  |          |       |   | 10.7  |       |       |   | 11.2  |      
|                                                             |                |                |       |          |       |               |       |          |       |   |       |       |       |   |       |      
|                                                             |                | Total revenues |       |          | 692.6 |               |       |          | 687.2 |   |       |       | 725.2 |   |       |       | 723.2 | 
|                                                             |                |                |       |          |       |               |       |          |       |   |       |       |       |   |       |      
|Expenses:                                                    |                |                |       |          |       |               |       |          |       |   |       |       |       |   |       |      
|Restaurant employee, occupancy and other expenses            |                |                | 257.8 |          |       |               | 260.1 |          |       |   | 292.5 |       |       |   | 299.1 |      
|Restaurant food, beverages and packaging                     |                |                | 148.0 |          |       |               | 147.1 |          |       |   | 162.5 |       |       |   | 159.0 |      
|General and administrative expenses                          |                |                | 108.0 |          |       |               | 116.0 |          |       |   | 102.4 |       |       |   | 103.3 |      
|Wholesale cost of sales and operating expenses               |                |                | 51.7  | (a)      |       |               | 54.3  |          |       |   | 43.5  | (a)   |       |   | 46.3  |      
|Depreciation and amortization                                |                |                | 41.3  |          |       |               | 40.3  |          |       |   | 41.8  |       |       |   | 41.2  |      
|Impairment charges and other                                 |                |                |      | (b)      |       |               | 15.5  |          |       |   | 0.9   | (b)   |       |   | 7.0   |      
|                                                             |                |                |       |          |       |               |       |          |       |   |       |       |       |   |       |      
|                                                             | Total expenses |                |       | 606.8    |       |               |       | 633.3    |       |   |       | 643.6 |       |   |       | 655.9 |      
|                                                             |                |                |       |          |       |               |       |          |       |   |       |       |       |   |       |      
|Operating profit                                             |                |                | 85.8  |          |       |               | 53.9  |          |       |   | 81.6  |       |       |   | 67.3  |      
|Interest expense, net                                        |                |                | 23.2  |          |       |               | 24.6  |          |       |   | 33.9  |       |       |   | 33.3  |      
|                                                             |                |                |       |          |       |               |       |          |       |   |       |       |       |   |       |      
|Income before income taxes                                   |                |                | 62.6  |          |       |               | 29.3  |          |       |   | 47.7  |       |       |   | 34.0  |      
|Income tax expense                                           |                |                | 24.7  |          |       |               | 13.7  |          |       |   | 20.0  |       |       |   | 15.7  |      
|                                                             |                |                |       |          |       |               |       |          |       |   |       |       |       |   |       |      
|Income from continuing operations                            |                |                | 37.9  |          |       |               | 15.6  |          |       |   | 27.7  |       |       |   | 18.3  |      
|Extraordinary loss on debt extinguishments, net
    of taxes |                |                | 1.0   | (c)      |       |               |      |          |       |   | 0.2   | (c)   |       |   |      |      
|Discontinued operations, net of taxes                        |                |                |      |          |       |               |      |          |       |   |      | (d)   |       |   |      |      
|                                                             |                |                |       |          |       |               |       |          |       |   |       |       |       |   |       |      
|Net income                                                   |                | $              | 36.9  |          |       | $             | 15.6  |          |       | $ | 27.5  |       |       | $ | 18.3  |      
|                                                             |                |                |       |          |       |               |       |          |       |   |       |       |       |   |       |      



---



|    |                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Amount includes wholesale cost of sales and
    wholesale operating expenses.                                                                                                                                                                                                                                                                  
|   
|(b) | Amount includes charges for restaurant closings,
    including Pine Tree, charges for asset write-offs from
    re-imaging, software write-offs, restructuring charges, charges
    for other asset write-offs and net gain (loss) on sale of
    assets.                                                                                      
|   
|(c) | Following the guidance of SFAS 145, the as
    restated amounts have classified losses associated with
    early debt extinguishments as a component of interest expense
    and the associated income tax benefit as a component of income
    tax expense.                                                                                 
|   
|(d) | In 2000, the Company had less than
    $0.1 million of net losses associated with a discontinued
    operation whose revenues were $3.3 million. In the as
    restated amounts, this loss was classified as a component
    of impairment charges and other, and the associated income tax
    benefit is a component of income tax expense.

F-41



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


The following table compares previously reported
balance sheet amounts with restated amounts as of
December 30, 2001. The notes below the table describe where
amounts presented below aggregate amounts presented separately
in the Companys Annual Report on Form 10-K for 2001.
In addition to the restatement adjustments, the as
restated column includes certain reclassifications to
conform to the 2002 balance sheet presentation. These
reclassifications have not been made to the as previously
reported column. The reclassifications relate to bank
overdrafts and certain accruals.

|                                            |                                                  |                                            |       |           |       |   |       |       |       | 
|------------------------------------------- | ------------------------------------------------ | ------------------------------------------ | ----- | --------- | ----- | - | ----- | ----- | ----- | 
|                                            |                                                  | 2001                                       |       | 2001     
|                                            |                                                  |                                            |       |          
|                                            |                                                  | (As                                        |       |          
|                                            |                                                  | Previously                                 |       | (As      
|                                            |                                                  | Reported)                                  |       | Restated)
|                                            |                                                  |                                            |       |          
|                                            |                                                  |                                           
|                                            |                                                  | (In millions)                             
|ASSETS                                      |                                                  |                                            |       |           |       |   |       |      
|Current assets:                             |                                                  |                                            |       |           |       |   |       |      
|Cash and cash equivalents                   |                                                  | $                                          | 12.8  |           |       | $ | 5.1   |      
|Accounts and current notes receivable, net  |                                                  |                                            | 24.6  |           |       |   | 27.7  |      
|Inventories                                 |                                                  |                                            | 16.1  |           |       |   | 15.9  |      
|Prepaid income taxes                        |                                                  |                                            | 1.6   |           |       |   | 12.2  |      
|Other current assets                        |                                                  |                                            | 4.1   | (a)       |       |   | 13.6  |      
|                                            |                                                  |                                            |       |           |       |   |       |      
|                                            |                                                  | Total current assets                       |       |           | 59.2  |   |       |       | 74.5  | 
|Long-term assets:                           |                                                  |                                            |       |           |       |   |       |      
|Property and equipment, net                 |                                                  |                                            | 255.1 |           |       |   | 238.2 |      
|Goodwill                                    |                                                  |                                            | 101.8 |           |       |   | 67.0  |      
|Trademarks and other intangible assets, net |                                                  |                                            | 73.5  | (b)       |       |   | 114.8 |      
|Other long-term assets, net                 |                                                  |                                            | 33.6  | (c)       |       |   | 30.8  |      
|                                            |                                                  |                                            |       |           |       |   |       |      
|                                            |                                                  | Total long-term assets                     |       |           | 464.0 |   |       |       | 450.8 | 
|                                            |                                                  |                                            |       |           |       |   |       |      
|                                            |                                                  | Total assets                               |       | $         | 523.2 |   |       | $     | 525.3 | 
|                                            |                                                  |                                            |       |           |       |   |       |      
|LIABILITIES AND SHAREHOLDERS
    EQUITY    |                                                  |                                            |       |           |       |   |       |      
|Current liabilities:                        |                                                  |                                            |       |           |       |   |       |      
|Accounts payable                            |                                                  | $                                          | 43.0  | (d)       |       | $ | 59.0  |      
|Accrued liabilities                         |                                                  |                                            | 19.0  | (e)       |       |   | 17.8  |      
|Current debt maturities                     |                                                  |                                            | 33.6  | (f)       |       |   | 33.7  |      
|                                            |                                                  |                                            |       |           |       |   |       |      
|                                            |                                                  | Total current liabilities                  |       |           | 95.6  |   |       |       | 110.5 | 
|Long-term liabilities:                      |                                                  |                                            |       |           |       |   |       |      
|                                            | Long-term debt                                   |                                            |       | 175.8     | (g)   |   |       | 175.8 |      
|                                            | Deferred credits and other long-term liabilities |                                            |       | 28.1      |       |   |       | 51.7  |      
|                                            |                                                  |                                            |       |           |       |   |       |      
|                                            |                                                  | Total long-term liabilities                |       |           | 203.9 |   |       |       | 227.5 | 
|Shareholders equity:                       |                                                  |                                            |       |           |       |   |       |      
|Preferred stock                             |                                                  |                                            |      |           |       |   |      |      
|Common stock                                |                                                  |                                            | 0.3   |           |       |   | 0.3   |      
|Capital in excess of par value              |                                                  |                                            | 212.6 |           |       |   | 212.1 |      
|Notes receivable from officers              |                                                  |                                            | (7.7  | )         |       |   | (7.7  | )    
|Accumulated losses                          |                                                  |                                            | 18.5  |           |       |   | (17.4 | )    
|                                            |                                                  |                                            |       |           |       |   |       |      
|                                            |                                                  | Total shareholders equity                 |       |           | 223.7 |   |       |       | 187.3 | 
|                                            |                                                  |                                            |       |           |       |   |       |      
|                                            |                                                  | Total liabilities and shareholders equity |       | $         | 523.2 |   |       | $     | 525.3 | 
|                                            |                                                  |                                            |       |           |       |   |       |      



---



|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(a) | Amount includes deferred income taxes and prepaid
    expenses and other.                                                      
|   
|(b) | Amount includes franchise value and trade name,
    net and other intangible assets, net.                                      
|   
|(c) | Amount includes notes receivable, net, deferred
    income taxes, assets under contractual agreement, net and other
    assets.

F-42



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000




|    |                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(d) | Amount includes accounts payable, income taxes
    payable and bank overdrafts.                                                                                   
|   
|(e) | Amount includes accrued interest, accrued
    insurance expenses, accrued employee compensation, accrued
    employee benefit expenses and other accrued expenses.



|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(f) | Amount includes current portion of long-term
    debt, the current portion of capital lease obligations,
    short-term borrowings and the current portion of acquisition
    line of credit from.



|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(g) | Amount includes long-term debt, net of current
    portion and capital lease obligations, net of current portion.

The following table compares previously reported
cash flow amounts with restated amounts for fiscal years 2001
and 2000.

|                                            |                                 |               |       |          |   |            |       |          |   |   |       |     |  |   |       |      |  
|------------------------------------------- | ------------------------------- | ------------- | ----- | -------- | - | ---------- | ----- | -------- | - | - | ----- | --- |  | - | ----- | ---- | -
|                                            |                                 |               |       |         
|                                            |                                 | 2001          |       | 2000    
|                                            |                                 |               |       |         
|                                            |                                 | As            |       |          |   | As         |       |         
|                                            |                                 | Previously    |       | As       |   | Previously |       | As      
|                                            |                                 | Reported      |       | Restated |   | Reported   |       | Restated
|                                            |                                 |               |       |          |   |            |       |         
|                                            |                                 |              
|                                            |                                 | (In millions)
|Cash flows provided by operating activities |                                 | $             | 71.3  |          |   | $          | 57.4  |          |   | $ | 62.3  |     |  | $ | 59.9  |     
|Cash flows used in investing activities     |                                 |               | (21.7 | )        |   |            | (17.5 | )        |   |   | (24.8 | )   |  |   | (19.9 | )   
|Cash flows used in financing activities     |                                 |               | (60.4 | )        |   |            | (50.0 | )        |   |   | (36.4 | )   |  |   | (40.4 | )   
|                                            |                                 |               |       |          |   |            |       |          |   |   |       |     |  |   |       |     
|                                            | Net (decrease) increase in cash |               | $     | (10.8    | ) |            | $     | (10.1    | ) |   | $     | 1.1 |  |   | $     | (0.4 | )
|                                            |                                 |               |       |          |   |            |       |          |   |   |       |     |  |   |       |     

Note  24 Subsequent
Events

Seattle Coffee Divestiture.On July 14, 2003, the Company
sold its Seattle Coffee subsidiary to Starbucks Corporation for
$72.0 million. Net proceeds of the sale, after transaction
costs and adjustments, are expected to be approximately
$63.0 million, which is subject to adjustment based upon
the determination of certain financial results of Seattle Coffee
for pre-closing periods of operation. In this transaction, the
Company sold substantially all of the continental U.S. and
Canadian operations of Seattle Coffee, and its wholesale coffee
business. Following this transaction, the Company continues to
franchise the Seattles Best Coffee brand in retail
locations in Hawaii, in certain international markets outside
North America and on certain U.S. military bases. The Company is
currently in the process of finalizing the terms of any
remaining purchase price adjustments and does not expect that
any gain or loss on this transaction will be material in 2003.

Pursuant to the terms of the 2002 Credit
Facility, the Company is required to use the proceeds from the
sale of Seattle Coffee to pay down indebtedness under the
facility in addition to that otherwise reflected in the schedule
of debt maturities at Note 10. On July 17, 2003, the
Company paid down $31.3 million of indebtedness under the
facility. On October 31, 2003, the Company paid down another
$29.2 million of indebtedness. An additional payment of
approximately $2.5 million (representing the remaining
estimated net proceeds from the Seattle Coffee sale) may be
required.

Amendments to the 2002 Credit Facility.On March 31, 2003,
May 30, 2003, July 14, 2003, August 22, 2003 and
October 30, 2003, the Company amended its 2002 Credit
Facility. The effect of these amendments was to:



| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Extend, for purposes of the facility, the filing
    deadline for the Companys 2002 Annual Report on
    Form 10-K to December 15, 2003.                                                    
|
| |  | Extend, for purposes of the facility, the filing
    deadline for the Companys Quarterly Reports on
    Form 10-Q for the first, second and third quarters of 2003
    to February 28, 2004.

F-43



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000




| |   |                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Raise the interest rate on outstanding
    indebtedness under the 2002 Credit Facility (see Note 10) until
    such time as the Company has satisfied its 2002 annual reporting
    requirement, its 2003 quarterly reporting requirements and
    attained a bank credit rating of Ba3 and BB-, or better, by each
    of Moodys and Standard & Poors, respectively.          
|
| |  | Temporarily reduce the Companys revolving
    line of credit from $75.0 million to $65.0 million
    until the Company files and delivers all of the required
    financial statements and demonstrates a total leverage ratio of
    not greater than two to one, at which time the revolving line of
    credit limit will return to the original amount of
    $75.0 million.
|
| |  | Approve the Seattle Coffee divestiture.                                                                                                                                                                                                                                                                                                                                          
|
| |  | Deposit $2.8 million in a collateral
    account. This occurred on October 31, 2003.                                                                                                                                                                                                                                                                                             
|
| |  | Adjust the computation of certain loan covenant
    ratios in 2003 so as to exclude from the computations certain
    costs of a productivity study performed in the first quarter of
    2003, subject to certain monetary limits, and the various costs
    associated with the restatement of the Companys previously
    issued financial statements.                       

In conjunction with these amendments, the Company
paid fees of approximately $2.4 million in 2003.

Information Technology
Outsourcing  IBM.In
August 1994, the Company entered into an information technology
outsourcing contract with IBM. The contract was amended in June
1999. During 2002, pursuant to the terms and conditions of the
contract, the Company gave written notice to cancel it effective
January 1, 2003. No future minimum payments exist under
this contract. Operating expenses of approximately
$7.8 million, $8.2 million and $8.0 million
related to it are included in the statements of operations for
the years 2002, 2001 and 2000, respectively.

On April 1, 2003, the Company entered into a
new outsourcing service contract with IBM, which expires
March 31, 2010. Future minimum payments under this contract
are as follows:

|           |  |               |      | 
|---------- |  | ------------- | ---- | 
|           |  | (In millions)
|           |  |              
|2003       |  | $             | 4.1  | 
|2004       |  |               | 5.4  | 
|2005       |  |               | 5.0  | 
|2006       |  |               | 4.8  | 
|2007       |  |               | 4.5  | 
|Thereafter |  |               | 9.6  | 
|           |  |               |      | 
|           |  | $             | 33.4 | 
|           |  |               |      | 

F-44



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


Note  25 Quarterly Financial Data
(Unaudited)

The financial information for the first three
quarters of 2002 and all quarters of 2001 presented below have
been restated from amounts previously reported, for the various
matters discussed in Note 23. For the first three quarters
of 2002, the aggregate effects of the various restatement items
increased previously reported net income by $3.1 million.

|                                         |  |                                      |       |         |  |         |       |           |  |   |       |  |  |   |       |  
|---------------------------------------- |  | ------------------------------------ | ----- | ------- |  | ------- | ----- | --------- |  | - | ----- |  |  | - | ----- | -
|                                         |  |                                     
|                                         |  | 2002                                
|                                         |  |                                     
|                                         |  | First(a)                             |       | Second  |  | Third   |       | Fourth(b)
|                                         |  | Quarter                              |       | Quarter |  | Quarter |       | Quarter  
|                                         |  |                                      |       |         |  |         |       |          
|                                         |  |                                     
|                                         |  | (In millions, except per share data)
|Results of Operations                    |  |                                      |       |         |  |         |       |           |  |   |       |  |  |   |       |  
|Total revenues                           |  | $                                    | 194.8 |         |  | $       | 149.5 |           |  | $ | 134.7 |  |  | $ | 140.6 |  
|Operating profit (loss)                  |  |                                      | 29.0  |         |  |         | 18.5  |           |  |   | 17.8  |  |  |   | (26.6 | )
|Income (loss) before accounting change   |  |                                      | 14.9  |         |  |         | 3.4   |           |  |   | 9.9   |  |  |   | (28.1 | )
|Net income (loss)                        |  |                                      | 3.1   |         |  |         | 3.4   |           |  |   | 9.9   |  |  |   | (28.1 | )
|                                        
|Basic earnings (loss) per common share   |  |                                      |       |         |  |         |       |           |  |   |       |  |  |   |       |  
|Income (loss) before accounting change   |  | $                                    | 0.49  |         |  | $       | 0.11  |           |  | $ | 0.33  |  |  | $ | (1.01 | )
|Net income (loss)                        |  |                                      | 0.10  |         |  |         | 0.11  |           |  |   | 0.33  |  |  |   | (1.01 | )
|                                        
|Diluted earnings (loss) per common share |  |                                      |       |         |  |         |       |           |  |   |       |  |  |   |       |  
|Income (loss) before accounting change   |  | $                                    | 0.46  |         |  | $       | 0.10  |           |  | $ | 0.31  |  |  | $ | (1.01 | )
|Net income (loss)                        |  |                                      | 0.10  |         |  |         | 0.10  |           |  |   | 0.31  |  |  |   | (1.01 | )

|                                  |  |                                      |       |         |  |         |       |           |  |   |       |  |  |   |       | 
|--------------------------------- |  | ------------------------------------ | ----- | ------- |  | ------- | ----- | --------- |  | - | ----- |  |  | - | ----- | 
|                                  |  |                                     
|                                  |  | 2001                                
|                                  |  |                                     
|                                  |  | First(a)                             |       | Second  |  | Third   |       | Fourth(b)
|                                  |  | Quarter                              |       | Quarter |  | Quarter |       | Quarter  
|                                  |  |                                      |       |         |  |         |       |          
|                                  |  |                                     
|                                  |  | (In millions, except per share data)
|Results of Operations             |  |                                      |       |         |  |         |       |           |  |   |       |  |  |   |       | 
|Total revenues                    |  | $                                    | 210.3 |         |  | $       | 161.0 |           |  | $ | 157.3 |  |  | $ | 158.6 | 
|Operating profit                  |  |                                      | 15.8  |         |  |         | 16.0  |           |  |   | 15.9  |  |  |   | 6.2   | 
|Income before accounting change   |  |                                      | 3.8   |         |  |         | 5.5   |           |  |   | 5.2   |  |  |   | 1.1   | 
|Net income                        |  |                                      | 3.8   |         |  |         | 5.5   |           |  |   | 5.2   |  |  |   | 1.1   | 
|                                 
|Basic earnings per common share   |  |                                      |       |         |  |         |       |           |  |   |       |  |  |   |       | 
|Income before accounting change   |  | $                                    | 0.14  |         |  | $       | 0.18  |           |  | $ | 0.18  |  |  | $ | 0.03  | 
|Net income                        |  |                                      | 0.14  |         |  |         | 0.18  |           |  |   | 0.18  |  |  |   | 0.03  | 
|                                 
|Diluted earnings per common share |  |                                      |       |         |  |         |       |           |  |   |       |  |  |   |       | 
|Income before accounting change   |  | $                                    | 0.13  |         |  | $       | 0.17  |           |  | $ | 0.17  |  |  | $ | 0.03  | 
|Net income                        |  |                                      | 0.13  |         |  |         | 0.17  |           |  |   | 0.17  |  |  |   | 0.03  | 



---



|    |                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | In 2002 and 2001, the Companys first
    quarter contained sixteen weeks. The remaining quarters contain
    twelve weeks.                                                                                                                                                                                         
|   
|(b) | Other than the impairment losses discussed in
    Note 18, there were no significant fourth quarter adjustments in
    2002 or 2001. In addition, the Companys Cinnabon bakeries
    and Seattle Coffee cafes have traditionally experienced the
    strongest operating results during the holiday shopping season

F-45



---



##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000




| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | between Thanksgiving and New Years. Any
    factors that cause reduced traffic at these locations between
    Thanksgiving and New Years would impair their ability to
    achieve normal operating results.



| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the fourth quarter of 2002, due to the
    Companys loss before accounting change, the dilutive
    effect of stock options were excluded from the denominator for
    the Companys fully diluted loss per share computation.
    Thus, the basic and fully diluted loss per share are the same.

As discussed in Note 23, the Company has
restated its previously reported financial statements to correct
for certain accounting errors. The following tables summarize
the effect of the restatement for the first three quarters of
2002 and for all four quarters of 2001 and 2000.

|                                         |  |                                      |       |                |  |               |       |          |  |            |       |          |  |   |       |  |  |   |       |  |  |   |       | 
|---------------------------------------- |  | ------------------------------------ | ----- | -------------- |  | ------------- | ----- | -------- |  | ---------- | ----- | -------- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                         |  |                                     
|                                         |  | 2002                                
|                                         |  |                                     
|                                         |  |                                      |       |                |  |              
|                                         |  | First Quarter                        |       | Second Quarter |  | Third Quarter
|                                         |  |                                      |       |                |  |              
|                                         |  | As                                   |       |                |  | As            |       |          |  | As         |       |         
|                                         |  | Previously                           |       | As             |  | Previously    |       | As       |  | Previously |       | As      
|                                         |  | Reported                             |       | Restated       |  | Reported      |       | Restated |  | Reported   |       | Restated
|                                         |  |                                      |       |                |  |               |       |          |  |            |       |         
|                                         |  |                                     
|                                         |  | (In millions, except per share data)
|Operating Results                        |  |                                      |       |                |  |               |       |          |  |            |       |          |  |   |       |  |  |   |       |  |  |   |       | 
|Total revenues                           |  | $                                    | 194.4 |                |  | $             | 194.8 |          |  | $          | 149.7 |          |  | $ | 149.5 |  |  | $ | 135.2 |  |  | $ | 134.7 | 
|Operating profit                         |  |                                      | 26.4  |                |  |               | 29.0  |          |  |            | 24.5  |          |  |   | 18.5  |  |  |   | 18.5  |  |  |   | 17.8  | 
|Income before accounting change          |  |                                      | 13.0  |                |  |               | 14.9  |          |  |            | 7.0   |          |  |   | 3.4   |  |  |   | 10.6  |  |  |   | 9.9   | 
|Net income (loss)                        |  |                                      | (4.4  | )              |  |               | 3.1   |          |  |            | 7.0   |          |  |   | 3.4   |  |  |   | 10.6  |  |  |   | 9.9   | 
|Basic earnings (loss) per common share   |  |                                      |       |                |  |               |       |          |  |            |       |          |  |   |       |  |  |   |       |  |  |   |       | 
|Income before accounting change          |  | $                                    | 0.42  |                |  | $             | 0.49  |          |  | $          | 0.23  |          |  | $ | 0.11  |  |  | $ | 0.35  |  |  | $ | 0.33  | 
|Net income (loss)                        |  |                                      | (0.15 | )              |  |               | 0.10  |          |  |            | 0.23  |          |  |   | 0.11  |  |  |   | 0.35  |  |  |   | 0.33  | 
|Diluted earnings (loss) per common share |  |                                      |       |                |  |               |       |          |  |            |       |          |  |   |       |  |  |   |       |  |  |   |       | 
|Income before accounting change          |  | $                                    | 0.40  |                |  | $             | 0.46  |          |  | $          | 0.22  |          |  | $ | 0.10  |  |  | $ | 0.34  |  |  | $ | 0.31  | 
|Net income (loss)                        |  |                                      | (0.14 | )              |  |               | 0.10  |          |  |            | 0.22  |          |  |   | 0.10  |  |  |   | 0.34  |  |  |   | 0.31  | 

|                                  |  |                                      |       |                |  |               |       |                |  |            |       |          |  |            |       |          |  |   |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|--------------------------------- |  | ------------------------------------ | ----- | -------------- |  | ------------- | ----- | -------------- |  | ---------- | ----- | -------- |  | ---------- | ----- | -------- |  | - | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                  |  |                                     
|                                  |  | 2001                                
|                                  |  |                                     
|                                  |  |                                      |       |                |  |               |       |               
|                                  |  | First Quarter                        |       | Second Quarter |  | Third Quarter |       | Fourth Quarter
|                                  |  |                                      |       |                |  |               |       |               
|                                  |  | As                                   |       |                |  | As            |       |                |  | As         |       |          |  | As         |       |         
|                                  |  | Previously                           |       | As             |  | Previously    |       | As             |  | Previously |       | As       |  | Previously |       | As      
|                                  |  | Reported                             |       | Restated       |  | Reported      |       | Restated       |  | Reported   |       | Restated |  | Reported   |       | Restated
|                                  |  |                                      |       |                |  |               |       |                |  |            |       |          |  |            |       |         
|                                  |  |                                     
|                                  |  | (In millions, except per share data)
|Operating Results                 |  |                                      |       |                |  |               |       |                |  |            |       |          |  |            |       |          |  |   |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|Total revenues                    |  | $                                    | 210.6 |                |  | $             | 210.3 |                |  | $          | 161.6 |          |  | $          | 161.0 |          |  | $ | 157.8 |  |  | $ | 157.3 |  |  | $ | 159.3 |  |  | $ | 158.6 | 
|Operating profit                  |  |                                      | 21.6  |                |  |               | 15.8  |                |  |            | 20.2  |          |  |            | 16.0  |          |  |   | 19.5  |  |  |   | 15.9  |  |  |   | 23.1  |  |  |   | 6.2   | 
|Income before accounting change   |  |                                      | 8.0   |                |  |               | 3.8   |                |  |            | 8.7   |          |  |            | 5.5   |          |  |   | 8.4   |  |  |   | 5.2   |  |  |   | 11.8  |  |  |   | 1.1   | 
|Net income                        |  |                                      | 8.0   |                |  |               | 3.8   |                |  |            | 8.7   |          |  |            | 5.5   |          |  |   | 8.4   |  |  |   | 5.2   |  |  |   | 11.8  |  |  |   | 1.1   | 
|Basic earnings per common share   |  |                                      |       |                |  |               |       |                |  |            |       |          |  |            |       |          |  |   |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|Income before accounting change   |  | $                                    | 0.29  |                |  | $             | 0.14  |                |  | $          | 0.29  |          |  | $          | 0.18  |          |  | $ | 0.28  |  |  | $ | 0.18  |  |  | $ | 0.39  |  |  | $ | 0.03  | 
|Net income                        |  |                                      | 0.29  |                |  |               | 0.14  |                |  |            | 0.29  |          |  |            | 0.18  |          |  |   | 0.28  |  |  |   | 0.18  |  |  |   | 0.39  |  |  |   | 0.03  | 
|Diluted earnings per common share |  |                                      |       |                |  |               |       |                |  |            |       |          |  |            |       |          |  |   |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|Income before accounting change   |  | $                                    | 0.27  |                |  | $             | 0.13  |                |  | $          | 0.27  |          |  | $          | 0.17  |          |  | $ | 0.27  |  |  | $ | 0.17  |  |  | $ | 0.37  |  |  | $ | 0.03  | 
|Net income                        |  |                                      | 0.27  |                |  |               | 0.13  |                |  |            | 0.27  |          |  |            | 0.17  |          |  |   | 0.27  |  |  |   | 0.17  |  |  |   | 0.37  |  |  |   | 0.03  | 

F-46



---



##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2002, 2001 and 2000


|                                  |  |                                      |       |                |  |               |       |                |  |            |       |          |  |            |       |          |  |   |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|--------------------------------- |  | ------------------------------------ | ----- | -------------- |  | ------------- | ----- | -------------- |  | ---------- | ----- | -------- |  | ---------- | ----- | -------- |  | - | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                  |  |                                     
|                                  |  | 2000                                
|                                  |  |                                     
|                                  |  |                                      |       |                |  |               |       |               
|                                  |  | First Quarter                        |       | Second Quarter |  | Third Quarter |       | Fourth Quarter
|                                  |  |                                      |       |                |  |               |       |               
|                                  |  | As                                   |       |                |  | As            |       |                |  | As         |       |          |  | As         |       |         
|                                  |  | Previously                           |       | As             |  | Previously    |       | As             |  | Previously |       | As       |  | Previously |       | As      
|                                  |  | Reported                             |       | Restated       |  | Reported      |       | Restated       |  | Reported   |       | Restated |  | Reported   |       | Restated
|                                  |  |                                      |       |                |  |               |       |                |  |            |       |          |  |            |       |         
|                                  |  |                                     
|                                  |  | (In millions, except per share data)
|Operating Results                 |  |                                      |       |                |  |               |       |                |  |            |       |          |  |            |       |          |  |   |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|Total revenues                    |  | $                                    | 217.5 |                |  | $             | 217.9 |                |  | $          | 163.0 |          |  | $          | 163.0 |          |  | $ | 162.6 |  |  | $ | 162.4 |  |  | $ | 180.8 |  |  | $ | 179.9 | 
|Operating profit                  |  |                                      | 19.3  |                |  |               | 24.8  |                |  |            | 17.4  |          |  |            | 13.7  |          |  |   | 20.1  |  |  |   | 14.9  |  |  |   | 23.4  |  |  |   | 13.9  | 
|Income before accounting change   |  |                                      | 5.1   |                |  |               | 7.7   |                |  |            | 5.7   |          |  |            | 3.3   |          |  |   | 7.4   |  |  |   | 4.1   |  |  |   | 9.3   |  |  |   | 3.2   | 
|Net income                        |  |                                      | 5.1   |                |  |               | 7.7   |                |  |            | 5.7   |          |  |            | 3.3   |          |  |   | 7.4   |  |  |   | 4.1   |  |  |   | 9.3   |  |  |   | 3.2   | 
|Basic earnings per common share   |  |                                      |       |                |  |               |       |                |  |            |       |          |  |            |       |          |  |   |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|Income before accounting change   |  | $                                    | 0.19  |                |  | $             | 0.29  |                |  | $          | 0.22  |          |  | $          | 0.13  |          |  | $ | 0.28  |  |  | $ | 0.16  |  |  | $ | 0.35  |  |  | $ | 0.12  | 
|Net income                        |  |                                      | 0.19  |                |  |               | 0.29  |                |  |            | 0.22  |          |  |            | 0.13  |          |  |   | 0.28  |  |  |   | 0.16  |  |  |   | 0.35  |  |  |   | 0.12  | 
|Diluted earnings per common share |  |                                      |       |                |  |               |       |                |  |            |       |          |  |            |       |          |  |   |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|Income before accounting change   |  | $                                    | 0.18  |                |  | $             | 0.27  |                |  | $          | 0.20  |          |  | $          | 0.12  |          |  | $ | 0.26  |  |  | $ | 0.14  |  |  | $ | 0.32  |  |  | $ | 0.11  | 
|Net income                        |  |                                      | 0.18  |                |  |               | 0.27  |                |  |            | 0.20  |          |  |            | 0.12  |          |  |   | 0.26  |  |  |   | 0.14  |  |  |   | 0.32  |  |  |   | 0.11  | 

F-47