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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 28,
    2003                                             
|          
|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 þ         No o

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
Nasdaq National Market, was approximately $327,106,000. As of
February 22, 2004, there were 28,050,137 shares of the
registrants common stock outstanding.

Documents incorporated by reference:Portions of the Registrants
Proxy Statement in connection with its Annual Shareholders
Meeting to be filed within 120 days after December 28, 2003
is incorporated by reference in Part III.



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AFC ENTERPRISES, INC.

INDEX TO FORM 10-K

|                                                   |  |                                                                                                                      |  |  |    | 
|-------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I                                            
|Item 1.                                            |  | Business                                                                                                             |  |  | 1  | 
|Item 2.                                            |  | Properties                                                                                                           |  |  | 11 | 
|Item 3.                                            |  | Legal Proceedings                                                                                                    |  |  | 13 | 
|Item 4.                                            |  | Submission of Matters to a
    Vote of Security Holders                                                              |  |  | 14 | 
|Item 4A.                                           |  | Executive Officers                                                                                                   |  |  | 15 | 
|                                                  
|PART II                                           
|Item 5.                                            |  | Market for Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |  |  | 17 | 
|Item 6.                                            |  | Selected Financial Data                                                                                              |  |  | 18 | 
|Item 7.                                            |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |  |  | 22 | 
|Item 7A.                                           |  | Quantitative and Qualitative
    Disclosures about Market Risk                                                       |  |  | 48 | 
|Item 8.                                            |  | Consolidated Financial
    Statements and Supplementary Data                                                         |  |  | 48 | 
|Item 9.                                            |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                             |  |  | 49 | 
|Item 9A.                                           |  | Controls and Procedures                                                                                              |  |  | 49 | 
|                                                  
|PART III                                          
|Item 10.                                           |  | Directors and Executive
    Officers of the Registrant                                                               |  |  | 51 | 
|Item 11.                                           |  | Executive Compensation                                                                                               |  |  | 51 | 
|Item 12.                                           |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters               |  |  | 51 | 
|Item 13.                                           |  | Certain Relationships and
    Related Transactions                                                                   |  |  | 51 | 
|Item 14.                                           |  | Principal Accountant Fees
    and Services                                                                           |  |  | 51 | 
|                                                  
|PART IV                                           
|Item 15.                                           |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                                 |  |  | 52 | 
|EX-2.2 FIRST AMENDMENT OF STOCK PURCHASE AGREEMENT
|EX-2.3 SECOND AMENDMENT OF STOCK PURCHASE AGMNT.  
|EX-2.4 THIRD AMENDMENT OF STOCK PURCHASE AGREEMENT
|EX-10.15 AMENDMENT DATED JANUARY 1, 2002          
|EX-10.78 EMPLOYMENT AGREEMENT, ALLAN J. TANENBAUM 
|EX-10.79 FIRST AMENDMENT, ALLAN J. TANENBAUM      
|EX-10.80 EMPLOYMENT AGREEMENT, CHRIS ELLIOT       
|EX-10.81 EMPLOYMENT AGREEMENT, F. B. BEILSTEIN    
|EX-10.82 EMPLOYMENT AGREEMENT, HENRY HOPE III     
|EX-10.83 FIRST AMENDMENT TO CREDIT FACILITY       
|EX-10.84 SECOND AMENDMENT TO CREDIT FACILITY      
|EX-10.85 THIRD AMENDMENT TO CREDIT FACILITY       
|EX-10.86 FOURTH AMENDMENT TO CREDIT FACILITY      
|EX-10.87 FIFTH AMENDMENT TO CREDIT FACILITY       
|EX-10.88 FRANCHISE AGREEMENT                      
|EX-10.89 DEVELOPMENT AGREEMENT                    
|EX-10.90 SIXTH AMENDMENT TO CREDIT AGREEMENT      
|EX-21.1 SUBSIDIARIES OF AFC                       
|EX-23.1 CONSENT OF INDEPENDENT AUDITORS           
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO      
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO      
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO      
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO      










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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, our inability to successfully implement new computer
systems, 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, our inability to compete with
others in the QSR 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.

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 two distinct business segments: chicken and bakery. Our
chicken segment operates and franchises under the trade names
Popeyes® Chicken & Biscuits (Popeyes)
and Churchs ChickenTM
(Churchs); our bakery segment operates and
franchises under the trade name Cinnabon®
(Cinnabon) and currently franchises cafes under the
trade name Seattles Best Coffee®. Financial
information for these segments can be found in Note 24 to
the Consolidated Financial Statements.

On July 14, 2003, we sold Seattle Coffee
Corporation (Seattle Coffee  the parent
company for what had been our Seattles Best Coffee®
and Torrefazione Italia® Coffee brands) to Starbucks
Corporation for $72.0 million. Net proceeds of the sale,
after transaction costs and adjustments, were approximately
$62.1 million. In this transaction, we sold substantially
all the continental U.S. and Canadian operations of Seattle
Coffee and its wholesale coffee business. 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.

As of December 28, 2003, our brands operated
or franchised 4,091 QSRs in 46 states, the District of
Columbia, Puerto Rico (which we include in our international
operations) and 36 foreign countries.

|                      |       |          |     |               |  |          |       |            |  |       |   |   |  |  |     |     |  |  |       |       | 
|--------------------- | ----- | -------- | --- | ------------- |  | -------- | ----- | ---------- |  | ----- | - | - |  |  | --- | --- |  |  | ----- | ----- | 
|                     
|                      |       |          |     |               |  |         
|                      |       | Domestic |     | International |  |         
|                      |       |          |     |               |  |         
|                      |       | Company- |     |               |  | Company- |       |            |  |      
|                      |       | Operated |     | Franchised    |  | Operated |       | Franchised |  | Total
|                     
|Popeyes               |       |          | 80  |               |  |          | 1,367 |            |  |       |  |   |  |  | 359 |     |  |  | 1,806 |      
|Churchs              |       |          | 282 |               |  |          | 953   |            |  |       |  |   |  |  | 286 |     |  |  | 1,521 |      
|Cinnabon              |       |          | 75  |               |  |          | 366   |            |  |       |  |   |  |  | 185 |     |  |  | 626   |      
|Seattles Best Coffee |       |          |    |               |  |          | 16    |            |  |       |  |   |  |  | 122 |     |  |  | 138   |      
|                      | Total |          |     | 437           |  |          |       | 2,702      |  |       |   |  |  |  |     | 952 |  |  |       | 4,091 | 

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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 28, 2003, there were
1,806 Popeyes restaurants worldwide. These restaurants were
located in 42 states, the District of Columbia, Puerto Rico
and 21 foreign countries. During 2003, the Popeyes
restaurant system generated $1.5 billion of sales. Measured
by system-wide sales, Popeyes is currently the third largest
chicken QSR concept in the world.

Of our 80 company-operated Popeyes
restaurants, more than 85% were concentrated in Louisiana and
Georgia. Of our 1,367 domestic franchised Popeyes
restaurants, more than 70% were concentrated in Texas,
California, Louisiana, Florida, Illinois, Maryland,
New York, Mississippi, Virginia and Georgia.

(POPEYES LOGO)

Of our 359 international franchised Popeyes
restaurants, more than 60% were located in Korea, Indonesia
and Canada.

Churchs
ChickenTM.
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 28, 2003, there were 1,521 Churchs
restaurants worldwide. These restaurants were located in
29 states, Puerto Rico and 12 foreign countries. During
2003, the Churchs restaurant system generated
$0.9 billion of sales. Measured by system-wide sales,
Churchs is currently the fourth largest chicken QSR
concept in the world.

Of our 282 company-operated Churchs
restaurants, more than 75% were concentrated in Texas, Georgia
and Arizona. Of our 953 domestic franchised Churchs
restaurants, more than 60% were concentrated in Texas,
California, Louisiana, Florida, Georgia and Alabama.

(CHURCH'S CHICKEN LOGO)

Of our 286 international franchised
Churchs restaurants, more than 75% were located in Puerto
Rico, Indonesia and Mexico.

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 28, 2003, there were 626 Cinnabon bakeries
worldwide. These

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bakeries were located in 40 states, the
District of Columbia, Puerto Rico and 24 foreign countries,
primarily in high traffic venues such as shopping malls,
airports, train stations and travel plazas. During 2003, the
Cinnabon bakery system generated $0.2 billion of sales.


Of our 75 domestic company-operated Cinnabon
bakeries, approximately 36% were concentrated in California. Of
our 366 domestic franchised Cinnabon bakeries,
approximately 40% were concentrated in California, Florida,
Ohio, Texas, New York and Washington.

(CINNABON LOGO)

Of our 185 international franchised Cinnabon
bakeries, more than 60% were located in Saudi Arabia, Canada,
Korea, Japan, the Philippines, and Venezuela.

Seattles Best
Coffee®. Founded in Seattle,
Washington in 1970, Seattles Best Coffee is one of the
oldest specialty coffee cafe chains. Starbucks Corporation owns
the Seattles Best Coffee trademark, having purchased
Seattle Coffee from us in July of 2003. We franchise
Seattles Best Coffee cafes in Hawaii, in certain
international markets and on certain U.S. military bases
under license from Seattle Coffee. As of December 28, 2003,
we franchised 138 Seattles Best Coffee cafes, with
more than 50% located in Japan.

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AFCs Overall Business Strategy



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Improving Operational
    Efficiencies.Through our
    purchasing cooperative, technology enhancements 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. We intend to continuously
    improve our customers experience when visiting our QSRs by
    offering appetizing food, friendly service, clean and appealing
    dining environments, and quick service times.                                                                                                                                                                                                                                                                                                 
|
| | 2. | Increasing the Efficiency and Effectiveness
    of Our Corporate and Brand
    Overhead.We will continue a
    process initiated in 2003 to improve the benefit and reduce the
    cost of our corporate and brand overhead. In particular, we will
    work to (a) eliminate any and all spending that creates
    minimal value, (b) eliminate redundancies and duplicated
    resources and (c) review and improve the terms of key
    vendor relationships.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | 3. | Growing Through Our Franchise
    Network.We will fuel our business
    growth principally through franchising activities. 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 28, 2003, approximately
    89% of our brands 4,091 system-wide units were franchised,
    and we had development commitments from existing and new
    franchisees to open 2,154 additional units. Our emphasis on
    franchising includes the periodic sale of company-operated QSRs
    to franchisees (unit conversions). This strategic
    initiative began in 2001. We have not completed this initiative
    nor have we, as yet, fully achieved the anticipated overhead
    cost reduction we expect to result from those unit conversions.
|
| | 4. | Building Our Model Markets
    Program.For each of our brands,
    we will continue to own and operate units in one or more
    markets. The objective of this program is to have a number of
    company-operated units that are concentrated in certain
    strategic 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.                                                                                                                                                                                                                                                                                                                                                         
|
| | 5. | Promoting Uniquely Positioned
    Brands.We continually promote and
    refresh the image of our brands in order to increase consumer
    interest and sales. During 2000, we initiated a new re-imaging
    program that is designed to update the general publics
    perception of our brands. We plan to have substantially all of
    the QSRs in our systems re-imaged by the end of 2007. 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.                                                                                                                                                                                                                                                                                                                                              
|
| | 6. | 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,
    travel plazas and airports.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | 7. | 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
    952 franchised units in Puerto Rico and 36 foreign
    countries at the end of 2003. Additionally, commitments to
    develop international franchised units have increased from 502
    at the end of 1995 to 1,172 at the end of 2003.                                                                                                                                                                                                                                                                                         
|
| | 8. | Enhancing Stakeholder Value by Unlocking
    the Potential within Our Portfolio of
    Brands.We believe that our
    portfolio of brands has significant intrinsic value, which we
    are committed to unlocking and enhancing. Within the brands, we
    will continue to manage our operations so that menu offerings
    and advertising campaigns remain fresh and appealing to our
    customers. Within the portfolio, we will pursue appropriate
    acquisitions and dispositions that serve to improve the
    portfolios quality and value. Our sale of Seattle Coffee
    in 2003 constitutes a strategic divestiture designed to improve
    the overall performance of our brand portfolio.                                                                                                                                                                                                                         

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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 a
specified number of QSRs 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. 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 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 executed.

Domestic 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 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 freestanding 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 Popeyes, Churchs and Cinnabon franchise
agreements generally require franchisees to pay a 5% royalty on
net QSR sales. In addition, our franchise agreements require
franchisees to participate in certain advertising funds.
Payments to the advertising funds are up to 3% of net QSR sales
for Popeyes franchisees; up to 4% of net QSR sales for
Churchs franchisees (reduced to a maximum of 1% if a local
advertising co-operative is formed); and up to 3% of net QSR
sales for Cinnabon 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.

International Franchise
Agreements.The terms of our
international franchise agreements are substantially similar to
those included in our domestic franchise agreements, except that
international franchisees must prepay up to $15,000 per
unit in franchise fees at the time their related franchise
development agreement is executed. These agreements may be
modified to reflect the multi-national nature of the transaction
and to comply with the requirements of applicable local laws. In
addition, royalty rates may differ from those included in
domestic franchise agreements, and generally are slightly lower
due to the number of units required to be developed by our
international franchisees.

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.

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
freestanding sites with ample parking and easy dinnertime access
from high traffic roads. For our Cinnabon brand, we emphasize
high traffic venues such as malls, in-line shopping centers,
transportation facilities, central business districts and
airports. 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.

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AFC Loan Guarantee
Programs.In March 1999, we
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, we guarantee up to 20% of the loan amount toward a
maximum aggregate liability for the entire pool of
$1.0 million. For loans within the pool, we assume a first
loss risk until the maximum liability for the pool has been
reached. Such guarantees typically extend for a three-year
period. As of December 28, 2003, approximately
$9.1 million was borrowed under this program, of which we
were contingently liable for $1.0 million in the event of
default.

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. Under the program, we assume a first loss risk on the
portfolio up to 10% of the sum of the original funded principal
balances of all program loans. As of December 28, 2003,
approximately $1.5 million was borrowed under this program,
of which we were contingently liable for $0.2 million in
the event of default.

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 28, 2003, AFC owned approximately 14% of SMS and
held three of its eleven board seats. 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.

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 11 suppliers who service us from 34
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 fresh
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
specified cuts. 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 three
months to two 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 beverage supply
arrangements with certain beverage vendors. These contracts are
customary to the QSR industry. Pursuant to the terms of these
arrangements, marketing rebates are provided to us and our
franchisees from the beverage vendors based upon the dollar
volume of purchases for our company-operated QSRs and franchised
QSRs, respectively, which will vary according to our demand for
beverage syrup and fluctuations in the market rates for beverage
syrup.

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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.

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 we have experienced significant savings in
our marketing programs through our advertising cooperatives. In
2003, we, our franchisees and certain of our vendors contributed
approximately $86.1 million to these advertising funds.

Employees

As of December 28, 2003, we had
7,376 hourly employees working in our company-operated
QSRs. This includes approximately 250 Cinnabon employees
hired for the holiday shopping season between Thanksgiving Day
and New Years Day. Additionally, we had 988 employees
involved in the management of our company-operated QSRs,
comprised of multi-unit managers and field management employees.
We also had 324 employees responsible for corporate
administration, franchise administration and business
development. 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. and through our
franchisees and employees, 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
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 2003
and 2002, we contributed approximately $0.4 million 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.

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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. Minorities and women
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 and others, or their linguistic equivalents, in
approximately 150 foreign countries. There is no assurance that
we will be able to obtain the registration for the marks in
every country where registration has been sought. We consider
our intellectual property rights to be important to our business
and we actively defend and enforce them.

Seattle Coffees intellectual property
rights were transferred to Starbucks in connection with the
July 14, 2003 sale of Seattle Coffee. We retain 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.

Copeland Formula
Agreement.We have a formula
licensing agreement with Alvin C. Copeland, the founder of
Popeyes. Under this agreement, we have the worldwide exclusive
rights to the Popeyes 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 license to use the image and likeness of the
cartoon character Popeye in connection with the
operation of our Popeyes restaurants in the United States.
Popeyes locations outside the United States have the exclusive
use of the image and likeness of the cartoon character
Popeye and certain companion characters such as
Olive Oyl in connection with their restaurant
operations. Under these agreements, 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 sales of the
Popeye products sold through retail outlets 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 28, 2003, we had franchised
internationally 359 Popeyes QSRs, 286 Churchs QSRs,
185 Cinnabon QSRs and 122 Seattles Best Coffee
QSRs. In 2003, franchise revenues from these operations
represented approximately 15.6% of our total franchise revenues.
For each of 2003, 2002 and 2001, foreign-sourced revenues
represented 3.9%, 3.5% and 2.9% 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 operations experience their
strongest operating results during the holiday shopping season
between Thanksgiving Day and New Years Day. Seasonality
has little effect on the remaining portions of our business.

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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 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 Seattles Best Coffee franchisees
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 and
2003 financial statements and the financial filings due
thereafter. See Risk Factors  The number of new
units to be opened by franchisees has been adversely affected by
our delay in releasing audited financial statements for 2002 and
for 2003 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 150 of our
currently and formerly owned and/or leased properties are known
or suspected to have been used by prior owners or operators as
retail gas stations, and a few of these properties may have been
used for other environmentally sensitive purposes. 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 or
former 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

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to cover any potential environmental remediation
liabilities. We are currently not subject to any administrative
or court order requiring remediation at any of our properties.


Where You Can Find Additional
Information

We file our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports with the 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 and bakeries
as of December 28, 2003:

|                     |       |                |    |                 |  |       |    |     |  |  |     |     | 
|-------------------- | ----- | -------------- | -- | --------------- |  | ----- | -- | --- |  |  | --- | --- | 
|                    
|                     |       | Land and       |    | Land and/or     |  |      
|                     |       | Building Owned |    | Building Leased |  | Total
|                     |       |               
|                     |       |               
|Texas                |       |                | 98 |                 |  |       | 58 |     |  |  | 156 |    
|Georgia              |       |                | 25 |                 |  |       | 46 |     |  |  | 71  |    
|Louisiana            |       |                | 4  |                 |  |       | 35 |     |  |  | 39  |    
|California           |       |                |   |                 |  |       | 27 |     |  |  | 27  |    
|Arizona              |       |                | 15 |                 |  |       | 10 |     |  |  | 25  |    
|Alabama              |       |                | 15 |                 |  |       | 9  |     |  |  | 24  |    
|Tennessee            |       |                | 12 |                 |  |       | 2  |     |  |  | 14  |    
|Mississippi          |       |                | 10 |                 |  |       | 1  |     |  |  | 11  |    
|Pennsylvania         |       |                |   |                 |  |       | 8  |     |  |  | 8   |    
|New Mexico           |       |                | 5  |                 |  |       | 2  |     |  |  | 7   |    
|Colorado             |       |                |   |                 |  |       | 6  |     |  |  | 6   |    
|Arkansas             |       |                | 5  |                 |  |       | 1  |     |  |  | 6   |    
|Missouri             |       |                | 6  |                 |  |       |   |     |  |  | 6   |    
|North Carolina       |       |                |   |                 |  |       | 6  |     |  |  | 6   |    
|Maryland             |       |                |   |                 |  |       | 4  |     |  |  | 4   |    
|Massachusetts        |       |                |   |                 |  |       | 4  |     |  |  | 4   |    
|New Jersey           |       |                |   |                 |  |       | 4  |     |  |  | 4   |    
|Kansas               |       |                | 2  |                 |  |       | 1  |     |  |  | 3   |    
|Delaware             |       |                |   |                 |  |       | 2  |     |  |  | 2   |    
|District of Columbia |       |                |   |                 |  |       | 2  |     |  |  | 2   |    
|Florida              |       |                |   |                 |  |       | 2  |     |  |  | 2   |    
|Illinois             |       |                |   |                 |  |       | 2  |     |  |  | 2   |    
|New Hampshire        |       |                |   |                 |  |       | 2  |     |  |  | 2   |    
|South Carolina       |       |                |   |                 |  |       | 2  |     |  |  | 2   |    
|Maine                |       |                |   |                 |  |       | 1  |     |  |  | 1   |    
|Nevada               |       |                |   |                 |  |       | 1  |     |  |  | 1   |    
|Ohio                 |       |                |   |                 |  |       | 1  |     |  |  | 1   |    
|Virginia             |       |                |   |                 |  |       | 1  |     |  |  | 1   |    
|                     | Total |                |    | 197             |  |       |    | 240 |  |  |     | 437 | 

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 are typically leased under
standard retail lease terms for malls and community shopping
centers. 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.

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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.

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

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 our Annual Report
on Form 10-K for 2002 for a discussion of the restatements.

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 current and former directors and
officers. By order dated May 21, 2003, the district court
consolidated the eight lawsuits into one consolidated action. On
January 26, 2004, the plaintiffs filed a Consolidated
Amended Class Action Complaint (the Consolidated
Complaint) on behalf of a putative class of persons who
purchased or otherwise acquired AFC stock between March 2,
2001 and March 24, 2003. In the Consolidated Complaint,
plaintiffs allege that the registration statement filed in
connection with AFCs March 2001 initial public offering
(IPO) contained false and misleading statements in
violation of Sections 11 and 15 of the Securities Act of
1933 (1933 Act). The defendants to the
1933 Act claims include AFC, certain of AFCs current
and former directors and officers, an institutional shareholder
of AFC, and the underwriters of AFCs IPO. Plaintiffs also
allege violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (1934 Act) and
Rule 10b-5 promulgated thereunder. The plaintiffs
1934 Act allegations are pled against AFC, certain current
and former directors and officers of AFC, and two institutional
shareholders. The plaintiffs also allege violations of
Section 20A of the 1934 Act against certain current
and former directors and officers and two institutional
shareholders based upon certain alleged stock sales. The
Consolidated Complaint seeks certification as a class action,
compensatory damages, pre-judgment and post-judgment interest,
attorneys fees and costs, an accounting of the proceeds of
certain defendants alleged stock sales, disgorgement of
bonuses and trading profits by AFCs CEO and former CFO,
injunctive relief, including the imposition of a constructive
trust on certain defendants alleged trading proceeds and
other relief. AFC has not yet filed a response to the
Consolidated Complaint.

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 derivative
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 stock sales by
certain defendants, recovery of attorneys fees and costs,
and other relief. On February 23, 2004, the defendants
moved to dismiss the consolidated complaint. The plaintiffs have
not yet responded to the defendants motion to dismiss.

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 January 20, 2004, the defendants
moved to dismiss or, alternatively, to stay the case. The
plaintiff has not yet responded to the defendants motion.

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 $185.0 million public offering of
common stock. The lawsuit asserts claims under Sections 11
and 15 of the 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 us 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,

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##### Table of Contents



was 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 remanding the case to state court but staying
the order to allow the defendants to seek interlocutory
appellate review of the decision. The United States Court of
Appeals for the Eleventh Circuit agreed to hear the
defendants appeal. Briefing in the Court of Appeals is
expected to be completed on or about April 2, 2004.


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 are cooperating 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 or liquidity.

Other Matters

We are 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. We
have established adequate reserves 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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Item 4A. EXECUTIVE
OFFICERS

The following table sets forth the name, age (as
of the date of this filing) and position of our current
executive officers:

|                       |  |     |    |          |  |                                                                                        
|---------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------------------------------
|Name                   |  | Age |    | Position
|                       |  |     |    |         
|Frank J. Belatti       |  |     | 56 |          |  | Chairman of the Board and Chief Executive Officer                                      
|Dick R. Holbrook       |  |     | 51 |          |  | President & Chief Operating Officer,
    Acting President of Popeyes Chicken & Biscuits
|Frederick B. Beilstein |  |     | 56 |          |  | Chief Financial Officer                                                                
|Allan J. Tanenbaum     |  |     | 57 |          |  | Senior Vice President, General Counsel and
    Corporate Secretary                     
|Hala G. Moddelmog      |  |     | 48 |          |  | President, Churchs Chicken                                                            
|Christopher P. Elliott |  |     | 49 |          |  | President, Cinnabon, Inc.                                                              
|H. Melville Hope, III  |  |     | 43 |          |  | Senior Vice President, Finance and Chief
    Accounting Officer                        

Frank J. Belatti,age 56, has served as our
Chairman of the Board and Chief Executive Officer since we
commenced operations in November 1992, following the
reorganization of our predecessor. Mr. Belatti served as
our interim Chief Financial Officer from April 28, 2003
until January 2004. 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 51, 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.

Frederick B.
Beilstein,age 56, has served as
our Chief Financial Officer since January 2004. From January
2002 to December 2003, Mr. Beilstein was the Principal and
founder of Beilstein & Company, a financial and
operational consulting practice with concentration in advising
companies on strategic issues such as refinancing and
recapitalization opportunities. From January 1997 to December
2001, Mr. Beilstein was Executive Vice President, Treasurer
and Chief Financial Officer for Americold Logistics, LLC, a
supply chain solutions company located in Atlanta, Georgia.

Allan J. Tanenbaum,age 57, has served as our Senior
Vice President, General Counsel and Corporate 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 G. Moddelmog,age 48, 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. Ms. Moddelmog is the present board chair of
Leadership Atlanta and past board member of Emory
Universitys Board of Visitors.

15



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##### Table of Contents



Christopher P. 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.

H. Melville
Hope, III,age 43, has
served as our Senior Vice President, Finance and Chief
Accounting Officer, since February 2004. From April 2003 to
February 2004, Mr. Hope was our Vice President of Finance.
Prior to joining AFC, he was an independent consultant in
Atlanta, Georgia from January 2003 to April 2003. From April
2002 to January 2003, Mr. Hope was Chief Financial Officer
for First Cambridge HCI Acquisitions, LLC, a real estate
investment trust, located in Birmingham, Alabama. From November
2001 to April 2002, Mr. Hope was a financial and business
advisory consultant in Atlanta, Georgia. From July 1984 to July
2001, Mr. Hope was an accounting, auditing and business
advisory professional for PricewaterhouseCoopers, LLP in
Atlanta, Georgia, in Savannah, Georgia and in Houston, Texas
where he was admitted to the partnership in 1998.

16



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##### Table of Contents






PART II.






|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | MARKET FOR REGISTRANTS COMMON EQUITY,
    RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES

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 the high and low
per share sales prices of our common stock, by quarter for
fiscal 2003 and 2002.

|                    |  |      |       |      |  |      |       |     |  |   |       |  |  |   |       | 
|------------------- |  | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|                   
|                    |  |      |       |     
|(Dollars per share) |  | 2003 |       | 2002 |  |     
|                   
|                    |  | High |       | Low  |  | High |       | Low
|                    |  |      |       |      |  |      |       |    
|First Quarter       |  | $    | 22.00 |      |  | $    | 11.30 |     |  | $ | 34.55 |  |  | $ | 26.00 | 
|Second Quarter      |  | $    | 18.49 |      |  | $    | 14.95 |     |  | $ | 34.81 |  |  | $ | 26.04 | 
|Third Quarter       |  | $    | 17.30 |      |  | $    | 12.00 |     |  | $ | 27.16 |  |  | $ | 18.27 | 
|Fourth Quarter      |  | $    | 20.25 |      |  | $    | 15.50 |     |  | $ | 22.23 |  |  | $ | 16.42 | 

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 made certain 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 February 22, 2004, we had
72 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.

17



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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 2003, 2002, 2001 and
2000 and from unaudited consolidated financial information for
1999. Such data should be read in conjunction with our
Consolidated Financial Statements and the notes thereto and
Managements Discussion and Analysis of Financial Condition
and Results of Operations. For periods prior to 2003, certain
items in the following table have been reclassified to conform
to the current presentation.

|                                                                       |                                       |                |       |       |       |      |       |       |       |      |       |       |       |   |       |       |       |   |       |       |       | 
|---------------------------------------------------------------------- | ------------------------------------- | -------------- | ----- | ----- | ----- | ---- | ----- | ----- | ----- | ---- | ----- | ----- | ----- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                                                                      
|(Dollars in millions, except per share data)                           |                                       | 2003           |       | 2002  |       | 2001 |       | 2000  |       | 1999
|                                                                      
|Summary of
    operations:(1)                                          |                                       |                |       |       |       |      |       |       |       |      |       |       |       |   |       |       |       |   |       |      
|Revenues(2)                                                            |                                       |                |       |       |       |      |       |       |       |      |       |       |       |   |       |       |       |   |       |      
|                                                                       | Sales by company-operated restaurants |                | $     | 323.4 |       |      | $     | 385.9 |       |      | $     | 479.3 |       |   | $     | 538.8 |       |   | $     | 534.3 |      
|                                                                       | Franchise revenues                    |                |       | 114.3 |       |      |       | 109.8 |       |      |       | 100.3 |       |   |       | 88.0  |       |   |       | 77.2  |      
|                                                                       | Other revenues                        |                |       | 21.6  |       |      |       | 29.0  |       |      |       | 17.9  |       |   |       | 11.0  |       |   |       | 8.6   |      
|                                                                       |                                       |               
|                                                                       |                                       | Total revenues |       | $     | 459.3 |      |       | $     | 524.7 |      |       | $     | 597.5 |   |       | $     | 637.8 |   |       | $     | 620.1 | 
|Operating profit(3)                                                    |                                       | $              | 0.6   |       |       | $    | 69.1  |       |       | $    | 63.5  |       |       | $ | 68.5  |       |       | $ | 47.9  |      
|(Loss) income before discontinued operations and
    accounting change |                                       |                | (6.0  | )     |       |      | 29.0  |       |       |      | 22.6  |       |       |   | 19.0  |       |       |   | 5.5   |      
|Net (loss) income(4)                                                   |                                       |                | (9.1  | )     |       |      | (11.7 | )     |       |      | 15.6  |       |       |   | 18.3  |       |       |   | 10.0  |      
|Basic earnings per common
    share:(5)                                |                                       |                |       |       |       |      |       |       |       |      |       |       |       |   |       |       |       |   |       |      
|(Loss) income before discontinued operations and
    accounting change |                                       | $              | (0.22 | )     |       | $    | 0.97  |       |       | $    | 0.77  |       |       | $ | 0.72  |       |       | $ | 0.21  |      
|Net (loss) income                                                      |                                       |                | (0.33 | )     |       |      | (0.39 | )     |       |      | 0.53  |       |       |   | 0.70  |       |       |   | 0.38  |      
|Diluted earnings per common
    share:(5)                              |                                       |                |       |       |       |      |       |       |       |      |       |       |       |   |       |       |       |   |       |      
|(Loss) income before discontinued operations and
    accounting change |                                       | $              | (0.22 | )     |       | $    | 0.92  |       |       | $    | 0.72  |       |       | $ | 0.66  |       |       | $ | 0.19  |      
|Net (loss) income                                                      |                                       |                | (0.33 | )     |       |      | (0.37 | )     |       |      | 0.50  |       |       |   | 0.64  |       |       |   | 0.35  |      
|Year-end balance sheet data:                                           |                                       |                |       |       |       |      |       |       |       |      |       |       |       |   |       |       |       |   |       |      
|Total assets                                                           |                                       | $              | 355.5 |       |       | $    | 487.3 |       |       | $    | 525.3 |       |       | $ | 547.8 |       |       | $ | 587.4 |      
|Total debt(6)                                                          |                                       |                | 130.9 |       |       |      | 226.6 |       |       |      | 209.5 |       |       |   | 313.1 |       |       |   | 348.1 |      
|Total shareholders equity(7)                                          |                                       |                | 108.8 |       |       |      | 109.8 |       |       |      | 187.3 |       |       |   | 115.1 |       |       |   | 95.4  |      
|Cash flow data relating to continuing
    operations:                  |                                       |                |       |       |       |      |       |       |       |      |       |       |       |   |       |       |       |   |       |      
|Cash flows provided by operating activities                            |                                       | $              | 50.1  |       |       | $    | 91.1  |       |       | $    | 61.5  |       |       | $ | 61.6  |       |       | $ | 59.7  |      
|Capital expenditures                                                   |                                       |                | (24.3 | )     |       |      | (43.5 | )     |       |      | (49.1 | )     |       |   | (43.6 | )     |       |   | (42.7 | )    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On July 14, 2003, we sold our Seattle Coffee
    subsidiary to Starbucks for $72.0 million. Net proceeds
    from this sale, after transaction costs and other adjustments,
    were approximately $62.1 million. In this transaction, we
    sold substantially all of the continental U.S. and Canadian
    operations of Seattle Coffee and its wholesale business. See
    Note 23 to the Consolidated Financial Statements for a
    discussion of this transaction. For all periods presented, the
    Seattle Coffee operations that were sold have been removed from
    continuing operations.
|   
|(2) | 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 includes 53 weeks. All other
    years shown include 52 weeks.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | (b) | In 2000, we began a program to strategically sell
    company-operated QSRs to franchisees, which reduces sales from
    company-operated restaurants as well as related restaurant
    costs. These transactions also result in increased franchise
    revenues. This program was temporarily discontinued in 2003 due
    to our inability to produce current financial statements to
    include in Uniform Franchise Offering Circulars
    (UFOCs) and, accordingly, there were no unit
    conversions in 2003. By brand, the number of unit
    conversions and the

18



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##### Table of Contents



| |  |                                                                                                                                           
| |  | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | associated gains and losses on such sales in our
    Consolidated Financial Statements for the fiscal years presented
    were as follows:

|                               |          |                        |      |      |     |      |      |    |     |   |     |    |    | 
|------------------------------ | -------- | ---------------------- | ---- | ---- | --- | ---- | ---- | -- | --- | - | --- | -- | -- | 
|                              
|(Dollars in millions)          |          | 2002                   |      | 2001 |     | 2000
|                              
|Unit Conversions:              |          |                        |      |      |     |      |      |    |     |   |     |   
|                               | Popeyes  |                        |      |     |     |      |      | 27 |     |   |     | 36 |   
|                               | Churchs |                        |      | 111  |     |      |      | 70 |     |   |     | 25 |   
|                               | Cinnabon |                        |      | 63   |     |      |      | 36 |     |   |     | 10 |   
|                               |          |                       
|                               |          | Total unit conversions |      |      | 174 |      |      |    | 133 |   |     |    | 71 | 
|                               |          |                       
|Gains and Losses:              |          |                        |      |      |     |      |      |    |     |   |     |   
|(Losses) gains recognized, net |          | $                      | (3.9 | )    |     | $    | (1.3 | )  |     | $ | 6.2 |   
|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. In our Consolidated Financial
    Statements, these fees are a component of other
    revenues.                                                                                                                                                                          
|
| | During 2003, 2002 and 2001, we recognized
    previously deferred gains of $1.2 million,
    $0.5 million and $0.2 million, respectively, in
    income. In our Consolidated Financial Statements, these gains
    are a component of impairment charges and other.
    During 2003, a dispute relating to a 2002 unit conversion was
    settled. The settlement was treated as an adjustment to the
    purchase price, reducing the deferred gain by $1.5 million.



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



|    |                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | In addition to the matters discussed in
    Note 2, factors that impact the comparability of operating
    profit for the years presented include:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | During 2003, we recorded charges for impairment
    and other write-downs of non-current assets of
    $46.1 million, compared to $11.3 million in 2002,
    $10.4 million in 2001, $6.8 million in 2000 and
    $8.8 million in 1999. See Note 18 to the Consolidated
    Financial Statements for a discussion of the 2003 impairments.                                                                                                                                   
|
| | (b) | During 2003, we incurred $14.0 million in
    costs associated with the re-audit and restatement of previously
    issued financial statements, an independent investigation
    commissioned by our Audit Committee and legal fees associated
    the shareholder lawsuit described in Item 3 herein. There
    were no comparable costs in other years.                                                                                                                   
|
| | (c) | 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. Amortization expense was
    $0.1 million in 2003, $0.1 million in 2002,
    $7.8 million in 2001, $8.1 million in 2000 and
    $8.2 million in 1999.
|
| | (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.                                                                                                                                                                                                                
|
| | (e) | During 2003, we incurred $5.0 million of
    employee severance costs and consultant fees for a productivity
    initiative. Comparable costs in other years were immaterial.                                                                                                                                                                                                                                                                                               



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | 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, we had net losses associated with discontinued operations
    of $1.9 million.
|   
|(5) | Weighted average common shares for the
    computation of basic earnings per common share were
    27.8 million, 30.0 million, 29.5 million,
    26.3 million and 26.2 million for 2003, 2002, 2001,
    2000 and 1999, respectively. Weighted average common shares for
    the computation of diluted earnings per common share were
    28.7 million, 31.5 million, 31.3 million,
    28.7 million and 28.4 million for 2003, 2002, 2001,
    2000 and 1999, respectively.                                   
|   
|(6) | 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.                                                                                                                                                                                                                                            
|   
|(7) | 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 
Continuing Operations

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
provided by our franchisees. We present this data because it
includes important operational measures relevant to the QSR
industry.

|                                                                               |                        |       |       |       |     |      |       |         |     |      |       |       |     |  |       |       |     |  |       |       |     | 
|------------------------------------------------------------------------------ | ---------------------- | ----- | ----- | ----- | --- | ---- | ----- | ------- | --- | ---- | ----- | ----- | --- |  | ----- | ----- | --- |  | ----- | ----- | --- | 
|                                                                              
|                                                                               |                        | 2003  |       | 2002  |     | 2001 |       | 2000(1) |     | 1999
|                                                                              
|Increase in system-wide sales from the prior
    year                          |                        |       | 2.3   | %     |     |      | 4.4   | %       |     |      | 6.3   | %     |     |  | 13.1  | %     |     |  | 16.0  | %    
|                                                                               |                        |      
|Domestic same-store sales growth
    (decline)  company-operated
    QSRs(2): |                        |       |       |       |     |      |       |        
|                                                                               | Popeyes                |       |       | (2.4  | )%  |      |       | 1.1     | %   |      |       | 4.8   | %   |  |       | 0.9   | %   |  |       | 0.1   | %  
|                                                                               | Churchs               |       |       | (0.8  | )%  |      |       | (1.3    | )%  |      |       | 2.8   | %   |  |       | (0.2  | )%  |  |       | 1.1   | %  
|                                                                               | Cinnabon retail        |       |       | (6.6  | )%  |      |       | (5.8    | )%  |      |       | 1.1   | %   |  |       | 4.9   | %   |  |       | 1.7   | %  
|Domestic same-store sales growth
    (decline)  franchised
    QSRs(3):       |                        |       |       |       |     |      |       |         |     |      |       |      
|                                                                               | Popeyes                |       |       | (2.7  | )%  |      |       | 0.6     | %   |      |       | 4.1   | %   |  |       | 3.8   | %   |  |       | 5.2   | %  
|                                                                               | Churchs               |       |       | (2.7  | )%  |      |       | (1.7    | )%  |      |       | 2.0   | %   |  |       | 1.7   | %   |  |       | 1.0   | %  
|                                                                               | Cinnabon retail        |       |       | (3.2  | )%  |      |       | (6.9    | )%  |      |       | (1.9  | )%  |  |       | 4.6   | %   |  |       | 3.2   | %  
|System-wide unit
    openings(3):                                              |                        |       |       |       |     |      |       |         |     |      |       |      
|                                                                               | Popeyes                |       |       | 177   |     |      |       | 169     |     |      |       | 177   |     |  |       | 143   |     |  |       | 151   |    
|                                                                               | Churchs               |       |       | 50    |     |      |       | 110     |     |      |       | 79    |     |  |       | 98    |     |  |       | 133   |    
|                                                                               | Cinnabon retail        |       |       | 61    |     |      |       | 102     |     |      |       | 121   |     |  |       | 81    |     |  |       | 46    |    
|                                                                               | Seattles Best Coffee  |       |       | 48    |     |      |       | 41      |     |      |       | 34    |     |  |       | 16    |     |  |       | 6     |    
|                                                                               |                        |      
|                                                                               |                        | Total |       |       | 336 |      |       |         | 422 |      |       |       | 411 |  |       |       | 338 |  |       |       | 336 | 
|                                                                               |                        |      
|System-wide units(end of period):                                              |                        |       |       |       |     |      |       |         |     |      |       |       |     |  |       |      
|Total system-wide                                                              |                        |       | 4,091 |       |     |      | 3,924 |         |     |      | 3,735 |       |     |  | 3,509 |       |     |  | 3,283 |      
|                                                                               | Total company-operated |       |       | 437   |     |      |       | 464     |     |      |       | 645   |     |  |       | 785   |     |  |       | 864   |    
|                                                                               | Total franchised       |       |       | 3,654 |     |      |       | 3,460   |     |      |       | 3,090 |     |  |       | 2,724 |     |  |       | 2,419 |    
|                                                                              
|Popeyes                                                                        |                        |       | 1,806 |       |     |      | 1,712 |         |     |      | 1,620 |       |     |  | 1,501 |       |     |  | 1,396 |      
|                                                                               | Company-operated       |       |       | 80    |     |      |       | 96      |     |      |       | 96    |     |  |       | 130   |     |  |       | 175   |    
|                                                                               | Franchised             |       |       | 1,726 |     |      |       | 1,616   |     |      |       | 1,524 |     |  |       | 1,371 |     |  |       | 1,221 |    
|                                                                              
|Churchs                                                                       |                        |       | 1,521 |       |     |      | 1,509 |         |     |      | 1,517 |       |     |  | 1,534 |       |     |  | 1,492 |      
|                                                                               | Company-operated       |       |       | 282   |     |      |       | 284     |     |      |       | 397   |     |  |       | 468   |     |  |       | 494   |    
|                                                                               | Franchised             |       |       | 1,239 |     |      |       | 1,225   |     |      |       | 1,120 |     |  |       | 1,066 |     |  |       | 998   |    
|                                                                              
|Cinnabon retail                                                                |                        |       | 626   |       |     |      | 612   |         |     |      | 544   |       |     |  | 451   |       |     |  | 388   |      
|                                                                               | Company-operated       |       |       | 75    |     |      |       | 84      |     |      |       | 152   |     |  |       | 187   |     |  |       | 195   |    
|                                                                               | Franchised             |       |       | 551   |     |      |       | 528     |     |      |       | 392   |     |  |       | 264   |     |  |       | 193   |    
|                                                                              
|Seattles Best Coffee (all franchised)                                         |                        |       | 138   |       |     |      | 91    |         |     |      | 54    |       |     |  | 23    |       |     |  | 7     |      
|                                                                              
|Total commitments outstanding(end of year)(4)                                  |                        |       | 2,154 |       |     |      | 2,550 |         |     |      | 2,288 |       |     |  | 2,260 |       |     |  | 1,930 |      

20



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##### Table of Contents





---



|    |                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
    2003, 2002, 2001 and 2000 and 12 months for 1999.
    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 both
    company-operated QSRs and franchised QSRs, which were as follows:                                                                                                                                                                                                                                            

|                      |  |      |     |      |  |      |     |      |  |      |     |  |  |  |     |  |  |  |     | 
|--------------------- |  | ---- | --- | ---- |  | ---- | --- | ---- |  | ---- | --- |  |  |  | --- |  |  |  | --- | 
|                     
|Unit Openings         |  | 2003 |     | 2002 |  | 2001 |     | 2000 |  | 1999
|                     
|Company-operated QSRs |  |      | 1   |      |  |      | 8   |      |  |      | 16  |  |  |  | 11  |  |  |  | 38  | 
|Franchised QSRs       |  |      | 335 |      |  |      | 414 |      |  |      | 395 |  |  |  | 327 |  |  |  | 298 | 
|Total                 |  |      | 336 |      |  |      | 422 |      |  |      | 411 |  |  |  | 338 |  |  |  | 336 | 



|    |                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Commitments associated with our continuing
    operations that were 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 |  | 2003 |       | 2002 |  | 2001 |       | 2000 |  | 
|                      |  | 1999
|Popeyes               |  |      | 999   |      |  |      | 1,198 |      |  |  | 903   |  |  |  | 896   |  |  |  | 713   | 
|Churchs              |  |      | 593   |      |  |      | 677   |      |  |  | 671   |  |  |  | 743   |  |  |  | 561   | 
|Cinnabon              |  |      | 400   |      |  |      | 476   |      |  |  | 486   |  |  |  | 426   |  |  |  | 387   | 
|Seattles Best Coffee |  |      | 162   |      |  |      | 199   |      |  |  | 228   |  |  |  | 195   |  |  |  | 269   | 
|Total                 |  |      | 2,154 |      |  |      | 2,550 |      |  |  | 2,288 |  |  |  | 2,260 |  |  |  | 1,930 | 

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

Nature of Business

AFC develops, operates and franchises quick
service restaurants, bakeries and cafes in two distinct business
segments: chicken and bakery. Our chicken segment operates and
franchises under the trade names Popeyes®
Chicken & Biscuits (Popeyes) and
Churchs ChickenTM (Churchs),
and our bakery segment operates and franchises under the trade
name Cinnabon® (Cinnabon) and currently
franchises cafes under the trade name Seattles Best
Coffee®. Financial information for these segments can be
found in Note 24 to our Consolidated Financial Statements.
Prior to the July 14, 2003 sale of our Seattle Coffee
subsidiary, we also operated a coffee business segment. In the
Consolidated Financial Statements, financial results relating to
our divested operations are presented as discontinued operations
and previously reported consolidated financial statement amounts
have been restated to present the divested operations in a
manner consistent with our 2003 presentation. Unless otherwise
noted, discussions and amounts throughout this Annual Report on
Form 10-K relate to our continuing operations.

As of December 28, 2003, we operated and
franchised 4,091 QSRs in 46 states, the District of
Columbia, Puerto Rico and 36 foreign countries. That total, by
brand, was as follows:

|                      |       |          |     |               |  |          |       |            |  |       |   |   |  |  |     |     |  |  |       |       | 
|--------------------- | ----- | -------- | --- | ------------- |  | -------- | ----- | ---------- |  | ----- | - | - |  |  | --- | --- |  |  | ----- | ----- | 
|                     
|                      |       |          |     |               |  |         
|                      |       | Domestic |     | International |  |         
|                      |       |          |     |               |  |         
|                      |       | Company- |     |               |  | Company- |       |            |  |      
|                      |       | Operated |     | Franchised    |  | Operated |       | Franchised |  | Total
|                     
|Popeyes               |       |          | 80  |               |  |          | 1,367 |            |  |       |  |   |  |  | 359 |     |  |  | 1,806 |      
|Churchs              |       |          | 282 |               |  |          | 953   |            |  |       |  |   |  |  | 286 |     |  |  | 1,521 |      
|Cinnabon              |       |          | 75  |               |  |          | 366   |            |  |       |  |   |  |  | 185 |     |  |  | 626   |      
|Seattles Best Coffee |       |          |    |               |  |          | 16    |            |  |       |  |   |  |  | 122 |     |  |  | 138   |      
|                      | Total |          |     | 437           |  |          |       | 2,702      |  |       |   |  |  |  |     | 952 |  |  |       | 4,091 | 

Management Overview

For 2003 and 2002, key performance data that our
management uses to measure our business were as follows:

|                                                                       |  |          |       |      |  |            |       |         |  |   |       |   |  |  |       |   
|---------------------------------------------------------------------- |  | -------- | ----- | ---- |  | ---------- | ----- | ------- |  | - | ----- | - |  |  | ----- | --
|                                                                      
|                                                                       |  | Increase |       | As a
|(Dollars in millions)                                                  |  | 2003     |       | 2002 |  | (Decrease) |       | Percent
|                                                                      
|Total revenues                                                         |  | $        | 459.3 |      |  | $          | 524.7 |         |  | $ | (65.4 | ) |  |  | (12.5 | )%
|Operating profit                                                       |  |          | 0.6   |      |  |            | 69.1  |         |  |   | (68.5 | ) |  |  | (99.1 | )%
|(Loss) income before discontinued operations and
    accounting change |  |          | (6.0  | )    |  |            | 29.0  |         |  |   | (35.0 | ) |  |  | n/a   |   
|Net loss                                                               |  |          | (9.1  | )    |  |            | (11.7 | )       |  |   | 2.6   |   |  |  | n/a   |   

The $65.4 million decline in total revenues
was principally due to the sale of 174 company-operated
QSRs to franchisees during 2002. These sales were part of a
strategic program to convert a substantial portion of our
company-operated QSRs to franchised QSRs. As a result of these
conversion transactions, we have experienced a reduction in
sales from company-operated restaurants and associated
restaurant costs, with a related increase in franchise revenues.
We have engaged in these transactions because we believe our
profit margins and our returns on investment will be higher if
our brands systems are predominantly franchised as opposed
to company-operated. This

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##### Table of Contents



program was suspended in 2003 due to our delay in
producing current financial statements to include in Uniform
Franchise Offering Circulars (UFOCs).


The delay in filing current UFOCs in accordance
with federal and state regulations also prevented our brands
from selling domestic franchises to prospective franchisees for
the majority of 2003 (and 2004 through the date of this filing).
The delay was caused by the restatements and re-audits of
previously issued financial information. See our 2002 Annual
Report on Form 10-K for a discussion of the restatements.

The factors principally responsible for our
decline in operating profit are:



| |   |                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $28.5 million of impairment charges
    associated with our bakery business segment in 2003 compared to
    $5.3 million in 2002;                                                                                                                                                                                                  
|
| |  | $17.2 million of impairment charges
    associated with our chicken business segment in 2003 compared to
    $6.0 million in 2002;                                                                                                                                                                                                 
|
| |  | $14.0 million of expenses related to the
    restatements referred to above, an independent investigation
    commissioned by our Audit Committee and legal fees associated
    with the shareholder lawsuit (described in Item 3
    Legal Proceedings of this Annual Report on
    Form 10-K) in 2003 compared to zero in 2002;
|
| |  | $8.0 million in fees from unit conversions
    in 2002 compared to no equivalent fees in 2003. There were no
    unit conversions in 2003;                                                                                                                                                                                         
|
| |  | $5.0 million of employee severance costs and
    consultant fees for a productivity initiative in 2003 compared
    to $0.2 million of employee severance costs in 2002;                                                                                                                                                           
|
| |  | $4.2 million of higher provisions for
    uncollectible accounts receivable and notes receivable in 2003
    versus 2002;                                                                                                                                                                                                          
|
| |  | Less contribution to operating profit from QSRs
    that were previously company-operated and are now
    franchised; and                                                                                                                                                                                                          
|
| |  | Negative same-store sales at our brands (see
    system-wide data in Item 6).                                                                                                                                                                                                                                                      

The $28.5 million of impairment charges in
2003 that is associated with our bakery business segment include
$28.0 million of fourth-quarter impairment charges:
$18.1 million relating to trademarks and trade names;
$7.6 million relating to goodwill; $1.8 million
relating to property and equipment at QSR sites; and
$0.5 million relating to other intangible assets. These
fourth quarter charges resulted from an independent valuation of
Cinnabons operations. Cinnabons business was
adversely impacted by the economic challenges of 2003. Consumer
visits to malls declined in 2003, which adversely impacted
Cinnabons same-store sales growth throughout the year.
Compared to the prior years assessment of the estimated
value of our Cinnabon business, the 2003 assessment reflects
lower expected net unit growth over the next five years as we
plan to close under-performing locations and lower expectations
with respect to future same-store sales growth for the remaining
bakeries. In the 2003 assessment, these revised assumptions
resulted in lower cash flow projections and a lower estimated
value for the business.

The $17.2 million of impairment charges in
2003 that is associated with our chicken business segment
include $13.6 million of fourth quarter impairment charges:
$6.6 million related to the closing of
19 company-operated QSRs; and $7.0 million related to
the write-down of assets under contractual agreement. Assets
under contractual agreement relate to certain assets of
company-operated QSRs; that were sold to franchisees in prior
years. Because the risks of ownership in these transactions had
not passed to the buyers, we did not remove these assets from
our books and records. In the fourth quarter of 2003, we
concluded that these assets were other than temporarily impaired
and, accordingly, we wrote them down to their estimated fair
value. Additionally, during 2003 there were $3.6 million of
impairment charges, $2.0 million of which related to a new
restaurant concept that was abandoned.

We believe the following are mitigating factors
that will impact our performance for 2004:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Shortly after filing this Annual Report on
    Form 10-K, we expect to issue UFOCs with current financial
    information and commence the filing of applicable state
    registrations thereby allowing us to begin the process of
    selling new domestic franchises. We plan to actively pursue the
    sale of domestic franchises throughout 2004 and 2005 focusing on
    greater penetration of existing geographic markets and new
    geographic markets.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Like others in the QSR industry, our brands
    experienced downward trends in same-store sales during the first
    half of 2003, due in large part to the prevailing general
    economic climate in the United States. With the strengthened
    national economy in the second half of 2003, this performance
    measure improved throughout the industry and for our brands,
    though our brands lagged behind industry averages. Period
    same-store sales turned positive for our brands domestic
    operations in the latter part of 2003.



| |  |                                                                                                                                                                                                                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During 2003 and into 2004, we have refreshed our
    menus at each of our brands to attract new customers, and we are
    pursuing new advertising strategies. Together, these
    initiatives, as well as other operational initiatives, are
    designed to improve our brands same-store sales.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We expect to experience additional savings
    related to our 2003 productivity initiative.                                                                                                                                                                                                                                                                                                                                             
|
| |  | While certain accounting costs will continue to
    be higher than normal in the first and second quarters of 2004
    due to the restatement and due to the controls and systems
    changes that resulted from the restatement, we expect that such
    costs will lessen in subsequent periods.                                                                                                                                      
|
| |  | As noted above, during 2003, we incurred
    significant impairment charges at our Cinnabon operations. As of
    the filing date of this Annual Report on Form 10-K, we are
    not aware of any adverse trends in the operations of any of our
    brands that might give rise to future impairments of goodwill
    and other intangible assets or that would materially impact our
    financial condition or results of operations.

At the same time, we expect certain costs to rise
in 2004. We expect fresh chicken prices to rise as the supply of
fast-food sized chickens and the number of fast-food sized
chicken suppliers to the QSR industry declines. We also expect
to see our franchisee support costs, information technology
costs and legal costs rise.

The past year was, for many reasons, a
challenging one. Yet, going into 2004, we believe our base
operations are strong and our brand strategies will result in
top-line growth in revenues and bottom-line growth in
profitability. Our system-wide sales growth rate has declined
over the last several years (see Item 6 herein). We believe
a critical factor to achieving growth and profitability will be
our ability to reverse this trend and improve same-store sales.
We will seek to improve system-wide sales through:



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | Strong growth in the number of franchised units,
    as discussed above;                       
|
| |  | Some modest growth in company-operated units
    consistent with our model market strategy; and
|
| |  | Improved same-store sales.                                                                     

During 2003, we engaged in significant
consumer-based research. We surveyed our customers regarding our
menu offerings, our operations, our facilities, our service and
our use of technology. We are working to use this information to
improve our operations throughout our brands. We believe our
strategic response to this information will strongly influence
the direction of same-store sales in future periods, as well as
interest among potential franchisees.

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| |                                                            
| | -----------------------------------------------------------
| | Consolidated Results of Operations: 2003,
    2002 and 2001

In addition to the matters referred to in the
immediately preceding discussion entitled Management
Overview, our consolidated statements of operations
include the following items and events that affect comparability
with other periods:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As part of our ongoing effort to grow our
    business through franchising, during 2001 we began an initiative
    to strategically sell selected 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. There were
    no unit conversions in 2003. By brand, the number of unit
    conversions and the associated gains and losses on such
    sales for 2002 and 2001 were as follows:

|                       |                        |      |      |      |  |   |      |     | 
|---------------------- | ---------------------- | ---- | ---- | ---- |  | - | ---- | --- | 
|                      
|(Dollars in millions)  |                        | 2002 |      | 2001
|                      
|Unit conversions:      |                        |      |      |      |  |   |      |    
|                       |                        |      |      |      |  |   |      |    
|Popeyes                |                        |      |     |      |  |   | 27   |    
|Churchs               |                        |      | 111  |      |  |   | 70   |    
|Cinnabon               |                        |      | 63   |      |  |   | 36   |    
|                       |                        |     
|                       | Total unit conversions |      |      | 174  |  |   |      | 133 | 
|                       |                        |     
|Gains and Losses:      |                        |      |      |      |  |   |      |    
|Losses recognized, net |                        | $    | (3.9 | )    |  | $ | (1.3 | )  
|Gains deferred         |                        |      | 10.3 |      |  |   | 6.4  |    



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, during 2002 and 2001, we recognized
    approximately $8.0 million and $4.9 million,
    respectively, in fees associated with these unit conversions.                                                                                                                                                                                                                                                                                                    
|
| | During 2003, 2002 and 2001, we recognized
    previously deferred gains of $1.2 million,
    $0.5 million and $0.2 million, respectively, in
    income. In our Consolidated Financial Statements, these gains
    are a component of impairment charges and other.
    During 2003, a dispute relating to a 2002 unit conversion was
    settled. The settlement was treated as an adjustment to the
    purchase price, reducing the deferred gain by $1.5 million.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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. Amortization expense associated with
    the finite-lived intangible assets of our continuing operations
    was $0.1 million in 2003, $0.1 million in 2002, and
    $7.8 million in 2001.
|
| |  | During 2001, we accrued expenses relating to the
    retirement of a former officer. This increased 2001 general and
    administrative expenses by $2.9 million.                                                                                                                                                                                                                                                                                                                                                
|
| |  | Included in interest expense are premiums and
    discounts associated with the repurchase of all of our senior
    subordinated notes and the amortization and write-off of debt
    issuance costs, which aggregate to $10.7 million and
    $3.2 million in 2002 and 2001, respectively.                                                                                                                                                                                                                      

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The following table presents selected revenues
and expenses as a percentage of total revenues (or, in certain
circumstances, as a percentage of a corresponding revenue line
item).

|                                                                                     |                                                                                  |                   |    |      |     |      |    |    |     |   |    |    |     |  
|------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------- | ----------------- | -- | ---- | --- | ---- | -- | -- | --- | - | -- | -- | --- | -
|                                                                                    
|                                                                                     |                                                                                  | 2003              |    | 2002 |     | 2001
|                                                                                    
|Revenues:                                                                            |                                                                                  |                   |    |      |     |      |    |    |     |   |    |   
|                                                                                     | Sales by company-operated restaurants                                            |                   |    | 70   | %   |      |    | 74 | %   |   |    | 80 | %  
|                                                                                     | Franchise revenues                                                               |                   |    | 25   | %   |      |    | 21 | %   |   |    | 17 | %  
|                                                                                     | Other revenues                                                                   |                   |    | 5    | %   |      |    | 5  | %   |   |    | 3  | %  
|                                                                                     |                                                                                  |                  
|                                                                                     |                                                                                  | Total revenues(1) |    |      | 100 | %    |    |    | 100 | % |    |    | 100 | %
|                                                                                     |                                                                                  |                  
|                                                                                    
|Expenses:                                                                            |                                                                                  |                   |    |      |     |      |    |    |     |   |    |   
|                                                                                     | Restaurant employee, occupancy and other
    expenses(2)                         |                   |    | 52   | %   |      |    | 52 | %   |   |    | 51 | %  
|                                                                                     | Restaurant food, beverages and packaging(2)                                      |                   |    | 29   | %   |      |    | 28 | %   |   |    | 29 | %  
|                                                                                     | General and administrative expenses                                              |                   |    | 23   | %   |      |    | 19 | %   |   |    | 17 | %  
|                                                                                     | Depreciation and amortization                                                    |                   |    | 5    | %   |      |    | 5  | %   |   |    | 6  | %  
|                                                                                     | Impairment charges and other                                                     |                   |    | 14   | %   |      |    | 4  | %   |   |    | 2  | %  
|                                                                                     |                                                                                  |                  
|                                                                                     |                                                                                  | Total expenses    |    |      | 100 | %    |    |    | 87  | % |    |    | 89  | %
|                                                                                     |                                                                                  |                  
|                                                                                    
|Operating profit                                                                     |                                                                                  |                   |   |      |     |      | 13 | %  |     |   | 11 | % 
|                                                                                     | Interest expense, net                                                            |                   |    | 1    | %   |      |    | 4  | %   |   |    | 4  | %  
|                                                                                     |                                                                                  |                  
|(Loss) income before income taxes,
    discontinued operations and accounting change |                                                                                  |                   | (1 | )%   |     |      | 9  | %  |     |   | 7  | % 
|                                                                                     | Income tax expense                                                               |                   |    |     |     |      |    | 3  | %   |   |    | 3  | %  
|                                                                                     |                                                                                  |                  
|(Loss) income before discontinued
    operations and accounting change               |                                                                                  |                   | (1 | )%   |     |      | 6  | %  |     |   | 4  | % 
|                                                                                     | Loss from discontinued operations, net of income
    taxes                       |                   |    | (1   | )%  |      |    | (8 | )%  |   |    | (1 | )% 
|                                                                                     | Loss from the cumulative effect of an accounting
    change, net of income taxes |                   |    |     |     |      |    |   |     |   |    |   |    
|                                                                                     |                                                                                  |                  
|Net (loss) income                                                                    |                                                                                  |                   | (2 | )%   |     |      | (2 | )% |     |   | 3  | % 



---



|    |                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                         

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Comparisons of Fiscal Years 2003 and
2002

Sales by Company-Operated
Restaurants

|                      |       |      |       |       |  |            |       |         |  |   |       |       |   |  |       |       |   
|--------------------- | ----- | ---- | ----- | ----- |  | ---------- | ----- | ------- |  | - | ----- | ----- | - |  | ----- | ----- | --
|                     
|                      |       | As a
|(Dollars in millions) |       | 2003 |       | 2002  |  | (Decrease) |       | Percent
|                     
|Chicken               |       | $    | 292.3 |       |  | $          | 339.0 |         |  | $ | (46.7 | )     |   |  | (13.8 | )%   
|Bakery                |       |      | 31.1  |       |  |            | 46.9  |         |  |   | (15.8 | )     |   |  | (33.7 | )    
|                      | Total |      | $     | 323.4 |  |            | $     | 385.9   |  |   | $     | (62.5 | ) |  |       | (16.2 | )%

Chicken.Of
the $46.7 million decrease in sales by company-operated
restaurants, approximately $45.3 million of it was due to
the conversion of 111 company-operated Churchs
restaurants throughout 2002. Approximately $3.5 million of
the decrease was attributable to a net decrease in same-store
sales for 2003 compared to 2002 (a 0.8% decline in same-store
sales at Churchs company-operated restaurants and a 2.4%
decline 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
openings and closings. In 2003, we closed
19 company-operated restaurants and opened one new
company-operated restaurant.

Bakery.Of
the $15.8 million decrease in sales by company-operated
bakeries, approximately $12.8 million was due to the
conversion of 63 company-operated bakeries throughout 2002.
Approximately $2.1 million of the decrease was due to a
6.6% decline in same-store sales in 2003 compared to 2002. The
remaining fluctuation was due to various influences including
the actual number and timing of bakery openings and closings.
During 2003, we closed nine company-operated bakeries, and did
not open any new company-operated bakeries.

Franchise Revenues

|                      |       |      |       |       |  |          |      |         |  |   |     |     |  |  |     |     |  
|--------------------- | ----- | ---- | ----- | ----- |  | -------- | ---- | ------- |  | - | --- | --- |  |  | --- | --- | -
|                     
|                      |       | As a
|(Dollars in millions) |       | 2003 |       | 2002  |  | Increase |      | Percent
|                     
|Chicken               |       | $    | 102.4 |       |  | $        | 97.9 |         |  | $ | 4.5 |     |  |  | 4.6 | %  
|Bakery                |       |      | 11.9  |       |  |          | 11.9 |         |  |   |    |     |  |  |    |    
|                      | Total |      | $     | 114.3 |  |          | $    | 109.8   |  |   | $   | 4.5 |  |  |     | 4.1 | %

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 franchised units in a given
market. Royalty revenues are the largest component of franchise
revenues, constituting more than 90% of franchise revenues in
our chicken segment and more than 70% of franchise revenues in
our bakery segment.

Chicken.Of
the $4.5 million increase in franchise revenues,
approximately $6.7 million was due to an increase in
royalties resulting from an increase in franchised units, which
was partially offset by an approximately $2.2 million
decrease in royalties attributable to a decrease in same-store
sales for 2003 compared to 2002. As of December 28, 2003,
we had 2,965 franchised restaurants open, compared to 2,841 as
of December 29, 2002.

During 2003, the chicken segment had 226 new
franchised restaurant openings and 99 permanent restaurant
closings or temporary restaurant closings for re-imaging.

Bakery.Franchise revenues were $11.9 million in both 2003 and
2002. An increase in royalties resulting from new bakery
conversions and growth of approximately $0.3 million was
offset by a decrease in royalties attributable to declines in
same-store sales for 2003 compared to 2002 of approximately
$0.3 million. As of December 28, 2003, we had
551 franchised bakeries open, compared to 528 as of
December 29, 2002. With respect to Seattles Best
Coffee franchise operations, which we include in the bakery
segment, as of December 28, 2003, we had
138 franchised cafes open, compared to 91 as of
December 29, 2002.

During 2003, the bakery segment had 109 new
franchised bakery and cafe openings and 40 permanent or
temporary bakery closings for re-imaging.

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Other Revenues

|                        |       |          |      |      |  |            |      |         |  |   |      |      |   |  |       |       |   
|----------------------- | ----- | -------- | ---- | ---- |  | ---------- | ---- | ------- |  | - | ---- | ---- | - |  | ----- | ----- | --
|                       
|                        |       | Increase |      | As a
|(Dollars in millions)   |       | 2003     |      | 2002 |  | (Decrease) |      | Percent
|                       
|Rental income           |       | $        | 19.8 |      |  | $          | 17.3 |         |  | $ | 2.5  |      |   |  | 14.5  | %    
|Conversion related fees |       |          |     |      |  |            | 8.0  |         |  |   | (8.0 | )    |   |  | n/a   |      
|Wholesale revenues      |       |          | 1.7  |      |  |            | 3.6  |         |  |   | (1.9 | )    |   |  | (52.8 | )    
|Other                   |       |          | 0.1  |      |  |            | 0.1  |         |  |   |     |      |   |  |      |      
|                        | Total |          | $    | 21.6 |  |            | $    | 29.0    |  |   | $    | (7.4 | ) |  |       | (25.5 | )%

Substantially all of the $2.5 million
increase in rental income was due to a full year of rental
income in 2003 associated with unit conversions that occurred
during 2002. There were no unit conversions and related fees in
2003, which resulted in the $8.0 million decrease in such
fees compared to 2002. The $1.9 million decrease in
wholesale revenues was due to our discontinuance of selling
cinnamon rolls under a wholesale arrangement in our bakery
segment in the early part of 2003.

Restaurant Employee, Occupancy and Other
Expenses

Restaurant employee, occupancy and other expenses
were $169.6 million in 2003, a $30.8 million decrease
from 2002. This decrease was attributable to the reduction in
sales from company-operated restaurants from 2002 to 2003 (which
was principally due to the 2002 conversion of company-operated
QSRs to franchised QSRs). Restaurant employee, occupancy and
other expenses were approximately 52% of sales from
company-operated restaurants in both 2003 and 2002.

Restaurant Food, Beverages and
Packaging

Restaurant food, beverages and packaging expenses
were $94.9 million in 2003, a $14.2 million decrease
from 2002. This decrease was attributable to the reduction in
sales from company-operated restaurants from 2002 to 2003.
Restaurant food, beverage and packaging expenses were
approximately 29% of sales from company-operated restaurants in
2003, compared to approximately 28% in 2002.

General and Administrative Expenses

General and administrative expenses were
$107.3 million in 2003, a $5.7 million increase from
2002. The increase was principally due to $4.2 million of
higher provisions for uncollectible accounts and notes
receivable, $2.5 million of higher employee severance
costs, and $2.3 million relating to consultant fees in 2003
associated with a productivity initiative. These increases were
partially offset by $2.5 million less in corporate employee
costs due to personnel reductions and $1.0 million less in
management bonuses.

General and administrative expenses were
approximately 23% of total revenues in 2003, compared to
approximately 19% in 2002. The increase in general and
administrative expenses as a percent of sales was due to the
previously discussed increases in expenses and a decrease in
total revenues.

Depreciation and Amortization

Depreciation and amortization was
$23.0 million in 2003, a $2.3 million decrease from
2002. The decrease was primarily due to reduced property and
equipment balances resulting from unit conversions and
impairment charges in 2002. Depreciation and amortization as a
percentage of total revenues was approximately 5% in both 2003
and 2002.

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) professional fees and other related charges incurred
during 2003 associated with the restatement and the re-audit of
2001 and 2000 financial information; (3) costs associated
with unit closures and refurbishments; (4) gains and losses
on the sale of assets; (5) costs associated with an
independent investigation commissioned by our Audit Committee
and certain shareholder litigation discussed in Item 3; and

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(6) wholesale costs associated with bakery
wholesale sales. These aggregated to $63.9 million in 2003,
a $44.7 million increase from 2002.


The $44.7 million increase was primarily due
to $28.0 million of fourth quarter impairment charges in
2003 associated with our bakery segment that were recognized as
part of our annual assessment of impairment; $13.6 million
of fourth quarter impairment charges in 2003 associated with our
chicken segment; and $14.0 million of costs related to our
restatement and re-audits, an independent investigation
commissioned by our Audit Committee and legal fees associated
with shareholder litigation that were incurred in 2003 as
compared to zero in 2002. The increases were offset by
$0.8 million of gains on the sale of assets in 2003 as
compared to $4.0 million of losses in 2002 and other
miscellaneous matters.

Operating Profit

|                      |       |      |       |      |  |            |       |         |  |   |       |       |   |  |        |       |   
|--------------------- | ----- | ---- | ----- | ---- |  | ---------- | ----- | ------- |  | - | ----- | ----- | - |  | ------ | ----- | --
|                     
|                      |       | As a
|(Dollars in millions) |       | 2003 |       | 2002 |  | (Decrease) |       | Percent
|                     
|Chicken               |       | $    | 76.6  |      |  | $          | 103.9 |         |  | $ | (27.3 | )     |   |  | (26.3  | )%   
|Bakery                |       |      | (31.4 | )    |  |            | (12.3 | )       |  |   | (19.1 | )     |   |  | (155.3 | )    
|Corporate             |       |      | (44.6 | )    |  |            | (22.5 | )       |  |   | (22.1 | )     |   |  | (98.2  | )    
|                      | Total |      | $     | 0.6  |  |            | $     | 69.1    |  |   | $     | (68.5 | ) |  |        | (99.1 | )%

During 2003, we modified our approach to
allocating corporate overhead costs to our business segments.
During 2003, information technology costs were allocated to the
segments. Our allocations for earlier years were adjusted to be
consistent with the 2003 approach.

On a consolidated basis, operating profit
decreased by $68.5 million in 2003 when compared to 2002.
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.

The $27.3 million decline in operating
profit associated with our chicken segment was due to a decrease
in company-operated units from 2002 conversions, declining
same-store sales, $11.2 million of higher impairment
charges in that segment in 2003 compared with 2002 and
$4.2 million of higher provisions for uncollectible
accounts and notes receivable in 2003 compared with 2002.

The $19.1 million decline in operating
profit associated with our bakery segment was principally a
result of $23.2 million of higher impairment charges in
that segment in 2003 compared with 2002.

The $22.1 million decline in operating
profit associated with our corporate operations was principally
due to $14.0 million of costs related to our restatement
and re-audits, an independent investigation commissioned by our
Audit Committee and legal fees associated with shareholder
litigation that were incurred in 2003 versus zero in 2002. The
remaining difference is principally attributed to higher
consulting fees and other professional services in 2003 as well
as higher severance costs offset by lower corporate salaries and
bonuses in 2003 compared to 2002.

Interest Expense, Net

Interest expense, net was $7.1 million in
2003, a $15.5 million decrease from 2002. The decrease was
principally due to (1) the lack of costs associated with
debt extinguishments in 2003 as compared to $9.6 million in
2002 and (2) $5.7 million of lower interest on debt in
2003 as compared to 2002 due to lower debt balances. During
2003, our outstanding indebtedness dropped from
$226.6 million at the start of the year, to
$130.9 million at the end of the year.

Income Tax Expense

In 2003, we had an income tax benefit associated
with our continuing operations of $0.5 million compared to
an expense of $17.5 million in 2002. Our effective tax rate
for 2003 was (8.4%) compared to 37.6% for 2002. Our effective
tax rate decreased in 2003 compared to 2002 due primarily to the
write-off of $7.6 million of non-deductible goodwill.

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Loss from Discontinued Operations, Net of
Income Taxes

During 2003, we sold our Seattle Coffee
subsidiary. We recognized a $2.1 million loss, including
tax, on the disposition.

During 2003, we recognized a net loss of
$0.6 million relating to Seattle Coffee prior to its
disposition compared to a net loss of $40.7 million in
2002. During 2002, Seattle Coffee recognized $45.1 million
(pre-tax) of goodwill and other impairment charges.

Loss from the Cumulative Effect of an
Accounting Change, Net of Income Taxes

In 2003, we adopted SFAS No. 143,
Accounting for Asset Retirement Obligations
(SFAS 143). SFAS 143 addresses financial
accounting and reporting for legal 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. 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. As a result of obligations
under certain leases that are within the scope of SFAS 143,
we recorded a cumulative effect adjustment of $0.7 million
($0.4 million after tax).

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Comparisons of Fiscal Years 2002 and
2001

Sales by Company-Operated
Restaurants

|                      |       |      |       |       |  |            |       |         |  |   |       |       |   |  |       |       |   
|--------------------- | ----- | ---- | ----- | ----- |  | ---------- | ----- | ------- |  | - | ----- | ----- | - |  | ----- | ----- | --
|                     
|                      |       | As a
|(Dollars in millions) |       | 2002 |       | 2001  |  | (Decrease) |       | Percent
|                     
|Chicken               |       | $    | 339.0 |       |  | $          | 410.9 |         |  | $ | (71.9 | )     |   |  | (17.5 | )%   
|Bakery                |       |      | 46.9  |       |  |            | 68.4  |         |  |   | (21.5 | )     |   |  | (31.4 | )    
|                      | Total |      | $     | 385.9 |  |            | $     | 479.3   |  |   | $     | (93.4 | ) |  |       | (19.5 | )%

Chicken.Of
the $71.9 million decrease in sales by company-operated
restaurants, approximately $69.9 million 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 1.1% 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 68 company-operated bakeries during 2002. In
2002, we sold 63 bakeries to franchisees, closed ten bakeries,
and opened five new bakeries. Approximately $2.7 million of
the decrease was due to a 5.8% decline in retail 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.

Franchise Revenues

|                      |       |      |      |       |  |          |      |         |  |   |     |     |  |  |      |     |  
|--------------------- | ----- | ---- | ---- | ----- |  | -------- | ---- | ------- |  | - | --- | --- |  |  | ---- | --- | -
|                     
|                      |       | As a
|(Dollars in millions) |       | 2002 |      | 2001  |  | Increase |      | Percent
|                     
|Chicken               |       | $    | 97.9 |       |  | $        | 90.1 |         |  | $ | 7.8 |     |  |  | 8.7  | %  
|Bakery                |       |      | 11.9 |       |  |          | 10.2 |         |  |   | 1.7 |     |  |  | 16.7 |    
|                      | Total |      | $    | 109.8 |  |          | $    | 100.3   |  |   | $   | 9.5 |  |  |      | 9.5 | %

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 90% of franchise revenues in our chicken
segment and more than 70% of franchise revenues in our bakery
segment.

Chicken.Of
the $7.8 million increase in franchise revenues,
$8.2 million resulted from an increase in royalties due to
new unit growth and conversions within our network of
franchisees, which was partially offset by $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.

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 re-imaging.
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 $1.7 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. 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
528 franchised bakeries open, compared to 392 as of
December 30, 2001.

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Other Revenues

|                        |       |          |      |      |  |            |      |         |  |   |      |      |  |  |       |      |  
|----------------------- | ----- | -------- | ---- | ---- |  | ---------- | ---- | ------- |  | - | ---- | ---- |  |  | ----- | ---- | -
|                       
|                        |       | Increase |      | As a
|(Dollars in millions)   |       | 2002     |      | 2001 |  | (Decrease) |      | Percent
|                       
|Rental income           |       | $        | 17.2 |      |  | $          | 12.3 |         |  | $ | 4.9  |      |  |  | 39.8  | %   
|Conversion related fees |       |          | 8.0  |      |  |            | 4.9  |         |  |   | 3.1  |      |  |  | 63.3  |     
|Wholesale revenues      |       |          | 3.6  |      |  |            |     |         |  |   | 3.6  |      |  |  | n/a   |     
|Other                   |       |          | 0.2  |      |  |            | 0.7  |         |  |   | (0.5 | )    |  |  | (71.4 | )   
|                        | Total |          | $    | 29.0 |  |            | $    | 17.9    |  |   | $    | 11.1 |  |  |       | 62.0 | %

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.

During 2002, we had wholesale bakery sales of
$3.6 million related to the distribution of pre-packaged
cinnamon rolls through a major retailer. This was a new business
activity for our bakery segment in 2002, which we discontinued
in 2003.

Restaurant Employee, Occupancy and Other
Expenses

Restaurant employee, occupancy and other expenses
were $200.4 million in 2002, a $42.9 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 52% 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 $109.1 million in 2002, a $29.9 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
$101.6 million in 2002, a $2.2 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. General and
administrative expenses were approximately 19% of total revenues
in 2002, compared to approximately 17% in 2001.

Depreciation and Amortization

Depreciation and amortization was
$25.3 million in 2002, a $10.5 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 and lower depreciation expense resulting
from unit conversions. 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 aggregated to
$19.2 million in 2002, a $7.1 million increase from
2001. The increase was principally due to $3.0 million of
costs related to our bakery segments new wholesale
business operations in 2001 compared to no costs in 2000,
$2.9 million increase in losses associated with asset sales
and $0.9 million increase in impairment charges.

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Operating Profit

|                      |       |          |       |      |  |            |       |         |  |   |      |     |  |  |        |     |  
|--------------------- | ----- | -------- | ----- | ---- |  | ---------- | ----- | ------- |  | - | ---- | --- |  |  | ------ | --- | -
|                     
|                      |       | Increase |       | As a
|(Dollars in millions) |       | 2002     |       | 2001 |  | (Decrease) |       | Percent
|                     
|Chicken               |       | $        | 103.9 |      |  | $          | 84.6  |         |  | $ | 19.3 |     |  |  | 22.8   | %  
|Bakery                |       |          | (12.3 | )    |  |            | (4.6  | )       |  |   | (7.7 | )   |  |  | (167.4 | )  
|Corporate             |       |          | (22.5 | )    |  |            | (16.5 | )       |  |   | (6.0 | )   |  |  | (36.4  | )  
|                      | Total |          | $     | 69.1 |  |            | $     | 63.5    |  |   | $    | 5.6 |  |  |        | 8.8 | %

On a consolidated basis, operating profit
increased by $5.6 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.

The $19.3 million increase in operating
profit associated with our chicken segment 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 $7.7 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 $6.0 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
$1.1 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 Tax Expense

In 2002, we had income tax expense associated
with continuing operations of $17.5 million compared to
$16.3 million in 2001. In 2002, our effective tax rate was
37.6% of pre-tax income compared to 41.9% in 2001. Our effective
tax rate decreased in 2002 compared to 2001 due primarily to
lower, non-deductible, amortization expense in 2002.

Loss from Discontinued Operations, Net of
Income Taxes

During 2002, our loss from discontinued
operations was $40.7 million, a $33.7 million greater
loss compared with 2001. The increased loss was due to the
write-off of $45.1 million (pre-tax) of intangible assets
in 2002.

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Consolidated Cash Flows

|                                            |                                 |      |       |      |   |      |       |     |  |   |       |       |  
|------------------------------------------- | ------------------------------- | ---- | ----- | ---- | - | ---- | ----- | --- |  | - | ----- | ----- | -
|                                           
|(In millions)                               |                                 | 2003 |       | 2002 |   | 2001
|                                           
|Cash flows provided by operating activities |                                 | $    | 46.2  |      |   | $    | 93.8  |     |  | $ | 57.4  |      
|Cash flows used in investing activities     |                                 |      | 39.4  |      |   |      | (13.6 | )   |  |   | (17.5 | )    
|Cash flows used in financing activities     |                                 |      | (91.4 | )    |   |      | (75.7 | )   |  |   | (50.0 | )    
|                                            | Net increase (decrease) in cash |      | $     | (5.8 | ) |      | $     | 4.5 |  |   | $     | (10.1 | )

Cash flows provided by operating
activities.Net cash flows from
operating activities were $46.2 million in 2003, a
$47.6 million decrease from 2002. The decrease was
principally the result of a $27.3 million decrease in
deferred tax expense, a $4.9 million increase in net
operating assets in 2003 compared to a $2.6 million
decrease in 2002, and a $3.9 million use of cash from
discontinued operations in 2003 compared to $2.7 million of
cash provided by discontinued operations in 2002; offset by a
$1.3 million decrease in operating performance from
continuing operations before consideration of non-cash charges
for accounting changes, depreciation and amortization, asset
write-downs, provisions for bad debts and non-cash interest.

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
$14.5 million increase in deferred income tax expense, and
a $2.6 million decrease in net operating assets in 2002
compared to a $9.7 million increase in 2001, and a
$2.7 million of cash provided by discontinued operations in
2002 compared to $4.1 million of cash used in discontinued
operations in 2001.

Cash flows used in investing
activities.Net cash flows
provided by investing activities were $39.4 million in
2003, a $53.0 million increase from 2002. The increase was
principally due to net proceeds of $62.1 million related to
the sale of Seattle Coffee in 2003 and $24.1 million less
in capital expenditures in 2003 compared to 2002; offset by
$33.6 million less in sales proceeds from the disposition
of property and equipment. In 2003, capital expenditures were
$25.6 million compared to $49.7 million in 2002.

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 disposition of property and equipment were
$35.4 million in 2002 compared to $39.9 million in
2001.

Cash flows used in financing
activities.Net cash used in
financing activities was $91.4 million in 2003. During
2003, we used $93.6 million of cash to pay down
indebtedness under our 2002 Credit Facility. The remaining
$2.2 million of net cash proceeds from financing activities
includes proceeds from the issuance of stock options and various
other offsetting items.

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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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
($21.9 million available as of December 28, 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.

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 or
liquidity.

During 2003 and 2004, we obtained amendments to
our 2002 Credit Facility extending the periods in which we may
file our 2002 and 2003 audited financial statements, our 2003
quarterly financial statements and to adjust certain financial
ratios for 2003. Without the amendments, we would have been in
default of the 2002 Credit Facility and the entire amount of the
debt would have been subject to acceleration by the
facilitys lenders. If we are not able to continue to
provide timely financial information to the lenders as required
under the 2002 Credit Facility, there can be no assurance that
such lenders will provide future relief through waivers or
additional amendments. If we default on the terms and conditions
of the 2002 Credit Facility and the debt is accelerated by the
facilitys lenders, such developments will have a material
adverse impact on our financial condition and our 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, were approximately
$62.1 million. 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 and on certain U.S. military bases.

Pursuant to the terms of our 2002 Credit
Facility, we were required to use the net proceeds from the sale
of Seattle Coffee to pay down indebtedness under the facility.
On July 17, 2003, we paid down $31.3 million of
indebtedness under the facility using proceeds from the sale. On
October 31, 2003, we paid down another $29.2 million
of indebtedness with sales proceeds. An additional payment,
estimated at $1.6 million, may be required. This additional
payment is included in the schedule of contractual obligations
(below) as a 2004 payment.

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Contractual Obligations

The following table summarizes our contractual
obligations, due over the next five years and thereafter, as of
December 28, 2003:

|                                                |  |        |      |      |  |      |      |      |  |      |      |       |  |       |      |  |  |   |      |  |  |   |       |  |  |   |       | 
|----------------------------------------------- |  | ------ | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ----- |  | ----- | ---- |  |  | - | ---- |  |  | - | ----- |  |  | - | ----- | 
|                                               
|                                                |  | There- |      |     
|(In millions)                                   |  | 2004   |      | 2005 |  | 2006 |      | 2007 |  | 2008 |      | after |  | Total
|                                               
|Leases(1)                                       |  | $      | 24.3 |      |  | $    | 21.3 |      |  | $    | 18.2 |       |  | $     | 16.0 |  |  | $ | 13.5 |  |  | $ | 48.2  |  |  | $ | 141.5 | 
|Long-term debt(2)                               |  |        | 12.0 |      |  |      | 9.5  |      |  |      | 14.8 |       |  |       | 40.4 |  |  |   | 13.5 |  |  |   | 39.2  |  |  |   | 129.4 | 
|Copeland formula agreement(3)                   |  |        | 3.1  |      |  |      | 3.1  |      |  |      | 3.1  |       |  |       | 3.1  |  |  |   | 3.1  |  |  |   | 61.5  |  |  |   | 77.0  | 
|Information technology outsourcing 
    IBM(3) |  |        | 5.4  |      |  |      | 5.0  |      |  |      | 4.8  |       |  |       | 4.5  |  |  |   | 4.3  |  |  |   | 5.3   |  |  |   | 29.3  | 
|Accounting and tax outsourcing 
    D&T(3)     |  |        | 4.1  |      |  |      | 4.3  |      |  |      | 4.5  |       |  |       | 4.7  |  |  |   | 4.8  |  |  |   | 5.1   |  |  |   | 27.5  | 
|Information technology outsourcing 
    D&T(3) |  |        | 5.6  |      |  |      | 3.9  |      |  |      | 4.0  |       |  |       | 4.1  |  |  |   | 4.2  |  |  |   | 4.4   |  |  |   | 26.2  | 
|King Features agreements(3)                     |  |        | 0.9  |      |  |      | 0.9  |      |  |      | 0.9  |       |  |       | 0.9  |  |  |   | 0.9  |  |  |   | 1.4   |  |  |   | 5.9   | 
|Post-employment payments to a former officer    |  |        | 0.4  |      |  |      | 0.4  |      |  |      | 0.4  |       |  |       | 0.3  |  |  |   | 0.3  |  |  |   | 1.0   |  |  |   | 2.8   | 
|Purchase commitments(3)                         |  |        | 9.4  |      |  |      | 8.9  |      |  |      | 2.8  |       |  |       |     |  |  |   |     |  |  |   |      |  |  |   | 21.1  | 
|                                                |  | $      | 65.2 |      |  | $    | 57.3 |      |  | $    | 53.5 |       |  | $     | 74.0 |  |  | $ | 44.6 |  |  | $ | 166.1 |  |  | $ | 460.7 | 



---



|    |                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Of the $141.5 of minimum lease payments,
    $138.9 million relate to operating leases and the remaining
    $2.6 million relate to capital leases. See Note 11 to
    the Consolidated Financial Statements.                                                                                
|   
|(2) | See the discussion below and in Note 10 to
    our Consolidated Financial Statements for more information
    concerning our long-term borrowings.                                                                                                                                           
|   
|(3) | For information concerning the Copeland formula
    agreement, the accounting and tax outsourcing agreement, the
    information technology outsourcing agreements, the King Features
    agreements, and our purchase commitments, see Note 13 to
    our 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 JP Morgan Chase Bank, 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.

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 and our credit rating. The margins may fluctuate
because of changes in these ratios or ratings. 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 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

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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 has customary restrictions
on 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.


Pursuant to the terms of our 2002 Credit
Facility, we were required to use the proceeds from the sale of
Seattle Coffee to pay down indebtedness under the facility. On
July 17, 2003, we paid down $31.3 million of
indebtedness. On October 31, 2003, we paid down another
$29.2 million of indebtedness. An additional payment,
estimated at $1.6 million, may be required.

On March 31, 2003, May 30, 2003,
July 14, 2003, August 22, 2003, October 30, 2003
and March 26, 2004 we amended our 2002 Credit Facility. The
effect of these amendments was to:



| |   |                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Extend, for purposes of the facility, the
    deadline for providing our 2002 annual report to our lenders to
    December 15, 2003 (this requirement was satisfied as of
    that date).                                                                                                                                                                                        
|
| |  | Extend, for purposes of the facility, the
    deadline for providing our quarterly financial information to
    our lenders for the first, second and third quarters of 2003 to
    February 28, 2004 (this requirement was satisfied as of
    that date).                                                                                                                      
|
| |  | 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 deliver
    all of the required quarterly financial information and
    demonstrate a total leverage ratio of not greater than two to
    one for 2003, at which time the revolving line of credit limit
    will return to the original commitment 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 initiative performed in the first quarter of
    2003, subject to certain monetary limits, and the various costs
    associated with the restatement of our previously issued
    financial statements.                                  
|
| |  | Extend, for purposes of the facility, the
    deadline for providing our 2003 annual audited financial
    statements to our lenders to April 12, 2004.                                                                                                                                                                                                                          

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

As of December 28, 2003, there were
$33.7 million in outstanding borrowings under our revolving
credit facility, and $9.4 million in outstanding letters of
credit, leaving amounts available for short-term borrowings and
additional letters of credit of $21.9 million.

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 28, 2003, 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.

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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 2003, we invested $25.6 million in
various capital projects, including $6.3 million in new and
relocated restaurant, bakery and cafe locations,
$2.3 million in our re-imaging program, $0.7 million
in our Seattle Coffee wholesale operations, $5.5 million in
other capital assets to maintain, replace and extend the lives
of company-operated QSR equipment and facilities,
$10.2 million for information technology systems, and
$0.6 million to complete other projects.

During 2002, we invested $49.7 million in
various capital projects, including $7.7 million in new and
relocated 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,
$7.5 million for information technology systems, and
$0.9 million to complete other projects.

During 2001, we invested $58.0 million in
various capital projects, including $12.3 million in new
and relocated 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,
$1.4 million for information technology systems, and
$9.4 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 $30.0 to $35.0 million per year.
In 2004, these expenditures will include investments in
information technology and new accounting systems.

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 have traditionally
experienced the strongest operating results during the holiday
shopping season between Thanksgiving Day and New Years
Day. Any factors that cause reduced traffic at our Cinnabon
bakeries 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 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 have a material
adverse effect on our financial position or results of
operations.

In connection with our Cinnabon acquisition, we
acquired U.S. net operating loss carryforwards of
$13.4 million and tax credit carryforwards of
$1.8 million. In addition, we acquired numerous state net
operating loss carryforwards in the states where Cinnabon had
operations prior to our acquisition. The utilization of these
U.S. and state tax carryforwards 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

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$6.5 million. Accordingly, the balance sheet
does not reflect a net deferred tax asset for these net
operating loss and tax carryforwards.


Any subsequently recognized tax benefits relating
to the valuation allowance for deferred tax assets as of
December 28, 2003 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.Fresh chicken is the
principal raw material for our Popeyes and Churchs
operations. It constitutes approximately half of their combined
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 fresh
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 chicken pricing contracts with chicken suppliers.
These contracts establish pricing arrangements, but do not
establish any firm purchase commitments on the part of AFC or
its franchisees.

Due to diminishing availability of fast-food
sized chickens and other market forces we expect our chicken
costs to rise during 2004. Presently, we are in discussions with
our suppliers to seek to minimize the effect of these rising
chicken costs.

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 franchise operations. In 2003, franchise revenues
from these operations represented approximately 15.6% of our
total franchise revenues. For each of 2003, 2002 and 2001,
foreign-sourced revenues represented 3.9%, 3.5% and 2.9% of
total revenues, respectively. As of December 28, 2003,
approximately $3.1 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 streams from franchised operations in
Korea. Net losses incurred during 2003, 2002 and 2001 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 2002 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 28,
2003, the balances outstanding under our 2002 Credit Facility
totaled $129.3 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 $1.3 million.

Critical Accounting Policies

Our significant accounting policies are presented
in Note 2 to the Consolidated Financial Statements. We
believe that of our significant policies, the following involve
a higher degree of risk, judgment and/or complexity. These
policies involve estimations of the effect of matters that are
inherently uncertain and may significantly impact our quarterly
or annual results of operations or financial condition. Changes
in the estimates and judgments could significantly affect our
results of operations, financial condition and cash flows in
future years. A description of what we consider to be our most
significant critical accounting policies follows.

Impairment of Long-Lived
Assets.We evaluate 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, we perform an 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

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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 the 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.


Impairment of
Goodwill.We evaluate goodwill and
other indefinite-lived assets for impairment on an annual basis
(during the fourth quarter of each year) or more frequently when
circumstances arise indicating that a particular asset may be
impaired. In accordance with the requirements of SFAS 142,
we assign goodwill to our reporting units for purposes of our
impairment evaluation. Our reporting units are our business
segments.

Our impairment evaluation consists of a
comparison of each reporting units fair value with its
carrying value. The fair value of a reporting unit is the
estimated amount for which the unit as a whole could be sold in
a current transaction between willing parties. We estimate the
fair value of our reporting units 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 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 carrying value of a reporting unit exceeds its fair value,
goodwill is written down to its implied fair value.

Impairment of Assets Under Contractual
Agreements.We record impairment
charges related to our investments in assets under
contractual agreements whenever events or circumstances
indicate that a decrease in the value of an investment has
occurred that is other than temporary. In addition, we evaluate
our investments in unconsolidated affiliates for impairment when
they have experienced two consecutive years of operating losses.
Our impairment measurement test for an investment in an
unconsolidated affiliate is similar to that for our QSRs except
that we use discounted cash flows after interest and taxes
instead of discounted cash flows before interest and taxes as
used for our restaurants.

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.

Allowances for Accounts and Notes
Receivables and Contingent
Liabilities.We reserve a
franchisees receivable balance based upon pre-defined
aging criteria adjusted for specific facts and circumstances
that indicate that we may not collect the balance due. See
Note 2 to the Consolidated Financial Statements for
information concerning activity in our allowance accounts.

As a result of closed QSR sites and unit
conversions, we remain liable for certain lease obligations,
assignments and guarantees. We record a liability for our
exposure under these circumstances when such exposure is
probable and estimable. At December 28, 2003, we have
recorded a liability for our exposure, which we consider to be
probable and estimable.

With respect to litigation matters, we similarly
reserve for such contingencies when we are able to assess that
an expected loss is both probable and reasonably estimable.

Income Tax Valuation Allowances and Tax
Reserves.At December 28,
2003, we have recorded a valuation allowance of
$6.5 million primarily to reduce our net operating loss and
tax credit carryforwards of $13.4 million (tax benefit of
$5.1 million) and $1.8 million, respectively, to an
amount that will more likely than not be realized. These net
operating loss and tax credit carryforwards exist in many state
and foreign jurisdictions and have varying carryforward periods
and restrictions on usage. The estimation of future taxable
income in these state and foreign jurisdictions and our
resulting ability to utilize net operating loss and tax credit
carryforwards can significantly change based on future events,
including our determinations as to the feasibility of certain
tax planning strategies. Thus, recorded valuation allowances may
be subject to material future changes.

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As a matter of course, we are regularly audited
by federal, state and foreign tax authorities. We provide
reserves for potential exposures when we consider it probable
that a taxing authority may take a sustainable position on a
matter contrary to our position. We evaluate these reserves,
including interest thereon, on a quarterly basis to insure that
they have been appropriately adjusted for events that may impact
our ultimate payment for such exposures. Currently, the IRS is
auditing our U.S. tax returns for years 1999, 2000 and
2001. Presently, we do not believe that we have any tax matters
that could have a material adverse effect on our financial
position, results of operations or liquidity.

Accounting Standards Adopted in 2003

During 2003, we adopted SFAS No. 143,
Accounting for Asset Retirement Obligations. See
Note 2 to the Consolidated Financial Statements for a
discussion of the impact of adopting this accounting standard.

During 2003, we also adopted:



| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | SFAS No. 146, Accounting for Costs
    Associated with Exit or Disposal Activities;                                                       
|
| |  | FASB Interpretation 45, Guarantors
    Accounting and Disclosure Requirements for Guarantees;                                            
|
| |  | SFAS No. 148, Accounting for
    Stock-Based Compensation  Transition and
    Disclosure  an amendment of FASB Statement
    No. 12; and
|
| |  | SFAS No. 149, Amendment of Statement
    133 on Derivative Instruments and Hedging Activities.                                            

Adoption of these accounting standards did
materially impact our results of operations or our financial
condition.

Accounting Standards That We Have Not Yet
Adopted

For a discussion of recently issued accounting
standards that we have not yet adopted, see Note 3 to the
Consolidated Financial Statements. That note is hereby
incorporated by reference into this Item 7.

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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.



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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 28, 2003, the number of our franchised units
increased

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from 1,477 to 3,654. 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.




| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, Dick R. Holbrook, our President and Chief
Operating Officer, and other members of our senior management
team. 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 adversely affected by our delay in
    releasing audited financial statements for 2002 and 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 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
2004 being below the number we had previously anticipated and
may adversely affect the number of new units to be opened by
franchisees in 2005 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.

Our common stock was delisted from the Nasdaq
National Market as of the opening of business on Monday,
August 18, 2003, due to the failure to have filed our 2002
Annual Report on Form 10-K or our quarterly report for the
first quarter of 2003 by that date. 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. On that date our
common stock began trading on the National Quotation Bureau
(commonly known as 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. 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. In addition, 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

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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.




| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The successful implementation of new
    computer information systems is essential to our ability to
    accurately report our financial results on a timely
    basis.

A significant element of our plan to address
certain issues identified in the evaluation of our controls and
procedures is our deployment of a new financial reporting
system, a new QSR reporting sub-system and a new payroll system
administered by a third-party service provider. If we do not
successfully configure and implement the new systems, if the
systems fail to operate to specifications, or if we fail to
adequately train our staff to use the new systems to augment our
controls, the timeliness, accuracy and cost effectiveness of our
periodic financial reporting could 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 and 2004, we obtained amendments to
our 2002 Credit Facility extending the periods in which we may
file our 2002 and 2003 audited financial statements, our 2003
quarterly financial statements and to adjust certain financial
ratios for 2003. Without the amendments, we would have been in
default of the 2002 Credit Facility and the entire amount of the
debt would have been subject to acceleration by the
facilitys lenders. If we are not able to continue to
provide timely financial information to the lenders as required
under the 2002 Credit Facility, there can be no assurance that
such lenders will provide future relief through waivers or
additional amendments. If we default on the terms and conditions
of the 2002 Credit Facility and the debt is accelerated by the
facilitys lenders, such developments will have a material
adverse impact on our financial condition and our liquidity.



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

As of December 28, 2003, we franchised 2,702
Popeyes, Churchs, Cinnabon and Seattle Coffee units
domestically and 952 units in Puerto Rico and 36 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 instances
in which Churchs, Popeyes and Cinnabon franchisees have
not fulfilled their obligations under their development
agreements to open new units.

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| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | 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 11 suppliers who
service us from 34 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. In particular, due to diminishing availability of
fast-food sized chicken and other market trends, we expect our
chicken costs to rise during 2004. 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 28, 2003, we employed
7,376 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 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

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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 have traditionally experienced the strongest operating
results during the holiday shopping season between Thanksgiving
Day and New Years Day. Consequently, any factors that
cause reduced traffic at our Cinnabon bakeries 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;                                                                    
|
| |  | 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.

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| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, or we could suffer business interruption or loss.
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, declining number of distributors,
inclement weather or other conditions could adversely affect the
availability, quality and cost of ingredients, which would
adversely affect our operating results.



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

As of December 28, 2003, we had 952
franchised restaurants, bakeries and cafes in Puerto Rico and 36
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.

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| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 150 of our currently or formerly
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 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 and is hereby incorporated by reference into this
Item 7A.






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

Our Consolidated Financial Statements can be
found beginning on Page F-1 of this Annual Report on
Form 10-K and the relevant portions of those statements and
the accompanying notes are hereby incorporated by reference into
this Item 8.

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These statements do not include selected
quarterly financial data specified by Item 302(a) of
Regulation S-K required to be included in this Annual
Report on Form 10-K. We intend to provide this information
by an amendment to this Annual Report on Form 10-K as soon
as such information is available.






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

None.






|         |                        
|-------- | -----------------------
|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. 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 2003, 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 and CFO. This evaluation included a review of
certain deficiencies in internal controls noted during the audit
of our 2002 financial statements (and the re-audit of our 2001
and 2000 financial statements). In connection with those audits,
our independent auditors, KPMG LLP (KPMG),
assessed our internal controls and those of 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.

Additionally, during 2003, independent legal
counsel to our 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 no 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.

Actions taken in response to our
evaluation.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 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.

49



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We 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 initiated a search for a new chief financial
    officer.                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | We 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 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 established 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 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 instituted more rigorous procedures for
    quarter-end analysis of balance sheet and income statement
    accounts, quarter-end reconciliations of subsidiary ledgers, and
    the correction of reconciling items in a timely manner. We are
    also enhancing our accounting documentation policies.                                                                                                                                                                       
|
| |  | We began 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 began 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 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 broadened the scope of our internal audit
    function and changed its reporting responsibility. It now
    reports directly to the Audit Committee and CEO.                                                                                                                                                                                                                                                                                                                   
|
| |  | We 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.                                                                                                                                                                                                                         

Many of these changes in our controls and
procedures occurred during the fourth quarter of 2003 and have,
or will, materially strengthen our controls and procedures.
Since the end of fiscal 2003, we have hired a new CFO and we
have continued implementing the improvements described above,
which we believe will continue to strengthen our controls and
procedures.

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 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 and
CFO, believe 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.

50



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##### Table of Contents






PART III.





|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT

For information regarding our directors,
executive officers, audit committee and our audit committee
financial expert required by this Item 10, we refer you to
our definitive Proxy Statement for the 2004 Annual Meeting of
Stockholders under the headings Election of Directors and
Director Biographies, Board of Directors
Information and General  Compliance with
Section 16(a) Beneficial Ownership Reporting
Requirements. Biographical information on our executive
officers is contained in Item 4A of this Annual Report on
Form 10-K.

We have adopted an Honor Code that applies to our
directors and all of our employees, including our principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions. A copy of the Honor Code is available on our website
at www.afce.com. Copies will be furnished upon request. You may
mail your requests to the following address: Attn: Office of
General Counsel, Six Concourse Parkway, Suite 1700, Atlanta
GA, 30328-5352. If we make any amendments to the Honor Code
other than technical, administrative, or other non-substantive
amendments, or grant any waivers, including implicit waivers,
from the Honor Code, we will disclose the nature of the
amendment or waiver, its effective date and to who it applies on
our website or in a report on Form 8-K filed with the SEC.





|         |                       
|-------- | ----------------------
|Item 11. | EXECUTIVE COMPENSATION

For information regarding executive compensation
required by this Item 11, we refer you to our definitive
Proxy Statement for the 2004 Annual Meeting of Stockholders
under the headings Executive Compensation,
Board of Directors Information, Option Grants
in Last Fiscal Year, Aggregated Option Exercises in
Last Fiscal Year and Year End Option Value Table,
Employment Agreements, and General 
Compensation Committee Interlocks and Insider
Participation.





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

For information regarding security ownership of
certain beneficial owners and management and related stockholder
matters required by this Item 12, we refer you to our
definitive Proxy Statement for the 2004 Annual Meeting of
Stockholders under the heading Stock Ownership.





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

For information regarding certain relationships
and related transactions required by this Item 13, we refer
you to our definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders under the heading Insider
Transactions.





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

Fees Paid to Independent Auditors

Audit Fees.Aggregate fees and expenses for our 2003 annual audit and
quarterly reviews were approximately $2,200,000. Aggregate fees
and expenses for our 2002 annual audit, re-audits of 2001 and
2000, the review of financial statements filed on Forms 10-Q in
2002, and assistance with a registration statement were
approximately $8,652,000.

Audit-Related
Fees.KPMG did not perform any
audit-related services for us in 2003 or 2002.

Tax Fees.Aggregate fees and expenses for tax services were approximately
$603,000 and $324,000 for 2003 and 2002, respectively. These
fees were principally related to tax compliance and tax advice
on depreciation, escheat compliance and state tax consulting
matters.

All Other
Fees.None.

Pursuant to its revised charter, our Audit
Committee must pre-approve all audit and non-audit services to
be performed by our independent auditors and will not approve
any services that are not permitted by SEC rules.

51



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##### Table of Contents






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 28, 2003 and December 29, 2002                       |  |       | F-2 | 
|Consolidated Statements of Operations for Fiscal
    Years 2003, 2002 and 2001                      |  |       | F-3 | 
|Consolidated Statements of Changes in
    Shareholders Equity for Fiscal Years 2003, 2002 and 2001 |  |       | F-4 | 
|Consolidated Statements of Cash Flows for Fiscal
    Years 2003, 2002 and 2001                      |  |       | 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
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 furnished 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.

We furnished a Current Report on Form 8-K on
December 19, 2003, to provide a summary of the adjustments
to our previously issued financial statements for fiscal years
2000 and 2001, and the first three quarters of fiscal years 2002
to arrive at the restated amounts provided in our 2002 Annual
Report on Form 10-K filed on December 15, 2003.

We filed a Current Report on Form 8-K on
January 5, 2004, to announce the appointment of Frederick
B. Beilstein as our Chief Financial Officer.

We furnished a Current Report on Form 8-K on
January 22, 2004, to announce operating performance results
for the fourth quarter of 2003, which included our fiscal
periods 11, 12 and 13.

We furnished a Current Report on Form 8-K on
March 16, 2004, to announce operating performance results
for our first and second fiscal periods of 2004.



|    |         
|--- | --------
|(c) | Exhibits

|        |   |             |  |                                                                                                                                
|------- | - | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |            
|Number  |   | Description
|        |   |            
|        | 2 | .1(h)       |  | Stock Purchase Agreement between AFC
    Enterprises, Inc. and Starbucks Corporation, dated as of
    April 15, 2003.          
|        | 2 | .2          |  | First Amendment to Stock Purchase Agreement
    between AFC Enterprises, Inc. and Starbucks, dated as of
    June 30, 2003.    
|        | 2 | .3          |  | Second Amendment to Stock Purchase Agreement
    between AFC Enterprises, Inc. and Starbucks, dated as of
    July 11, 2003.   
|        | 2 | .4          |  | Third Amendment to Stock Purchase Agreement
    between AFC Enterprises, Inc. and Starbucks, dated as of
    November 19, 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.                                                                       

52



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 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.                                                                                                                                                                                                                                                                                                                              
|        | 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         |  | 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.                                                                                                                                                                                                                                                                                                                                                                

53



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|        |    |             |  |                                                                                                                                                                                           
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 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(e)     |  | Supply Agreement dated October 5, 1998
    between Churchs Operators Purchasing
    Association, Inc. and Cagles, Inc.
    (Cagles 92), as amended.                                 
|        | 10 | .37(e)     |  | Supply Agreement dated October 5, 1998
    between AFC d/b/a Popeyes Chicken and Biscuits and
    Cagles, Inc. as amended.                                                               
|        | 10 | .38(e)     |  | Supply Agreement dated April 1, 1999 between
    Churchs Operators Purchasing Association, Inc. and
    Tyson Foods, Inc, as amended.                                                    
|        | 10 | .39(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 | .40(e)      |  | Form of Cinnabon Development Agreement.                                                                                                                                                   
|        | 10 | .41(e)      |  | Form of Cinnabon Franchise Agreement.                                                                                                                                                     
|        | 10 | .42(e)      |  | Form of Seattles Best Coffee International
    Development Agreement.                                                                                                                    
|        | 10 | .43(e)      |  | Form of Seattles Best Coffee International
    Franchise Agreement.                                                                                                                      
|        | 10 | .44(a)      |  | Indemnification Agreement dated April 11,
    1996 by and between AFC and Ronald P. Spogli.*                                                                                              
|        | 10 | .45(a)      |  | Indemnification Agreement dated April 11,
    1996 by and between AFC and John M. Roth.*                                                                                                  
|        | 10 | .46(a)      |  | Indemnification Agreement dated May 1, 1996
    by and between AFC and Kelvin J. Pennington.*                                                                                             
|        | 10 | .47(a)      |  | Indemnification Agreement dated April 11,
    1996 by and between AFC and Matt L. Figel.*                                                                                                 
|        | 10 | .48(a)      |  | Indemnification Agreement dated April 11,
    1996 by and between AFC and Frank J. Belatti.*                                                                                              
|        | 10 | .49(e)      |  | Employment Agreement dated as of December 8,
    2000 between AFC and Frank J. Belatti.*                                                                                                  
|        | 10 | .50(e)      |  | Employment Agreement dated as of December 8,
    2000 between AFC and Dick R. Holbrook.*                                                                                                  
|        | 10 | .51(e)      |  | Employment Agreement dated as of December 8,
    2000 between AFC and Gerald J. Wilkins.*                                                                                                 
|        | 10 | .52(e)      |  | Employment Agreement dated as of December 8,
    2000 between AFC and Hala Moddelmog.*                                                                                                    
|        | 10 | .53(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 | .54(e)      |  | Second Amendment to Deferred Compensation Plan
    dated as of July 24, 2000.*                                                                                                            
|        | 10 | .55(e)      |  | Substitute Nonqualified Stock Option Plan,
    effective March 17, 1998.*                                                                                                                 
|        | 10 | .56(e)      |  | First Amendment to Employment Agreement dated
    February 8, 2001 between AFC and Frank J. Belatti.*                                                                                     
|        | 10 | .57(e)      |  | Fourth Amendment to Employment Agreement dated as
    of February 9, 2001 between AFC and Samuel N. Frankel.*                                                                             
|        | 10 | .58(e)      |  | First Amendment to Employment Agreement dated
    February 8, 2001 between AFC and Dick R. Holbrook.*                                                                                     
|        | 10 | .59(e)      |  | First Amendment to Employment Agreement dated
    February 8, 2001 between AFC and Gerald J. Wilkins.*                                                                                    
|        | 10 | .60(e)      |  | First Amendment to Employment Agreement dated
    February 8, 2001 between AFC and Hala Moddelmog.*                                                                                       
|        | 10 | .61(e)      |  | Amendment to Second Cagles, Inc. Agreement
    dated February 23, 2001 between Supply Management
    Services, Inc. and Cagles, Inc.                                                      

54



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .62(f)      |  | Second Amendment to Employment Agreement dated
    August 31, 2001 between AFC and Frank J. Belatti.*                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .63(f)      |  | Second Amendment to Employment Agreement dated
    August 31, 2001 between AFC and Dick R. Holbrook.*                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .64(f)      |  | Second Amendment to Employment Agreement dated
    August 31, 2001 between AFC and Gerald J. Wilkins.*                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .65(f)      |  | Second Amendment to Employment Agreement dated
    August 31, 2001 between AFC and Hala G. Moddelmog.*                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .66(f)      |  | Indemnification Agreement dated May 16, 2001
    by and between AFC and Gerald J. Wilkins.*                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .67(f)      |  | Indemnification Agreement dated May 16, 2001
    by and between AFC and Victor Arias Jr.*                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .68(f)      |  | Indemnification Agreement dated May 16, 2001
    by and between AFC and Carolyn Hogan Byrd.*                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .69(f)      |  | Indemnification Agreement dated May 16, 2001
    by and between AFC and R. William Ide, III.*                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10 | .70(i)      |  | Credit Agreement dated as of May 23, 2002
    among AFC Enterprises, Inc., as borrower, and the Lenders
    Party thereto, JP Morgan Chase Bank, as Administrative
    Agent, JP 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 (the 2002 Credit
    Facility).
|        | 10 | .71(g)      |  | AFC Enterprises, Inc. Employee Stock
    Purchase Plan.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .72(g)      |  | AFC Enterprises, Inc. 2002 Incentive Stock
    Plan.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .73(g)      |  | AFC Enterprises, Inc. Annual Executive Bonus
    Program.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .74(j)      |  | Consulting Agreement, dated May 27, 2003,
    between AFC and Gerald Wilkins.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .75(j)      |  | First Amendment to Employment Agreement dated as
    of December 4, 1995 between AFC Enterprises, Inc. and
    Samuel N. Frankel.*                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .76(j)      |  | Second Amendment to Employment Agreement dated as
    of December 4, 1995 between AFC Enterprises, Inc. and
    Samuel N. Frankel.*                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .77(j)      |  | Third Amendment to Employment Agreement dated as
    of December 4, 1995 between AFC Enterprises, Inc. and
    Samuel N. Frankel.*                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .78         |  | Employment Agreement dated as of January 1,
    2001 between AFC Enterprises, Inc. and Allan J. Tanenbaum.*                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .79         |  | First Amendment to Employment Agreement dated as
    of January 1, 2001 between AFC Enterprises, Inc. and
    Allan J. Tanenbaum.*                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .80         |  | Employment Agreement dated as of January 27,
    2003 between AFC Enterprises, Inc. and Chris Elliott.*                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10 | .81         |  | Employment Agreement effective as of
    December 29, 2003 between AFC Enterprises, Inc. and
    Frederick B. Beilstein.*                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .82         |  | Employment Agreement effective as of
    February 12, 2004 between AFC Enterprises, Inc. and
    Henry Hope, III.*                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .83         |  | First Amendment dated March 31, 2003 to the
    2002 Credit Facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .84         |  | Second Amendment dated March 31, 2003 to the
    2002 Credit Facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .85         |  | Third Amendment dated July 14, 2003 to the
    2002 Credit Facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .86         |  | Fourth Amendment dated August 22, 2003 to
    the 2002 Credit Facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10 | .87         |  | Fifth Amendment dated October 30, 2003 to
    the 2002 Credit Facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10 | .88         |  | Form of Cinnabon, Inc. Franchise Agreement
    for Seattles Best Coffee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .89         |  | Form of Cinnabon, Inc. Development Agreement
    for Seattles Best Coffee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .90         |  | Sixth Amendment dated March 26, 2004 to the
    2002 Credit Facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 11 | .1**        |  | Statement regarding computation of per share
    earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 21 | .1          |  | Subsidiaries of AFC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 23 | .1          |  | Consent of Independent Auditors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

55



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##### Table of Contents



|        |    |             |  |                                                                                                                                                           
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 31 | .1          |  | Certification Pursuant to Rule 13a-14(a), as
    Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.                                   
|        | 31 | .2          |  | Certification Pursuant to Rule 13a-14(a), as
    Adopted Pursuant to 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 Note 21 to the Consolidated
    Financial Statements in this Annual Report on Form 10-K.



|    |  |                                                                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                           
|   
|(i) |  | 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.                    
|   
|(j) |  | Filed as an exhibit to the Form 10-K of AFC
    for the year ended December 29, 2002 on December 15,
    2003 and incorporated by reference herein.                 

56



---



##### 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 29th
day of March 2004.



| |                      
| | ---------------------
| | 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 and
    Chief Executive Officer(Principal Executive Officer) |  | March 29, 2004
|                                            
|/s/ DICK R. HOLBROOKDick R. Holbrook         |  | President, Chief Operating
    Officer and Director                                |  | March 29, 2004
|                                            
|/s/ FRED B. BEILSTEINFred B. Beilstein       |  | Chief Financial Officer(Principal Financial and
     Accounting Officer)           |  | March 29, 2004
|                                            
|/s/ VICTOR ARIAS, JR.Victor Arias, Jr.       |  | Director                                                                           |  | March 29, 2004
|                                            
|/s/ CAROLYN H. BYRDCarolyn H. Byrd           |  | Director                                                                           |  | March 29, 2004
|                                            
|/s/ R. WILLIAM IDE, IIIR. William Ide, III   |  | Director                                                                           |  | March 29, 2004
|                                            
|/s/ KELVIN J. PENNINGTONKelvin J. Pennington |  | Director                                                                           |  | March 29, 2004
|                                            
|/s/ JOHN M. ROTHJohn M. Roth                 |  | Director                                                                           |  | March 29, 2004
|                                            
|/s/ RONALD P. SPOGLIRonald P. Spogli         |  | Director                                                                           |  | March 29, 2004
|                                            
|/s/ PETER STARRETTPeter Starrett             |  | Director                                                                           |  | March 29, 2004

57



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##### Table of Contents



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 28, 2003, and
December 29, 2002, 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 28, 2003. 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 28, 2003, and
December 29, 2002, and the results of their operations and
their cash flows for each of the years in the three-year period
ended December 28, 2003, in conformity with accounting
principles generally accepted in the United States of America.

The Company has not presented the selected
quarterly financial data specified by Item 302(a) of
Regulation S-K, that the Securities and Exchange Commission
requires as supplementary information to the basic financial
statements.

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

/s/ KPMG LLP

Atlanta, Georgia

March 29, 2004


F-1



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##### Table of Contents



AFC Enterprises, Inc.

Consolidated Balance Sheets

As of December 28, 2003 and
December 29, 2002


(In millions, except share data)


|                                         |                                                                                                                                                                                          |                                            |   |       |       |  |   |       |       | 
|---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ----- | ----- |  | - | ----- | ----- | 
|                                        
|                                         |                                                                                                                                                                                          | 2003                                       |   | 2002 
|                                        
|ASSETS                                   |                                                                                                                                                                                          |                                            |   |       |       |  |   |      
|Current assets:                          |                                                                                                                                                                                          |                                            |   |       |       |  |   |      
|                                         | Cash and cash equivalents                                                                                                                                                                |                                            | $ | 3.8   |       |  | $ | 8.4   |      
|                                         | Accounts and current notes receivable, net                                                                                                                                               |                                            |   | 23.3  |       |  |   | 25.6  |      
|                                         | Prepaid income taxes                                                                                                                                                                     |                                            |   | 20.6  |       |  |   | 20.6  |      
|                                         | Assets of discontinued operations                                                                                                                                                        |                                            |   |      |       |  |   | 70.8  |      
|                                         | Other current assets                                                                                                                                                                     |                                            |   | 16.5  |       |  |   | 17.1  |      
|                                         |                                                                                                                                                                                          |                                           
|                                         |                                                                                                                                                                                          | Total current assets                       |   |       | 64.2  |  |   |       | 142.5 | 
|                                         |                                                                                                                                                                                          |                                           
|                                        
|Long-term assets:                        |                                                                                                                                                                                          |                                            |   |       |       |  |   |      
|                                         | Property and equipment, net                                                                                                                                                              |                                            |   | 176.8 |       |  |   | 189.9 |      
|                                         | Goodwill                                                                                                                                                                                 |                                            |   | 14.7  |       |  |   | 22.3  |      
|                                         | Trademarks and other intangible assets, net                                                                                                                                              |                                            |   | 84.3  |       |  |   | 103.0 |      
|                                         | Other long-term assets, net                                                                                                                                                              |                                            |   | 15.5  |       |  |   | 29.6  |      
|                                         |                                                                                                                                                                                          |                                           
|                                         |                                                                                                                                                                                          | Total long-term assets                     |   |       | 291.3 |  |   |       | 344.8 | 
|                                         |                                                                                                                                                                                          |                                           
|                                         |                                                                                                                                                                                          | Total assets                               |   | $     | 355.5 |  |   | $     | 487.3 | 
|                                         |                                                                                                                                                                                          |                                           
|LIABILITIES AND SHAREHOLDERS
    EQUITY |                                                                                                                                                                                          |                                            |   |       |       |  |   |      
|Current liabilities:                     |                                                                                                                                                                                          |                                            |   |       |       |  |   |      
|                                         | Accounts payable                                                                                                                                                                         |                                            | $ | 41.3  |       |  | $ | 50.7  |      
|                                         | Accrued liabilities                                                                                                                                                                      |                                            |   | 16.7  |       |  |   | 17.8  |      
|                                         | Current debt maturities                                                                                                                                                                  |                                            |   | 12.1  |       |  |   | 17.6  |      
|                                         | Liabilities of discontinued operations                                                                                                                                                   |                                            |   |      |       |  |   | 10.7  |      
|                                         |                                                                                                                                                                                          |                                           
|                                         |                                                                                                                                                                                          | Total current liabilities                  |   |       | 70.1  |  |   |       | 96.8  | 
|                                         |                                                                                                                                                                                          |                                           
|                                        
|Long-term liabilities:                   |                                                                                                                                                                                          |                                            |   |       |       |  |   |      
|                                         | Long-term debt                                                                                                                                                                           |                                            |   | 118.8 |       |  |   | 209.0 |      
|                                         | Deferred credits and other long-term liabilities                                                                                                                                         |                                            |   | 57.8  |       |  |   | 71.7  |      
|                                         |                                                                                                                                                                                          |                                           
|                                         |                                                                                                                                                                                          | Total long-term liabilities                |   |       | 176.6 |  |   |       | 280.7 | 
|                                         |                                                                                                                                                                                          |                                           
|                                        
|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; 27,992,999 and
    27,478,744 shares issued and outstanding at the end of
    fiscal years 2003 and 2002, respectively) |                                            |   | 0.3   |       |  |   | 0.3   |      
|                                         | Capital in excess of par value                                                                                                                                                           |                                            |   | 150.1 |       |  |   | 144.7 |      
|                                         | Notes receivable from officers, including accrued
    interest                                                                                                                           |                                            |   | (3.4  | )     |  |   | (6.1  | )    
|                                         | Accumulated losses                                                                                                                                                                       |                                            |   | (38.2 | )     |  |   | (29.1 | )    
|                                         |                                                                                                                                                                                          |                                           
|                                         |                                                                                                                                                                                          | Total shareholders equity                 |   |       | 108.8 |  |   |       | 109.8 | 
|                                         |                                                                                                                                                                                          |                                           
|                                         |                                                                                                                                                                                          | Total liabilities and shareholders equity |   | $     | 355.5 |  |   | $     | 487.3 | 

See accompanying notes to consolidated financial
statements.

F-2



---



##### Table of Contents



AFC Enterprises, Inc.

Consolidated Statements of Operations

For Fiscal Years 2003, 2002 and 2001


(In millions, except per share data)


|                                                                                     |                                                                        |                |      |       |       |      |       |       |       |   |      |       |       | 
|------------------------------------------------------------------------------------ | ---------------------------------------------------------------------- | -------------- | ---- | ----- | ----- | ---- | ----- | ----- | ----- | - | ---- | ----- | ----- | 
|                                                                                    
|                                                                                     |                                                                        | 2003           |      | 2002  |       | 2001
|                                                                                    
|Revenues:                                                                            |                                                                        |                |      |       |       |      |       |       |       |   |      |      
|                                                                                     | Sales by company-operated restaurants                                  |                | $    | 323.4 |       |      | $     | 385.9 |       |   | $    | 479.3 |      
|                                                                                     | Franchise revenues                                                     |                |      | 114.3 |       |      |       | 109.8 |       |   |      | 100.3 |      
|                                                                                     | Other revenues                                                         |                |      | 21.6  |       |      |       | 29.0  |       |   |      | 17.9  |      
|                                                                                     |                                                                        |               
|                                                                                     |                                                                        | Total revenues |      |       | 459.3 |      |       |       | 524.7 |   |      |       | 597.5 | 
|                                                                                     |                                                                        |               
|Expenses:                                                                            |                                                                        |                |      |       |       |      |       |       |       |   |      |      
|                                                                                     | Restaurant employee, occupancy and other expenses                      |                |      | 169.6 |       |      |       | 200.4 |       |   |      | 243.3 |      
|                                                                                     | Restaurant food, beverages and packaging                               |                |      | 94.9  |       |      |       | 109.1 |       |   |      | 139.0 |      
|                                                                                     | General and administrative expenses                                    |                |      | 107.3 |       |      |       | 101.6 |       |   |      | 103.8 |      
|                                                                                     | Depreciation and amortization                                          |                |      | 23.0  |       |      |       | 25.3  |       |   |      | 35.8  |      
|                                                                                     | Impairment charges and other (Note 18)                                 |                |      | 63.9  |       |      |       | 19.2  |       |   |      | 12.1  |      
|                                                                                     |                                                                        |               
|                                                                                     |                                                                        | Total expenses |      |       | 458.7 |      |       |       | 455.6 |   |      |       | 534.0 | 
|                                                                                     |                                                                        |               
|                                                                                    
|Operating profit                                                                     |                                                                        |                | 0.6  |       |       |      | 69.1  |       |       |   | 63.5 |      
|                                                                                     | Interest expense, net                                                  |                |      | 7.1   |       |      |       | 22.6  |       |   |      | 24.6  |      
|                                                                                     |                                                                        |               
|(Loss) income before income taxes,
    discontinued operations and accounting change |                                                                        |                | (6.5 | )     |       |      | 46.5  |       |       |   | 38.9 |      
|                                                                                     | Income tax (benefit) expense                                           |                |      | (0.5  | )     |      |       | 17.5  |       |   |      | 16.3  |      
|                                                                                     |                                                                        |               
|(Loss) income before discontinued operations
    and accounting change               |                                                                        |                | (6.0 | )     |       |      | 29.0  |       |       |   | 22.6 |      
|                                                                                     | Discontinued operations, net of income taxes                           |                |      | (2.7  | )     |      |       | (40.7 | )     |   |      | (7.0  | )    
|                                                                                     | Cumulative effect of an accounting change, net of
    income taxes     |                |      | (0.4  | )     |      |       |      |       |   |      |      |      
|                                                                                     |                                                                        |               
|Net (loss) income                                                                    |                                                                        | $              | (9.1 | )     |       | $    | (11.7 | )     |       | $ | 15.6 |      
|                                                                                     |                                                                        |               
|                                                                                    
|Basic (loss) income per common
    share:                                            |                                                                        |                |      |       |       |      |       |       |       |   |      |      
|                                                                                     | (Loss) income before discontinued operations and
    accounting change |                | $    | (0.22 | )     |      | $     | 0.97  |       |   | $    | 0.77  |      
|                                                                                     | Discontinued operations, net of income taxes                           |                |      | (0.09 | )     |      |       | (1.36 | )     |   |      | (0.24 | )    
|                                                                                     | Cumulative effect of an accounting change, net of
    income taxes     |                |      | (0.02 | )     |      |       |      |       |   |      |      |      
|                                                                                     |                                                                        |               
|                                                                                     | Net (loss) income                                                      |                | $    | (0.33 | )     |      | $     | (0.39 | )     |   | $    | 0.53  |      
|                                                                                     |                                                                        |               
|Diluted (loss) income per common
    share:                                          |                                                                        |                |      |       |       |      |       |       |       |   |      |      
|                                                                                     | (Loss) income before discontinued operations and
    accounting change |                | $    | (0.22 | )     |      | $     | 0.92  |       |   | $    | 0.72  |      
|                                                                                     | Discontinued operations, net of income taxes                           |                |      | (0.09 | )     |      |       | (1.29 | )     |   |      | (0.22 | )    
|                                                                                     | Cumulative effect of an accounting change, net of
    income taxes     |                |      | (0.02 | )     |      |       |      |       |   |      |      |      
|                                                                                     |                                                                        |               
|                                                                                     | Net (loss) income                                                      |                | $    | (0.33 | )     |      | $     | (0.37 | )     |   | $    | 0.50  |      

See accompanying notes to consolidated financial
statements.

F-3



---



##### Table of Contents



AFC Enterprises, Inc.

Consolidated Statements of Changes in
Shareholders Equity

For Fiscal Years 2003, 2002 and 2001


(In millions, except share data)


|                             |                                                 |              |            |            |   |         |     |            |  |             |       |       |   |   |      |      |   |   |       |       |   |   |       |       |  
|---------------------------- | ----------------------------------------------- | ------------ | ---------- | ---------- | - | ------- | --- | ---------- |  | ----------- | ----- | ----- | - | - | ---- | ---- | - | - | ----- | ----- | - | - | ----- | ----- | -
|                            
|                             |                                                 |              |            |           
|                             |                                                 | Common Stock |            | Capital    |   |        
|                             |                                                 |              |            | in Excess  |   | Officer |     |           
|                             |                                                 | Number of    |            |            |   | of Par  |     | Notes      |  | Accumulated |       |      
|                             |                                                 | shares       |            | Amount     |   | Value   |     | Receivable |  | Losses      |       | Total
|                            
|Balance at December 31, 2000 |                                                 |              | 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 accrued                                |              |            |           |   |         |     |           |  |             |       |      |   |   |      | (0.4 | ) |   |       |      |   |   |       | (0.4  | )
|                             | Amortization of discount                        |              |            |           |   |         |     |           |  |             |       |      |   |   |      | (0.2 | ) |   |       |      |   |   |       | (0.2  | )
|                             | Net income                                      |              |            |           |   |         |     |           |  |             |       |      |   |   |      |     |   |   |       | 15.6  |   |   |       | 15.6  |  
|                             |                                                 |             
|Balance at December 30, 2001 |                                                 |              | 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 accrued                                |              |            |           |   |         |     |           |  |             |       |      |   |   |      | (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 |      
|                             | Issuance of common stock                        |              |            | 25,889     |   |         |     |           |  |             |       | 0.4   |   |   |      |     |   |   |       |      |   |   |       | 0.4   |  
|                             | Issuance of common stock under option plans     |              |            | 488,366    |   |         |     |           |  |             |       | 5.0   |   |   |      |     |   |   |       |      |   |   |       | 5.0   |  
|                             | Notes and interest receivable payments          |              |            |           |   |         |     |           |  |             |       |      |   |   |      | 3.1  |   |   |       |      |   |   |       | 3.1   |  
|                             | Interest accrued                                |              |            |           |   |         |     |           |  |             |       |      |   |   |      | (0.3 | ) |   |       |      |   |   |       | (0.3  | )
|                             | Amortization of discount                        |              |            |           |   |         |     |           |  |             |       |      |   |   |      | (0.1 | ) |   |       |      |   |   |       | (0.1  | )
|                             | Net loss                                        |              |            |           |   |         |     |           |  |             |       |      |   |   |      |     |   |   |       | (9.1  | ) |   |       | (9.1  | )
|                             |                                                 |             
|Balance at December 28, 2003 |                                                 |              | 27,992,999 |            |   | $       | 0.3 |            |  | $           | 150.1 |       |   | $ | (3.4 | )    |   | $ | (38.2 | )     |   | $ | 108.8 |      

See accompanying notes to consolidated financial
statements.

F-4



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##### Table of Contents



AFC Enterprises, Inc.

Consolidated Statements of Cash Flows


For Fiscal Years 2003, 2002 and 2001


(In millions)


|                                                                                              |                                                            |                                                  |                                                                                    |       |      |       |        |      |      |       |       |      |      |       |  
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------------------------ | ---------------------------------------------------------------------------------- | ----- | ---- | ----- | ------ | ---- | ---- | ----- | ----- | ---- | ---- | ----- | -
|                                                                                             
|                                                                                              |                                                            | 2003                                             |                                                                                    | 2002  |      | 2001 
|                                                                                             
|Cash flows provided by (used in) operating
    activities:                                    |                                                            |                                                  |                                                                                    |       |      |       |        |      |      |       |       |     
|Net (loss) income                                                                             |                                                            | $                                                | (9.1                                                                               | )     |      | $     | (11.7  | )    |      | $     | 15.6  |     
|Adjustments to reconcile net income (loss) to net
    cash                                    |                                                            |                                                  |                                                                                    |       |      |       |        |      |      |       |       |     
|                                                                                              | provided by (used in) operating activities:                |                                                  |                                                                                    |       |      |       |        |      |      |       |       |      |     
|                                                                                              | Loss from discontinued operations                          |                                                  |                                                                                    | 2.7   |      |       |        | 40.7 |      |       |       | 7.0  |     
|                                                                                              | Depreciation and amortization                              |                                                  |                                                                                    | 23.0  |      |       |        | 25.3 |      |       |       | 35.8 |     
|                                                                                              | Impairment and other write-downs of non-current
    assets |                                                  |                                                                                    | 46.1  |      |       |        | 11.3 |      |       |       | 10.4 |     
|                                                                                              | Cumulative effect of an accounting change, pre-tax         |                                                  |                                                                                    | 0.7   |      |       |        |     |      |       |       |     |     
|                                                                                              | Deferred income taxes                                      |                                                  |                                                                                    | (14.4 | )    |       |        | 12.9 |      |       |       | (1.6 | )   
|                                                                                              | Non-cash interest, net                                     |                                                  |                                                                                    | 0.5   |      |       |        | 3.8  |      |       |       | 1.6  |     
|                                                                                              | Net loss (gain) on sale of assets                          |                                                  |                                                                                    | (0.8  | )    |       |        | 4.0  |      |       |       | 1.1  |     
|                                                                                              | Provision for credit losses                                |                                                  |                                                                                    | 6.1   |      |       |        | 1.9  |      |       |       | 0.9  |     
|                                                                                              | Compensatory expense for stock options                     |                                                  |                                                                                    | 0.2   |      |       |        | 0.3  |      |       |       | 0.4  |     
|                                                                                              | Change in operating assets and liabilities:                |                                                  |                                                                                    |       |      |       |        |      |      |       |       |      |     
|                                                                                              |                                                            | Accounts receivable                              |                                                                                    |       | (0.5 | )     |        |      | (7.5 | )     |       |      | (5.8 | )    
|                                                                                              |                                                            | Prepaid income taxes                             |                                                                                    |       | (1.8 | )     |        |      | (8.4 | )     |       |      | (9.5 | )    
|                                                                                              |                                                            | Other operating assets                           |                                                                                    |       | 2.8  |       |        |      | 0.5  |       |       |      | 3.1  |      
|                                                                                              |                                                            | Accounts payable and other operating liabilities |                                                                                    |       | (5.4 | )     |        |      | 18.0 |       |       |      | 2.5  |      
|                                                                                              |                                                            |                                                 
|                                                                                              |                                                            |                                                  | Net cash provided by operating activities of
    continuing operations             |       |      | 50.1  |        |      |      | 91.1  |       |      |      | 61.5  |  
|                                                                                              |                                                            |                                                 
|                                                                                              |                                                            |                                                  | Net cash provided by (used in) operating
    activities of discontinued operations |       |      | (3.9  | )      |      |      | 2.7   |       |      |      | (4.1  | )
|                                                                                              |                                                            |                                                 
|Cash flows provided by (used in) investing
    activities:                                    |                                                            |                                                  |                                                                                    |       |      |       |        |      |      |       |       |     
|Capital expenditures of continuing operations                                                 |                                                            |                                                  | (24.3                                                                              | )     |      |       | (43.5  | )    |      |       | (49.1 | )   
|Capital expenditures of discontinued operations                                               |                                                            |                                                  | (1.3                                                                               | )     |      |       | (6.2   | )    |      |       | (8.9  | )   
|Proceeds from dispositions of property and
    equipment                                      |                                                            |                                                  | 1.8                                                                                |       |      |       | 35.4   |      |      |       | 39.9  |     
|Proceeds from sale of Seattle Coffee, net                                                     |                                                            |                                                  | 62.1                                                                               |       |      |       |       |      |      |       |      |     
|Other, net                                                                                    |                                                            |                                                  | 1.1                                                                                |       |      |       | 0.7    |      |      |       | 0.6   |     
|                                                                                              |                                                            |                                                 
|                                                                                              |                                                            |                                                  | Net cash provided by (used in) investing
    activities                            |       |      | 39.4  |        |      |      | (13.6 | )     |      |      | (17.5 | )
|                                                                                              |                                                            |                                                 
|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 | )   
|Principal payments  1997 Credit
    Facility                                                 |                                                            |                                                  |                                                                                   |       |      |       | (78.7  | )    |      |       | (79.9 | )   
|Principal payments  2002 Credit
    Facility                                                 |                                                            |                                                  | (93.6                                                                              | )     |      |       | (27.1  | )    |      |       |      |     
|Principal payments  capital lease
    obligations                                            |                                                            |                                                  |                                                                                   |       |      |       | (0.3   | )    |      |       | (2.0  | )   
|Net (repayments) borrowings 
    Southtrust Line of Credit                                   |                                                            |                                                  |                                                                                   |       |      |       | (1.7   | )    |      |       | 1.7   |     
|Issuance of common stock, net                                                                 |                                                            |                                                  | 0.4                                                                                |       |      |       | 0.3    |      |      |       | 46.0  |     
|Stock repurchases                                                                             |                                                            |                                                  |                                                                                   |       |      |       | (77.9  | )    |      |       |      |     
|Increase (decrease) in bank overdrafts, net
    (exclusive of effects of Seattle Coffee sale) |                                                            |                                                  | (1.0                                                                               | )     |      |       | (7.8   | )    |      |       | 4.4   |     
|Debt issuance costs                                                                           |                                                            |                                                  | (0.2                                                                               | )     |      |       | (4.9   | )    |      |       |      |     
|Proceeds from exercise of employee stock options
    and other, net                           |                                                            |                                                  | 3.0                                                                                |       |      |       | 5.8    |      |      |       | 4.1   |     
|                                                                                              |                                                            |                                                 
|                                                                                              |                                                            |                                                  | Net cash (used in) financing activities                                            |       |      | (91.4 | )      |      |      | (75.7 | )     |      |      | (50.0 | )
|                                                                                              |                                                            |                                                 
|Net increase (decrease) in cash and cash
    equivalents                                      |                                                            |                                                  | (5.8                                                                               | )     |      |       | 4.5    |      |      |       | (10.1 | )   
|Cash and cash equivalents at beginning of year                                                |                                                            |                                                  | 9.6                                                                                |       |      |       | 5.1    |      |      |       | 15.2  |     
|                                                                                              |                                                            |                                                 
|Cash and cash equivalents at end of year                                                      |                                                            | $                                                | 3.8                                                                                |       |      | $     | 9.6    |      |      | $     | 5.1   |     
|                                                                                              |                                                            |                                                 
|Cash and cash equivalents of continuing operations                                            |                                                            | $                                                | 3.8                                                                                |       |      | $     | 8.4    |      |      | $     | 4.2   |     
|Cash and cash equivalents of discontinued
    operations                                      |                                                            | $                                                |                                                                                   |       |      | $     | 1.2    |      |      | $     | 0.9   |     

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 2003, 2002 and 2001


Note  1 Description of
Business

In 46 states, the District of Columbia,
Puerto Rico and 36 foreign countries, AFC Enterprises, Inc.
and its subsidiaries (AFC or the
Company) develop, operate and franchise quick-service
restaurants, bakeries and cafes (generally referred to as
QSRs or units throughout these notes) in
two distinct business segments: chicken and bakery. The
Companys chicken segment operates and franchises under the
trade names Popeyes® Chicken & Biscuits
(Popeyes) and Churchs ChickenTM
(Churchs); its bakery segment operates and
franchises under the trade name Cinnabon®
(Cinnabon) and currently franchises cafes under the
trade name Seattles Best Coffee® (SBC).
The Companys SBC operations are contractually limited to
Hawaii, certain international markets and certain
U.S. military bases.

Discontinued
Operations.As discussed in
Note 23, on July 14, 2003, the Company sold Seattle
Coffee Company (Seattle Coffee), a subsidiary which
was the parent company for the Companys SBC and
Torrefazione Italia® Coffee brands. In the transaction, the
Company sold all of Seattle Coffee except for a portion of
SBCs franchising operations in Hawaii, certain
international markets and on certain U.S. military bases.
In the accompanying financial statements, financial results
relating to the divested operations are presented as a
discontinued operation. Previously reported consolidated
financial statement amounts have been restated to present the
divested operations in a manner consistent with the 2003
presentation. Unless otherwise noted, discussions and amounts
throughout these notes relate to the Companys continuing
operations.

Note  2 Summary of Significant
Accounting Policies

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
(loss) income.

Foreign Currency
Transactions.Substantially all of
the Companys foreign-sourced revenues (principally
royalties from international franchisees and, within
discontinued operations, coffee sales to international
customers) are recorded in U.S. dollars. The aggregate
effects of any exchange gains or losses associated with
continuing operations are, upon settlement, included in the
accompanying consolidated statements of operations as a
component of general and administrative expenses.
During 2003, 2002 and 2001 net foreign currency losses
related to continuing operations were $0.1 million,
$0.1 million and zero, respectively. During 2003, 2002 and
2001, net foreign currency losses related to discontinued
operations were zero, zero and $0.2 million, respectively.

Fiscal Year.The Companys fiscal year ends on the last Sunday in
December. The 2003, 2002 and 2001 fiscal years consisted of
52 weeks each.

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 28, 2003 and
December 29, 2002 such overdrafts were approximately
$2.1 million and $5.1 million, respectively, and were
included in accounts payable in the accompanying
consolidated balance sheets.

F-6



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001




| |                                        
| | ---------------------------------------
| | Supplemental Cash Flow
    Information.

|                                                                              |  |      |      |      |  |      |      |  |  |   |      | 
|----------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                                                             
|(In millions)                                                                 |  | 2003 |      | 2002 |  | 2001
|                                                                             
|Interest paid, net of capitalized amounts                                     |  | $    | 7.7  |      |  | $    | 21.2 |  |  | $ | 25.0 | 
|Income taxes paid, net of refunds                                             |  |      | 14.6 |      |  |      | 7.2  |  |  |   | 21.7 | 
|Notes received in conjunction with dispositions
    of property and equipment |  |      |     |      |  |      | 4.4  |  |  |   | 3.6  | 

Accounts Receivable,
Net.At December 28, 2003 and
December 29, 2002, accounts receivable, net were
$21.1 million and $24.0 million, respectively.
Accounts receivable consist primarily of amounts due from
franchisees related to royalties, rents and other miscellaneous
items. The accounts receivable balance is stated net of an
allowance for doubtful accounts. During 2003, 2002 and 2001,
changes in the allowance for doubtful accounts were as follows:

|                           |  |      |      |      |  |      |      |   |  |   |      |  
|-------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                          
|(In millions)              |  | 2003 |      | 2002 |  | 2001
|                          
|Balance, beginning of year |  | $    | 3.2  |      |  | $    | 2.2  |   |  | $ | 1.7  |  
|Provisions                 |  |      | 3.6  |      |  |      | 1.6  |   |  |   | 0.9  |  
|Recoveries and other       |  |      |     |      |  |      | (0.2 | ) |  |   |     |  
|Write-offs                 |  |      | (0.5 | )    |  |      | (0.4 | ) |  |   | (0.4 | )
|Balance, end of year       |  | $    | 6.3  |      |  | $    | 3.2  |   |  | $ | 2.2  |  

Notes Receivable,
Net.At December 28, 2003 and
December 29, 2002, notes receivable, net were approximately
$8.5 million and $13.7 million, respectively, of which
$2.2 million and $1.6 million, respectively, was
current. At December 28, 2003, interest rates on
approximately $0.2 million of the notes were indexed to the
prime rate and the remaining notes had fixed interest rates that
ranged from 5.0% to 13.0%.

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. Notes receivable also
include notes from franchisees to finance certain past due
franchise revenues, rents and interest. See Note 22 for a
discussion of notes receivable from officers which are included
as a component of shareholders equity in the accompanying
consolidated balance sheets.

The notes receivable balance is stated net of
allowances for uncollectibility. During 2003, 2002 and 2001,
changes in the allowance for uncollectible notes were as follows:

|                           |  |      |      |      |  |      |     |  |  |   |     | 
|-------------------------- |  | ---- | ---- | ---- |  | ---- | --- |  |  | - | --- | 
|                          
|(In millions)              |  | 2003 |      | 2002 |  | 2001
|                          
|Balance, beginning of year |  | $    | 0.5  |      |  | $    | 0.2 |  |  | $ | 0.2 | 
|Provisions                 |  |      | 2.5  |      |  |      | 0.3 |  |  |   |    | 
|Other                      |  |      | 1.3  |      |  |      |    |  |  |   |    | 
|Write-offs                 |  |      | (0.2 | )    |  |      |    |  |  |   |    | 
|Balance, end of year       |  | $    | 4.1  |      |  | $    | 0.5 |  |  | $ | 0.2 | 

During 2003, the Company fully reserved principal
and accrued interest on a note receivable associated with a 2002
unit conversion by recording a provision for uncollectible note
receivable of $2.5 million and reclassifying previously
deferred gains of $1.3 to the allowance for uncollectible notes.

Inventories.Inventories consist principally of food, beverage items and
supplies which are carried at the lower of cost (determined on a
first-in, first-out basis) or net realizable value.

F-7



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


Property and
Equipment.Property and equipment
is stated at cost less accumulated depreciation and impairment
write-downs. During 2003, 2002 and 2001, interest capitalized as
a component of property and equipment was approximately
$0.1 million, $0.3 million and $0.3 million,
respectively.

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). During 2003, 2002 and 2001 depreciation
expense associated with continuing operations was approximately
$22.9 million, $25.2 million and $28.0 million,
respectively. During 2003, 2002 and 2001 depreciation expense
associated with discontinued operations was $1.2 million,
$4.1 million and $2.9 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 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 Churchs franchise agreement and
a management agreement to operate the stores for the franchisee.

Because the risks of ownership had not passed to
the buyers, the Company did not remove the above assets from its
books and records. The Company has classified these assets as
assets under contractual agreement in the
accompanying consolidated balance sheets as a component of
other long-term assets, net. As of December 28,
2003 and December 29, 2002, the carrying values of these
assets were as follows:

|                            |  |      |     |      |  |   |     | 
|--------------------------- |  | ---- | --- | ---- |  | - | --- | 
|                           
|(In millions)               |  | 2003 |     | 2002
|                           
|Property and equipment, net |  | $    | 1.3 |      |  | $ | 2.7 | 
|Goodwill                    |  |      |    |      |  |   | 5.6 | 
|                            |  | $    | 1.3 |      |  | $ | 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 these assets annually for impairment or when
circumstances arise indicating potential impairment, and any
loss is recognized immediately. See Note 18 for a
discussion of impairments recognized in 2003.

Derivative Financial
Instruments.The Companys
use of derivative instruments is generally limited to foreign
currency contracts on the Korean Won entered into with financial
institutions. As of December 28, 2003 the Company had no
outstanding foreign currency contracts. 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.

F-8



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


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 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.

During 2003, 2002 and 2001, amortization expense
associated with the finite-lived intangible assets of the
Companys continuing operations was approximately
$0.1 million, $0.1 million and $7.8 million,
respectively. During 2003, 2002 and 2001, amortization expense
associated with the finite-lived intangible assets of the
Companys discontinued operations was $0.1 million,
$0.2 million and $1.6 million, respectively.
Application of SFAS 142s non-amortization provisions
in 2001 would have increased net income by approximately
$6.2 million and basic and diluted earnings per common
share by $0.21 and $0.19, 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 operating segments.

The impairment evaluation consists of a
comparison of each reporting units fair value with its
carrying value. The fair value of a reporting unit is the
estimated amount for which the unit as a whole could be sold in
a current transaction between willing parties. The Company
estimates the fair value of its reporting units 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 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 carrying value of a
reporting unit exceeds its fair value, goodwill is written down
to its implied fair value.

In the first quarter of 2002, in conjunction with
the Companys adoption of SFAS 142, the Company
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 Seattle Coffee and are now included in discontinued
operations. These charges were made necessary by consecutive
years of deteriorating operations and cash flow projections
indicating a decline in value. See Note 18 concerning
impairments associated with continuing operations.

In conjunction with the adoption of
SFAS 142, the Company also 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 2004 is $0.1 million and
for 2005 through 2008 is less than $0.1 million per year.
The remaining weighted average amortization period for these
assets is 8 years.

Asset
Retirements.In 2003, the Company
adopted SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143).
SFAS 143 addresses financial accounting and reporting for
legal 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. SFAS 143 requires that the fair value of
an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can
be made. The Company recorded a cumulative effect adjustment of
$0.7 million ($0.4 million after tax).

Debt Issuance
Costs.Costs incurred securing 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,

F-9



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


associated amortization expense is included as a
component of interest expense, net. Similarly,
write-offs of debt issuance costs (done in conjunction with the
early extinguishment of debt) are included in the Companys
consolidated statements of operations as a component of
interest expense, net.

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, as required by their franchise
agreements. These funds are used exclusively for brand
advertising.

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. The net funds balance
is included in the Companys consolidated balance sheets as
a component of accounts payable. At
December 28, 2003 and December 29, 2002, the net
funds balance was approximately $3.1 million and
$2.4 million, respectively.

The Companys contributions to the
advertising funds are reflected in the Companys
consolidated statements of operations as a component of
restaurant employee, occupancy and other expenses.
Such contributions and the Companys other advertising
costs are expensed as incurred. During 2003, 2002 and 2001, the
Companys advertising costs were approximately
$23.2 million, $26.7 million and $30.8 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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.
|
| | 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 QSR sales.                                                                                                                                                                                                                                                                                      

Development fees and franchise 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.

Other
Revenues.Other revenues are
principally composed of rental income associated with properties
leased or subleased to franchisees, other fees associated with
unit conversions and wholesale transactions within our bakery
segment. Rental income is 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. Revenues from the Companys wholesale bakery
operations are recognized based upon the terms of each sale.
Wholesale revenues include amounts billed for shipping and
handling costs.

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.

F-10



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


There were no unit conversions in 2003. During
2002 and 2001, gains and losses associated with unit
conversions, were as follows.

|                               |  |      |      |      |  |   |      |  
|------------------------------ |  | ---- | ---- | ---- |  | - | ---- | -
|                              
|(In millions)                  |  | 2002 |      | 2001
|                              
|(Losses) gains recognized, net |  | $    | (3.9 | )    |  | $ | (1.3 | )
|Gains deferred                 |  |      | 10.3 |      |  |   | 6.4  |  

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

During 2003, 2002 and 2001, previously deferred
gains of $1.2 million, $0.5 million and
$0.2 million, respectively, were recognized in income as a
component of impairment charges and other in the
accompanying consolidated statements of operations. During 2003,
a dispute relating to a 2002 unit conversion was settled. The
settlement was treated as an adjustment to the purchase price,
reducing the deferred gain by $1.5 million.

Research and
Development.Research and
development costs are expensed as incurred. During 2003, 2002
and 2001, such costs were approximately $2.5 million,
$2.5 million and $2.3 million, 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 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.

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 (loss)
income would have been adjusted to the following pro forma
amounts:

|                                                                                                                                     |  |      |       |      |  |      |       |   |  |   |      |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ---- | -
|                                                                                                                                    
|(In millions, except per share amounts)                                                                                              |  | 2003 |       | 2002 |  | 2001
|                                                                                                                                    
|Net (loss) income as reported                                                                                                        |  | $    | (9.1  | )    |  | $    | (11.7 | ) |  | $ | 15.6 |  
|Total stock-based employee compensation expense
    determined under fair value method for all awards net of related
    tax effects |  |      | (2.2  | )    |  |      | (2.4  | ) |  |   | (1.0 | )
|                                                                                                                                     |  |     
|Pro forma net (loss) income                                                                                                          |  | $    | (11.3 | )    |  | $    | (14.1 | ) |  | $ | 14.6 |  
|                                                                                                                                     |  |     
|Basic (loss) earnings per share                                                                                                      |  |      |       |      |  |      |       |   |  |   |      |  
|As reported                                                                                                                          |  | $    | (0.33 | )    |  | $    | (0.39 | ) |  | $ | 0.53 |  
|Pro forma                                                                                                                            |  |      | (0.41 | )    |  |      | (0.47 | ) |  |   | 0.49 |  
|                                                                                                                                    
|Diluted (loss) earnings per share                                                                                                    |  |      |       |      |  |      |       |   |  |   |      |  
|As reported                                                                                                                          |  | $    | (0.33 | )    |  | $    | (0.37 | ) |  | $ | 0.50 |  
|Pro forma                                                                                                                            |  |      | (0.41 | )    |  |      | (0.45 | ) |  |   | 0.46 |  

F-11



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


During 2003, 2002 and 2001, the fair value of
each option was estimated on the date of grant using the
Black-Scholes option pricing model. The following
weighted-average assumptions were used for the grants:

|                                               |  |         |     |      |  |      |      |   |  |  |      |  
|---------------------------------------------- |  | ------- | --- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                              
|                                               |  | 2003(a) |     | 2002 |  | 2001
|                                              
|Approximate risk-free interest rate percentage |  |         | n/a |      |  |      | 2.8  | % |  |  | 4.4  | %
|Expected dividend yield percentage             |  |         | n/a |      |  |      | 0.0  | % |  |  | 0.0  | %
|Expected lives (in years)                      |  |         | n/a |      |  |      | 4.0  |   |  |  | 4.6  |  
|Expected volatility percentage                 |  |         | n/a |      |  |      | 46.4 | % |  |  | 35.0 | %



---



|    |  |                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------
|(a) |  | During 2003, there were no options granted. See
    Note 16 for a further discussion of the Companys
    stock option plans.

Note  3 Recent Accounting
Pronouncements That The Company Has Not Yet Adopted

In January 2003, The Financial Accounting
Standards Board (FASB) issued Interpretation
No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51(FIN 46). In December 2003, the FASB issued
an update which revised and restated FIN 46 in its entirety
(FIN 46R).

FIN 46R clarifies the application of
Accounting Research Bulletin No. 51, Consolidated
Financial Statementsas it concerns the consolidation of
certain entities in which (a) the equity investment at risk
does not provide its holders with the characteristics of a
controlling financial interest or (b) the equity
investments at risk is not sufficient for the entity to finance
its activities without additional subordinated financial
support. For such entities, a controlling financial interest
cannot be identified based upon voting equity interests.
FIN 46R refers to such entities as variable interest
entities (VIEs). FIN 46R requires
consolidation of VIEs by its primary beneficiary. The primary
beneficiary is the entity, if any, that will absorb a majority
of the VIEs expected losses, receive a majority of its
expected residual returns, or both, as a result of holding
variable interests.

The Company is currently evaluating the effect of
FIN 46R on its accounting for certain franchisee
relationships. The Company will adopt FIN 46R in the first
quarter of fiscal 2004. If the Company determines that it is
appropriate to consolidate certain of its franchisees, it is
possible that consolidation of those franchisees will give rise
to a one-time charge for the recognition of minority interest
liabilities. At present, no such charge has been calculated.

Note  4 Other Current
Assets

|                      |  |      |      |      |  |   |      | 
|--------------------- |  | ---- | ---- | ---- |  | - | ---- | 
|                     
|(In millions)         |  | 2003 |      | 2002
|                     
|Restricted cash       |  | $    | 7.1  |      |  | $ | 6.8  | 
|Deferred income taxes |  |      | 2.7  |      |  |   | 1.3  | 
|Inventories           |  |      | 2.7  |      |  |   | 3.1  | 
|Other                 |  |      | 4.0  |      |  |   | 5.9  | 
|                      |  | $    | 16.5 |      |  | $ | 17.1 | 

Amounts classified as restricted cash principally
relate to the cooperative advertising funds the Company
maintains for its franchisees (Note 2). At
December 28, 2003, restricted cash includes
$2.8 million of deposits in a collateral account as
required by the Companys 2002 Credit Facility (see
Note 10).

F-12



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


Note  5 Property and Equipment,
Net

|                                               |  |      |        |      |  |   |        |  
|---------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                              
|(In millions)                                  |  | 2003 |        | 2002
|                                              
|Land                                           |  | $    | 40.8   |      |  | $ | 41.1   |  
|Buildings and improvements                     |  |      | 125.4  |      |  |   | 128.0  |  
|Equipment                                      |  |      | 143.9  |      |  |   | 144.5  |  
|Properties held for sale and other             |  |      | 1.7    |      |  |   | 1.1    |  
|                                               |  |     
|                                               |  |      | 311.8  |      |  |   | 314.7  |  
|Less accumulated depreciation and amortization |  |      | (135.0 | )    |  |   | (124.8 | )
|                                               |  | $    | 176.8  |      |  | $ | 189.9  |  

At December 28, 2003 and December 29,
2002, property and equipment, net includes capital lease assets
with a gross book value of $13.4 million and
$15.0 million, respectively and accumulated amortization of
$6.2 million and $6.8 million, respectively.

Note  6 Goodwill

|                                        |  |      |      |      |  |   |      |  
|--------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | -
|                                       
|(In millions)                           |  | 2003 |      | 2002
|                                       
|Balance, beginning of year              |  | $    | 22.3 |      |  | $ | 23.6 |  
|Impairments (Note 18)                   |  |      | (7.6 | )    |  |   |     |  
|Allocated to the sale of QSRs and other |  |      |     |      |  |   | (1.3 | )
|Balance, end of year                    |  | $    | 14.7 |      |  | $ | 22.3 |  

Of the $14.7 million of goodwill at
December 28, 2003, approximately $10.6 million relates
to the Companys chicken segment and approximately
$4.1 million relates to the Companys bakery segment.

Note  7 Trademarks and Other
Intangible Assets, Net

|                                   |                            |      |      |      |  |   |       |       | 
|---------------------------------- | -------------------------- | ---- | ---- | ---- |  | - | ----- | ----- | 
|                                  
|(In millions)                      |                            | 2003 |      | 2002
|                                  
|Non-amortized intangible assets:   |                            |      |      |      |  |   |       |      
|                                   | Trademarks and trade names |      | $    | 82.8 |  |   | $     | 100.9 | 
|                                   | Other                      |      |      | 1.2  |  |   |       | 1.7   | 
|                                   |                            |     
|                                   |                            |      | 84.0 |      |  |   | 102.6 |      
|Amortizable intangible assets, net |                            |      | 0.3  |      |  |   | 0.4   |      
|                                   |                            | $    | 84.3 |      |  | $ | 103.0 |      

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 the purchase price associated with the Companys 1998
acquisition of Cinnabon. Of the $82.8 million of trademarks
and trade names at December 28, 2003, approximately
$59.7 million relates to the Companys chicken segment
and approximately $23.1 million relates to the
Companys bakery segment. See Note 18 for a discussion
of write-downs of trademarks and trade names during 2003.

F-13



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


Note  8 Other Long-Term
Assets, Net

|                                   |  |      |      |      |  |   |      | 
|---------------------------------- |  | ---- | ---- | ---- |  | - | ---- | 
|                                  
|(In millions)                      |  | 2003 |      | 2002
|                                  
|Non-current notes receivable, net  |  | $    | 6.3  |      |  | $ | 12.1 | 
|Debt issuance costs                |  |      | 3.7  |      |  |   | 4.4  | 
|Assets under contractual agreement |  |      | 1.3  |      |  |   | 8.3  | 
|Other                              |  |      | 4.2  |      |  |   | 4.8  | 
|                                   |  | $    | 15.5 |      |  | $ | 29.6 | 

Note  9 Accrued
Liabilities

|                                       |  |      |      |      |  |   |      | 
|-------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | 
|                                      
|(In millions)                          |  | 2003 |      | 2002
|                                      
|Accrued wages, bonuses and commissions |  | $    | 3.7  |      |  | $ | 3.2  | 
|Accrued employee benefits              |  |      | 2.7  |      |  |   | 3.8  | 
|Accrued property taxes                 |  |      | 2.4  |      |  |   | 2.4  | 
|Accrued insurance                      |  |      | 2.3  |      |  |   | 2.8  | 
|Accrued legal                          |  |      | 2.2  |      |  |   | 2.1  | 
|Other                                  |  |      | 3.4  |      |  |   | 3.5  | 
|                                       |  | $    | 16.7 |      |  | $ | 17.8 | 

Note  10 Long-Term Debt and
Other Borrowings

|                                    |                           |      |       |      |  |   |       |      | 
|----------------------------------- | ------------------------- | ---- | ----- | ---- |  | - | ----- | ---- | 
|                                   
|(In millions)                       |                           | 2003 |       | 2002
|                                   
|2002 Credit Facility:               |                           |      |       |      |  |   |       |     
|                                    | Revolving credit facility |      | $     | 33.7 |  |   | $     | 50.0 | 
|                                    | Tranche A term loan       |      |       | 37.8 |  |   |       | 73.1 | 
|                                    | Tranche B term loan       |      |       | 57.8 |  |   |       | 99.8 | 
|Capital lease obligations (Note 11) |                           |      | 1.5   |      |  |   | 1.5   |     
|Other notes                         |                           |      | 0.1   |      |  |   | 2.2   |     
|                                    |                           |     
|                                    |                           |      | 130.9 |      |  |   | 226.6 |     
|Less current portion                |                           |      | (12.1 | )    |  |   | (17.6 | )   
|                                    |                           | $    | 118.8 |      |  | $ | 209.0 |     

2002 Credit
Facility.On May 23, 2002,
the Company entered into a new bank credit facility (the
2002 Credit Facility) with JP Morgan Chase
Bank, 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.

The term loans and the revolving credit facility
bear interest at LIBOR plus an applicable margin based on
certain financial leverage ratios and the Companys credit
rating. The margins 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
another amendment to the 2002 Credit Facility and remained at
those rates through December 28, 2003.

F-14



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


The Company also pays a quarterly commitment fee
of 0.125% (0.5% annual rate divided by 4) on the unused
portions of the revolving credit facility.

As of December 28, 2003, Tranche A
principal was payable in quarterly installments ranging from
$1.6 million to $3.1 million, maturing in May 2007. As
of December 28, 2003, Tranche B principal was payable
in quarterly installments ranging from $0.1 million to
$13.1 million, maturing in May 2009. For both the
Tranche A and Tranche B term loans, interest is paid,
typically at the Companys option, in one, two, three or
six-month intervals.

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 estimated 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.

During 2003, the Company made prepayments of
approximately $8.2 million associated with the cash flow
provisions described above and $60.5 million associated
with the sale of Seattle Coffee. During 2002, the Company made
an optional prepayment of $25.0 million on the
Tranche B term loan.

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 establishment of the 2002
Credit Facility, the Company incurred approximately
$4.9 million in debt issuance costs, which were capitalized
and are being amortized over the term 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 has customary restrictions on the
Companys ability to engage in mergers or acquisitions,
sell certain assets, repurchase its stock and enter into certain
lease transactions.

Amendments to the 2002 Credit
Facility.On March 31, 2003,
May 30, 2003, July 14, 2003, August 22, 2003,
October 30, 2003 and March 26, 2004, the Company
amended its 2002 Credit Facility. The effect of these amendments
was to:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Extend, for purposes of the facility, the
    deadline for providing the Companys 2002 annual report to
    its lenders to December 15, 2003 (this requirement was
    satisfied as of that date).                                                                                                                                                                                                   
|
| |  | Extend, for purposes of the facility, the
    deadline for providing the Companys quarterly financial
    information to its lenders for the first, second and third
    quarters of 2003 to February 28, 2004 (this requirement was
    satisfied as of that date).                                                                                                                                 
|
| |  | Raise the interest rate on outstanding
    indebtedness under the 2002 Credit Facility 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 delivers all of the required quarterly
    financial information and demonstrates a total leverage ratio of
    not greater than two to one for 2003, at which time the
    revolving line of credit limit will return to the original
    commitment amount of $75.0 million.
|
| |  | Approve the Seattle Coffee divestiture.                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Deposit $2.8 million in a collateral
    account. This occurred on October 31, 2003.                                                                                                                                                                                                                                                                                                                  

F-15



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001




| |   |                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Adjust the computation of certain loan covenant
    ratios in 2003 to exclude from the computations certain fees
    associated with a productivity initiative 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.
|
| |  | Extend, for purposes of the facility, the
    deadline for providing the Companys 2003 annual audited
    financial statements to its lenders to April 12, 2004.                                                                                                                                                                                                    

In conjunction with these amendments, the Company
paid fees of approximately $2.4 million in 2003. Because
the 2003 amendments were necessitated by the delays in filing
the Companys annual report for 2002 and quarterly reports
for 2003, a consequence of the restatement and re-audits of
previously issued financial information, these fees are included
as a component of the restatement costs discussed at
Note 18.

Without the amendments, the Company would have
been in default of the 2002 Credit Facility and the entire
amount of the debt would have been subject to acceleration by
the facilitys lenders. If the Company is not able to
continue to provide timely financial information to the lenders
as required under the 2002 Credit Facility, there can be no
assurance that such lenders will provide future relief through
waivers or additional amendments. If the Company defaults on the
terms and conditions of the 2002 Credit Facility and the debt is
accelerated by the facilitys lenders, such developments
will have a material adverse impact on the Companys
financial condition and its liquidity.

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 28, 2003, there was
$33.7 million in outstanding borrowings under the revolving
credit facility and $9.4 million of outstanding letters of
credit, leaving amounts available for short-term borrowings and
additional letters of credit of $21.9 million. The
revolving credit facility is due in full without installments in
May 2007.

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 $75.0 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 1997 Credit
Facility, 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
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 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

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


2002 Credit Facility. In connection with the 2002
and 2001 repurchases, the Company wrote-off an allocable portion
of its unamortized debt issue costs in each year. The premiums
and the write-offs of unamortized debt issue costs are a
component of interest expense, net in the
accompanying consolidated statements of operations.

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. 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 28, 2003, aggregate future
debt maturities were as follows:

|              |  |   |       | 
|------------- |  | - | ----- | 
|             
|(In millions)
|             
|2004          |  | $ | 12.0  | 
|2005          |  |   | 9.5   | 
|2006          |  |   | 14.8  | 
|2007          |  |   | 40.4  | 
|2008          |  |   | 13.5  | 
|Thereafter    |  |   | 39.2  | 
|              |  | $ | 129.4 | 

Note  11 Leases

At December 28, 2003, future minimum
payments under capital and non-cancelable operating leases were
as follows:

|                                                     |  |         |      |           |  |   |       | 
|---------------------------------------------------- |  | ------- | ---- | --------- |  | - | ----- | 
|                                                    
|                                                     |  | Capital |      | Operating
|(In millions)                                        |  | Leases  |      | Leases   
|                                                    
|2004                                                 |  | $       | 0.2  |           |  | $ | 24.1  | 
|2005                                                 |  |         | 0.2  |           |  |   | 21.1  | 
|2006                                                 |  |         | 0.2  |           |  |   | 18.0  | 
|2007                                                 |  |         | 0.3  |           |  |   | 15.7  | 
|2008                                                 |  |         | 0.2  |           |  |   | 13.3  | 
|Thereafter                                           |  |         | 1.5  |           |  |   | 46.7  | 
|Future minimum lease payments                        |  |         | 2.6  |           |  | $ | 138.9 | 
|Less amounts representing interest                   |  |         | (1.1 | )         |  |   |       | 
|Total obligations under capital leases
    (Note 10) |  | $       | 1.5  |           |  |   |       | 

During 2003, 2002 and 2001, rental expense
associated with continuing operations was approximately
$27.0 million, $28.6 million and $28.3 million,
respectively, including percentage rentals of $0.6 million,
$0.8 million and $1.0 million, respectively. During
2003, 2002 and 2001 rental expense associated with
discontinued operations was $4.0 million, $6.6 million
and $6.4 million, respectively. At December 28, 2003,
the implicit rate of interest on capital leases ranged from
10.9% to 11.5%.

The Company leases certain restaurant properties
and subleases other restaurant properties to franchisees. At
December 28, 2003, the aggregate gross book value and the
net book value of such properties was approximately
$29.7 million and $18.7 million, respectively. Rental
income from these leases and subleases, principally related to
the Companys chicken and bakery segments, was
approximately $19.8 million, $17.3 million and
$12.3 million in

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


2003, 2002 and 2001, respectively. At
December 28, 2003, future minimum rental income associated
with these leases and subleases, for each of the next five
years, is approximately $15.4 million, $13.4 million,
$12.0 million, $10.3 million and $8.9 million,
respectively.

Note  12 Deferred Credits and
Other Long-Term Liabilities

|                                                 |  |      |      |      |  |   |      | 
|------------------------------------------------ |  | ---- | ---- | ---- |  | - | ---- | 
|                                                
|(In millions)                                    |  | 2003 |      | 2002
|                                                
|Deferred franchise revenues                      |  | $    | 13.4 |      |  | $ | 14.3 | 
|Deferred gain on unit conversions                |  |      | 12.8 |      |  |   | 16.8 | 
|Deferred rentals                                 |  |      | 7.9  |      |  |   | 6.4  | 
|Deferred income taxes                            |  |      | 5.2  |      |  |   | 18.2 | 
|Future lease obligations  closed
    facilities |  |      | 5.1  |      |  |   | 3.1  | 
|Other                                            |  |      | 13.4 |      |  |   | 12.9 | 
|                                                 |  | $    | 57.8 |      |  | $ | 71.7 | 

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-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 28, 2003, the Company owned approximately 14% of
SMS and held three of its eleven board seats. 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 28,
2003.

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 beverage
supply agreements with certain beverage vendors. These contracts
are customary to the QSR industry. Pursuant to the terms of
these arrangements, marketing rebates are provided to the
Company and to the Companys franchises from the beverage
vendors based upon the dollar volume of purchases for
company-operated QSRs and franchised QSRs, respectively, which
will vary according to its demand for beverage syrup and
fluctuations in the market rates for beverage syrup.

On behalf of Cinnabon and its franchisees, SMS
has entered into a long-term dough supply agreement with minimum
volume purchases of $8.3 million for each of 2004 and 2005
and $2.8 million for 2006.

Through May 31, 2005, the Company has an
arrangement with a supplier to purchase restaurant equipment. At
December 28, 2003, approximately $1.6 million of
targeted purchases under the agreement were outstanding;
approximately $1.1 million relating to 2004 and the
remainder relating to 2005. If the purchase targets are not met,
a 30% penalty is due.

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.

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


(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 2003, 2002 and 2001, the Company expensed
approximately $3.1 million, $3.1 million and
$3.0 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 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 2003, 2002 and 2001 payments made to King
Features were $0.9 million, $0.9 million and
$1.2 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
$1.3 million (adjusted each year by a minimum 4% annual
increase), plus a variable fee based upon the number of
company-operated QSRs and the number of franchised QSRs. At
December 28, 2003, future minimum payments under this
contract, including the variable rates applied to the
Companys and its franchisees QSR count at
December 28, 2003, are as follows:

|              |  |   |      | 
|------------- |  | - | ---- | 
|             
|(In millions)
|             
|2004          |  | $ | 4.1  | 
|2005          |  |   | 4.3  | 
|2006          |  |   | 4.5  | 
|2007          |  |   | 4.7  | 
|2008          |  |   | 4.8  | 
|Thereafter    |  |   | 5.1  | 
|              |  | $ | 27.5 | 

During 2003 and 2002, the Company expensed
$4.0 million and $1.5 million, respectively, under
this agreement.

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


Information Technology
Outsourcing  D&T.The Company has an information technology outsourcing contract
with D&T. The contract became effective on January 1,
2003 and extends through December 31, 2009.

The contract, as amended, provides for an annual
information technology services fee of $2.8 million
(adjusted each year by a minimum 4% annual increase) as well as
recurring pass-through costs, software upgrade fees and other
miscellaneous annual charges. At December 28, 2003, the
future minimum payments under this contract were as follows:

|              |  |   |      | 
|------------- |  | - | ---- | 
|             
|(In millions)
|             
|2004          |  | $ | 5.6  | 
|2005          |  |   | 3.9  | 
|2006          |  |   | 4.0  | 
|2007          |  |   | 4.1  | 
|2008          |  |   | 4.2  | 
|Thereafter    |  |   | 4.4  | 
|              |  | $ | 26.2 | 

Included in the above amount for 2004 are
$1.5 million related to capital expenditures. During 2003,
the Company expensed $3.3 million under this agreement.

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 and $8.2 million related to it are
included in the statements of operations for the years 2002 and
2001, 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)
|             
|2004          |  | $ | 5.4  | 
|2005          |  |   | 5.0  | 
|2006          |  |   | 4.8  | 
|2007          |  |   | 4.5  | 
|2008          |  |   | 4.3  | 
|Thereafter    |  |   | 5.3  | 
|              |  | $ | 29.3 | 

During 2003, the Company expensed
$5.0 million under this agreement. During 2003, the Company
also incurred approximately $1.1 million of charges related
to the interim period between the two aforementioned contracts.

Employment
Agreements.The Company has
employment agreements with seven senior executives which provide
for annual base salaries ranging from $230,000 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

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


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
toward a maximum aggregate liability for the entire pool of
$1.0 million. For loans within the pool, the Company
assumes a first loss risk until the maximum liability for the
pool has been reached. Such guarantees typically extend for a
three-year period. As of December 28, 2003, approximately
$9.1 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. Under the program, the Company assumes a first loss
risk on the portfolio up to 10% of the sum of the original
funded principal balances of all program loans. As of
December 28, 2003, approximately $1.5 million was
borrowed under this program, of which the Company was
contingently liable for $0.2 million in the event of
default.

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
$1.4 million as of December 28, 2003. These guarantees
arose in connection with the sale of company-operated QSRs to
franchisees and 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.

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 current and former directors and
officers. By order dated May 21, 2003, the district court
consolidated the eight lawsuits into one consolidated action. On
January 26, 2004, the plaintiffs filed a Consolidated
Amended Class Action Complaint (the Consolidated
Complaint) on behalf of a putative class of persons who
purchased or otherwise acquired AFC stock between March 2,
2001 and March 24, 2003. In the Consolidated Complaint,
plaintiffs allege that the registration statement filed in
connection with AFCs March 2001 initial public offering
(IPO) contained false and misleading statements in
violation of Sections 11 and 15 of the Securities Act of
1933 (1933 Act). The defendants to the
1933 Act claims include AFC, certain of AFCs current
and former directors and officers, an institutional shareholder
of AFC, and the underwriters of AFCs IPO. Plaintiffs also
allege violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (1934 Act) and
Rule 10b-5 promulgated there under. The plaintiffs
1934 Act allegations are pled against AFC, certain current
and former directors and officers of AFC, and two institutional
shareholders. The plaintiffs also allege violations of
Section 20A of the 1934 Act against certain current
and former directors and officers and two institutional
shareholders based upon alleged stock sales. The Consolidated
Complaint seeks certification as a class action, compensatory
damages, pre-judgment and post-judgment interest,
attorneys fees and costs, an accounting of the proceeds of
certain defendants alleged stock sales, disgorgement of
bonuses and trading profits by AFCs CEO and former CFO,
injunctive relief, including the imposition of a constructive
trust on certain defendants alleged trading proceeds, and
other relief. AFC has not yet filed a response to the
Consolidated Complaint.

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


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 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 stock
sales by certain defendants, recovery of attorneys fees
and costs, and other relief. On February 23, 2004, the
defendants moved to dismiss the consolidated complaint. The
plaintiffs have not yet responded to the defendants motion
to dismiss.

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 January 20,
2004, the defendants moved to dismiss or, alternatively, to stay
the case. The plaintiff has not yet responded to the
defendants motion.

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
$185.0 million public offering of common stock. The lawsuit
asserts claims under Sections 11 and 15 of the
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, was 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 remanding the case to state
court but staying the order to allow the defendants to seek
interlocutory appellate review of the decision. The United
States Court of Appeals for the Eleventh Circuit agreed to hear
the defendants appeal. Briefing in the Court of Appeals is
expected to be completed on or about April 2, 2004.

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 is
cooperating 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

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


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 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 or
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 adequate 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 or
liquidity.

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 for the first
$0.3 million against such liabilities) which it believes
are customary for businesses of its size and type. 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 with respect
to the programs described above based on the estimated total
losses the Company will experience. At December 28, 2003,
the Companys insurance reserves were partially
collateralized by letters of credit and/or cash deposits of
$8.7 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.
Approximately 150 of the Companys current and formerly
owned and/or leased properties are known or suspected to have
been used by prior owners or operators as retail gas stations
and a few of these properties may have been used for other
environmentally sensitive purposes. 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 or former owner or operator of these sites, may be
jointly and severally liable for the costs of investigation and
remediation of any such contamination, as well as any other
environmental conditions at its properties that are unrelated to
USTs. The Company has 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.The Companys
international operations are limited to the franchising of its
various brands. For each of 2003, 2002 and 2001, such operations
represented approximately 15.6%. 16.6% and 17.3% of total
franchise revenues, respectively; and 3.9%, 3.5% and 2.9% of
total revenues, respectively. At December 28, 2003,
approximately $3.1 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. To reduce its
foreign currency risks associated with royalty streams from
franchised operations in Korea, on a limited basis, the Company
has entered into foreign currency agreements

F-23



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


with respect to the Korean Won. Net losses
incurred by the Company during 2003, 2002 and 2001 related to
these agreements were not significant to the Companys
financial position or its results of operations.

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

Significant
Franchisee.During 2003, 2002 and
2001, one domestic franchisee accounted for approximately 7.1%,
7.6% and 8.1%, respectively of the Companys royalty
revenues from continuing operations.

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 and accounts payable approximates carrying value.

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 Company believes the
fair value of its notes receivable from officers, including
accrued interest and unamortized discounts approximates their
carrying value, as the interest rates on these notes are not
substantially different from prevailing market rates.

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.

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.Effective July 22,
2002, the Companys board of directors approved a share
repurchase program of up to $50.0 million. 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.
During 2002, the Company repurchased 3,692,963 shares of
common stock for approximately $77.9 million under this
program. No repurchases were made during 2003.

Dividends.During 2003, 2002 and 2001, 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.

F-24



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


Note  16 Stock Option
Plans

The 1992 Stock Option
Plan.Under the 1992 Nonqualified
Stock Option Plan, the Company was authorized to issue options
to purchase approximately 1.2 million shares of the
Companys common stock. As of November 13, 2002, the
Company will no longer grant options from this plan. The per
share exercise price is $0.12. The outstanding options allow
certain officers of the Company to purchase 0.6 million
shares of common stock. If not exercised, the options expire
15 years after the date of issuance. As of
December 28, 2003, all of the outstanding options were
exercisable. As of December 28, 2003, the weighted-average
remaining contractual life of these options is 3.9 years
and the weighted-average exercise price was $0.12 per share.

The 1996 Nonqualified Performance Stock
Option Plan.In April 1996, the
Company created the 1996 Nonqualified Performance Stock Option
Plan. This plan authorized the issuance of options to purchase
approximately 1.6 million shares of the Companys
common stock. As of November 13, 2002, the Company will no
longer grant options from this plan. 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, the Company recorded approximately
$0.3 million in compensation expense. No compensation
expense was recorded under this plan during 2002 or 2003. As of
December 28, 2003, all of the outstanding options were
exercisable, the weighted-average remaining contractual life was
4.0 years and the weighted-average exercise price was
$9.12 per share.

The 1996 Nonqualified Stock Option
Plan.In April 1996, the Company
created the 1996 Nonqualified Stock Option Plan. This plan
authorized the issuance of approximately 4.1 million
options. As of November 13, 2002, the Company will no
longer grant options from this plan. Exercise prices range from
$4.98 to $32.48 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 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
1.6 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 2003, 2002 and 2001 the
Company recognized approximately $0.2 million,
$0.3 million and $0.1 million in compensation expense
from modifications to specific individual grants. As of
December 28, 2003, the weighted-average remaining
contractual life of the unexercised options was 3.6 years,
the weighted-average exercise price per share was $20.54 and
0.8 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
authorized the issuance of approximately 0.3 million
options at exercise prices that ranged 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. All remaining
options were exercised during 2003.

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 and
2003, 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-25



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


Under this plan, on February 6, 2004, the
Company issued to certain of its employees options to purchase
412,250 shares of the Companys common stock at a
strike price of $20.50 per share.

A Summary of Plan
Activity.A summary of the status
of the Companys five stock option plans and warrants as of
December 28, 2003, December 29, 2002 and
December 30, 2001 and changes during the years is presented
in the table and narrative below:

|                                                                |  |             |       |           |  |        |       |           |  |        |       |           |  |   |       |  |  |  |        |   |  |   |       | 
|--------------------------------------------------------------- |  | ----------- | ----- | --------- |  | ------ | ----- | --------- |  | ------ | ----- | --------- |  | - | ----- |  |  |  | ------ | - |  | - | ----- | 
|                                                               
|                                                                |  |             |       |           |  |       
|(Shares in thousands)                                           |  | 2 2002 2001
|                                                                |  |             |       | Wtd Avg   |  |        |       | Wtd Avg   |  |        |       | Wtd Avg  
|                                                                |  | Shares      |       | Ex. Price |  | Shares |       | Ex. Price |  | Shares |       | Ex. Price
|                                                                |  |            
|Outstanding at beginning of year                                |  |             | 4,136 |           |  | $      | 13.27 |           |  |        | 3,986 |           |  | $ | 8.68  |  |  |  | 4,232  |   |  | $ | 6.57  | 
|Granted options                                                 |  |             |      |           |  |        |      |           |  |        | 1,014 |           |  |   | 28.01 |  |  |  | 854    |   |  |   | 17.16 | 
|Exercised options and warrants                                  |  |             | (488  | )         |  |        | 6.65  |           |  |        | (710  | )         |  |   | 6.58  |  |  |  | (1,000 | ) |  |   | 6.35  | 
|Cancelled options and warrants                                  |  |             | (435  | )         |  |        | 23.54 |           |  |        | (154  | )         |  |   | 22.30 |  |  |  | (100   | ) |  |   | 15.40 | 
|                                                                |  |             |       |           |  |        |       |           |  |        |       |           |  |   |       |  |  |  |        |   |  |   |       | 
|Outstanding at end of year                                      |  |             | 3,213 |           |  |        | 12.89 |           |  |        | 4,136 |           |  |   | 13.27 |  |  |  | 3,986  |   |  |   | 8.68  | 
|                                                                |  |             |       |           |  |        |       |           |  |        |       |           |  |   |       |  |  |  |        |   |  |   |       | 
|Exercisable at end of year                                      |  |             | 2,486 |           |  | $      | 9.75  |           |  |        | 2,478 |           |  | $ | 6.95  |  |  |  | 2,754  |   |  | $ | 5.67  | 
|Weighted average fair value of options and
    warrants granted |  |             |       |           |  | $      | 6.14  |           |  |        |       |           |  | $ | 6.28  |  |  |  |        |   |  | $ | 4.29  | 

Options are granted 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 $0.4 million, $0.5 million and
$0.7 million during 2003, 2002 and 2001, 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 28, 2003, the funds were invested in money
market funds and variable life insurance policies that have an
aggregate value of approximately $2.8 million. At
December 29, 2002, the funds were invested in money market
funds and variable life insurance policies that had an aggregate
value of approximately $3.2 million. All plan assets are
subject to the Companys creditors. The Company expensed
approximately $0.1 million, $0.2 million and
$0.1 million in 2003, 2002 and 2001, respectively, for its
contributions to the plan. As of December 28, 2003 and
December 29, 2002, the Companys liability under the
plan was $2.7 million and $3.1 million, respectively.

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 life insurance arrangements. The
accumulated benefit

F-26



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


obligation related to this plan was approximately
$2.4 million and $2.3 million as of December 28,
2003 and December 29, 2002, 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
consolidated balance sheets as of December 28, 2003 and
December 29, 2002:

|                                                                      |  |      |      |      |  |   |      |  
|--------------------------------------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | -
|                                                                     
|(In millions)                                                         |  | 2003 |      | 2002
|                                                                     
|Actuarial present value of benefit obligation:                        |  |      |      |      |  |   |      |  
|Accumulated benefits obligation                                       |  | $    | 1.5  |      |  | $ | 1.2  |  
|                                                                      |  |     
|Projected benefit obligation                                          |  | $    | 2.0  |      |  | $ | 1.6  |  
|Plan assets at fair value                                             |  |      |     |      |  |   |     |  
|                                                                      |  |     
|Projected benefit obligation in excess of plan
    assets             |  |      | 2.0  |      |  |   | 1.6  |  
|Prior service cost not yet recognized in pension
    cost             |  |      | (0.3 | )    |  |   | (0.3 | )
|Unrecognized cumulative net gains and assumption
    change effects   |  |      | 0.7  |      |  |   | 1.0  |  
|                                                                      |  |     
|Plan liability before recognition of minimum
    liability adjustment |  |      | 2.4  |      |  |   | 2.3  |  
|Adjustment required to recognize minimum liability                    |  |      |     |      |  |   |     |  
|Plan liability                                                        |  | $    | 2.4  |      |  | $ | 2.3  |  

In 2003, 2002 and 2001, benefits paid under the
plan were less than $0.1 million. During 2004, the Company
estimates that benefits to be paid under the plan will be less
than $0.1 million. Expense for the retirement plan, for
fiscal years 2003, 2002 and 2001, include the following cost
components:

|               |  |      |     |      |  |      |     |  |  |   |     | 
|-------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|              
|(In millions)  |  | 2003 |     | 2002 |  | 2001
|              
|Service costs  |  | $    | 0.1 |      |  | $    | 0.1 |  |  | $ | 0.1 | 
|Interest costs |  |      | 0.1 |      |  |      | 0.1 |  |  |   | 0.1 | 
|Plan expense   |  | $    | 0.2 |      |  | $    | 0.2 |  |  | $ | 0.2 | 

The Companys assumptions used in
determining the plan cost and liabilities include a
6.0% per annum discount rate and a 5.0% rate of salary
progression in 2003, a 7.0% per annum discount rate and a
5.0% rate of salary progression in 2002 and a 7.5% per
annum discount rate and a 5.0% rate of salary progression in
2001.

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 28, 2003 and December 29, 2002, was
approximately $0.4 million and $0.3 million,
respectively. The net periodic expense for the medical coverage
continuation plan was less than $0.1 million for 2003 and
2002. In 2001, the Company recognized a $0.1 million
benefit in the plan. During 2004, the Company estimates that
benefits to be paid under the plan will be less than
$0.1 million.

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 28, 2003, there are
704,746 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. As of December 28, 2003 and
December 29, 2002 outstanding contributions under this
program are less than $0.1 million for each year.

F-27



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


Note  18 Impairment Charges
and Other

|                                                            |  |      |      |      |  |      |      |  |  |   |      | 
|----------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                                           
|(In millions)                                               |  | 2003 |      | 2002 |  | 2001
|                                                           
|Impairment and other write-downs of non-current
    assets  |  | $    | 46.1 |      |  | $    | 11.3 |  |  | $ | 10.4 | 
|Restatement costs                                           |  |      | 12.6 |      |  |      |     |  |  |   |     | 
|Unit closures and refurbishments                            |  |      | 3.2  |      |  |      | 0.9  |  |  |   | 0.6  | 
|Net (gain) loss on sale of assets                           |  |      | (0.8 | )    |  |      | 4.0  |  |  |   | 1.1  | 
|Special investigation, shareholder litigation and
    other |  |      | 1.4  |      |  |      |     |  |  |   |     | 
|Wholesale costs                                             |  |      | 1.4  |      |  |      | 3.0  |  |  |   |     | 
|                                                            |  | $    | 63.9 |      |  | $    | 19.2 |  |  | $ | 12.1 | 

Impairment charges by business segment were as
follows:

|              |  |      |      |      |  |      |      |  |  |   |      | 
|------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|             
|(In millions) |  | 2003 |      | 2002 |  | 2001
|             
|Chicken       |  | $    | 17.2 |      |  | $    | 6.0  |  |  | $ | 7.5  | 
|Bakery        |  |      | 28.5 |      |  |      | 5.3  |  |  |   | 2.2  | 
|Corporate     |  |      | 0.4  |      |  |      |     |  |  |   | 0.7  | 
|              |  | $    | 46.1 |      |  | $    | 11.3 |  |  | $ | 10.4 | 

The $17.2 million of impairment charges in
2003 that is associated with our chicken segment include fourth
quarter charges of $13.6 million. Of this,
$7.0 million relates to the write-down of assets under
contractual arrangements and the remainder to the closing of
19 company-operated QSRs. The write-down associated with
assets under contractual agreement was based upon an estimate of
the fair value of such assets giving consideration to certain
modifications to the terms of a particular agreement that is
currently being negotiated. Additionally, during 2003 there were
$3.6 million of impairment charges, $2.0 million of
which related to a new restaurant concept that was abandoned.

The $28.5 million of impairment charges in
2003 that is associated with our bakery segment include fourth
quarter charges of $28.0 million. Of this,
$7.6 million relates to the writedown of goodwill;
$18.1 million to the writedown of trademarks and trade
names; $0.5 million to the writedown of other intangible
assets and $1.8 million to the writedown of property and
equipment at QSR sites. These charges were the result of
consecutive years of deteriorating operations and lower cash
flow projections indicating a decline in value.

During 2003, the Company incurred costs
associated with the re-audit and restatement of its 2001 and
2000 financial statements. Included therein are fees for outside
auditors, fees for accountants engaged to assist in the
restatement, attorneys fees, bank amendment fees and
various ancillary costs. As a consequence of the restatement,
the Company also incurred significant costs associated with an
independent investigation commissioned by the Companys
Audit Committee, attorney fees associated with the shareholder
litigation discussed in Note 13 and certain other related
costs.

Unit closures and refurbishments includes the
accrual of future lease obligations on closed facilities and
other miscellaneous charges, with the exception of impairment
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
modernized. This typically involves an interior and exterior
makeover of the QSR along with new logos, uniforms, menu boards
and menu items. During 2003, 2002 and 2001, write-downs of
non-current assets related to unit closures and refurbishment
activities were approximately $3.5 million,
$3.7 million and $4.6 million, respectively. These
charges are a component of impairment and other
write-downs of non-current assets.

F-28



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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


Note  19 Interest Expense,
Net

|                                             |  |      |      |      |  |      |      |   |  |   |      |  
|-------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                            
|(In millions)                                |  | 2003 |      | 2002 |  | 2001
|                                            
|Interest on debt, net of capitalized amounts |  | $    | 7.0  |      |  | $    | 12.7 |   |  | $ | 22.2 |  
|Amortization of debt issuance costs          |  |      | 0.9  |      |  |      | 1.1  |   |  |   | 1.6  |  
|Write-off of debt issuance costs             |  |      |     |      |  |      | 3.1  |   |  |   | 0.5  |  
|Premiums  early debt extinguishments        |  |      |     |      |  |      | 6.5  |   |  |   | 1.1  |  
|Other debt related charges                   |  |      | 1.0  |      |  |      | 0.8  |   |  |   | 0.7  |  
|Interest income                              |  |      | (1.8 | )    |  |      | (1.6 | ) |  |   | (1.5 | )
|                                             |  | $    | 7.1  |      |  | $    | 22.6 |   |  | $ | 24.6 |  

Note  20 Income
Taxes

Total income taxes for fiscal years 2003, 2002
and 2001, were allocated as follows:

|                                                                                                                                         |  |      |      |      |  |      |      |   |  |   |      |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                                                                                                                        
|(In millions)                                                                                                                            |  | 2003 |      | 2002 |  | 2001
|                                                                                                                                        
|Income tax (benefit) expense from continuing
    operations                                                                              |  | $    | (0.5 | )    |  | $    | 17.5 |   |  | $ | 16.3 |  
|Income tax expense (benefit) from discontinued
    operations                                                                            |  |      | 1.7  |      |  |      | (1.5 | ) |  |   | (2.6 | )
|Cumulative effect of a change in accounting
    principle                                                                                |  |      | (0.3 | )    |  |      |     |   |  |   |     |  
|                                                                                                                                         |  |     
|Income taxes in the statements of operations, net                                                                                        |  |      | 0.9  |      |  |      | 16.0 |   |  |   | 13.7 |  
|Stockholders equity, for compensation
    expense for tax purposes in excess of amounts recognized for
    financial reporting purposes |  |      | (1.5 | )    |  |      | (5.3 | ) |  |   | (4.1 | )
|Total                                                                                                                                    |  | $    | (0.6 | )    |  | $    | 10.7 |   |  | $ | 9.6  |  

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

|                                       |         |      |      |      |   |      |      |     |  |   |      |      |  
|-------------------------------------- | ------- | ---- | ---- | ---- | - | ---- | ---- | --- |  | - | ---- | ---- | -
|                                      
|(In millions)                          |         | 2003 |      | 2002 |   | 2001
|                                      
|Current income tax expense:            |         |      |      |      |   |      |      |     |  |   |      |     
|                                       | Federal |      | $    | 4.6  |   |      | $    | 5.3 |  |   | $    | 13.3 |  
|                                       | Foreign |      |      | 2.4  |   |      |      | 2.1 |  |   |      | 2.3  |  
|                                       | State   |      |      | 2.0  |   |      |      |    |  |   |      | 2.2  |  
|                                       |         |     
|                                       |         |      | 9.0  |      |   |      | 7.4  |     |  |   | 17.8 |     
|Deferred income tax expense (benefit): |         |      |      |      |   |      |      |     |  |   |      |     
|                                       | Federal |      |      | (7.9 | ) |      |      | 8.7 |  |   |      | (1.5 | )
|                                       | Foreign |      |      |     |   |      |      |    |  |   |      |     |  
|                                       | State   |      |      | (1.6 | ) |      |      | 1.4 |  |   |      |     |  
|                                       |         | $    | (0.5 | )    |   | $    | 17.5 |     |  | $ | 16.3 |     

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.

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


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

|                                            |  |      |       |      |  |      |       |   |  |  |       |  
|------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                           
|                                            |  | 2003 |       | 2002 |  | 2001
|                                           
|Federal income tax rate                     |  |      | (35.0 | )%   |  |      | 35.0% |   |  |  | 35.0% |  
|State taxes, net of federal benefit         |  |      | 4.6   |      |  |      | 2.0   |   |  |  | 3.6   |  
|Non-deductible goodwill                     |  |      | 40.9  |      |  |      | 1.0   |   |  |  | 4.1   |  
|Non-deductible meals                        |  |      | 1.8   |      |  |      | .3    |   |  |  | .5    |  
|Benefit of job tax credits                  |  |      | (6.1  | )    |  |      | (.8   | ) |  |  | (1.9  | )
|Adjustment to prior year tax accruals       |  |      | (15.4 | )    |  |      |      |   |  |  |      |  
|Other items, net                            |  |      | .8    |      |  |      | .1    |   |  |  | .6    |  
|Effective income tax (benefit) expense rate |  |      | (8.4  | )%   |  |      | 37.6% |   |  |  | 41.9% |  

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

|                          |                                  |                                  |   |       |       |   |   |       |       |  
|------------------------- | -------------------------------- | -------------------------------- | - | ----- | ----- | - | - | ----- | ----- | -
|                         
|(In millions)             |                                  | 2003                             |   | 2002 
|                         
|Deferred tax assets:      |                                  |                                  |   |       |       |   |   |      
|                          | Deferred franchise fee revenue   |                                  | $ | 8.0   |       |   | $ | 8.4   |      
|                          | Deferred compensation            |                                  |   | 4.9   |       |   |   | 4.9   |      
|                          | Net operating loss carryforwards |                                  |   | 5.1   |       |   |   | 5.1   |      
|                          | Deferred rentals                 |                                  |   | 5.2   |       |   |   | 4.9   |      
|                          | Insurance accruals               |                                  |   | 2.1   |       |   |   | 2.8   |      
|                          | Tax credit carryforwards         |                                  |   | 1.8   |       |   |   | 4.6   |      
|                          | Allowance for doubtful accounts  |                                  |   | 2.4   |       |   |   | 1.2   |      
|                          | Other accruals                   |                                  |   | 0.3   |       |   |   | 0.1   |      
|                          | Other assets                     |                                  |   | 7.0   |       |   |   | 5.5   |      
|                          |                                  |                                 
|                          |                                  | Total gross deferred tax assets  |   |       | 36.8  |   |   |       | 37.5  |  
|                          | Less valuation allowance         |                                  |   | (6.5  | )     |   |   | (6.5  | )    
|                          |                                  |                                 
|                          |                                  | Net deferred tax assets          |   | $     | 30.3  |   |   | $     | 31.0  |  
|                          |                                  |                                 
|Deferred tax liabilities: |                                  |                                  |   |       |       |   |   |      
|                          | Franchise value and trademarks   |                                  | $ | (26.3 | )     |   | $ | (35.4 | )    
|                          | Property, plant and equipment    |                                  |   | (6.5  | )     |   |   | (12.5 | )    
|                          |                                  |                                 
|                          |                                  | Total gross deferred liabilities |   |       | (32.8 | ) |   |       | (47.9 | )
|                          |                                  | Net deferred tax liability       |   | $     | (2.5  | ) |   | $     | (16.9 | )

At December 28, 2003 and December 29,
2002, 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
$1.8 million expiring from 2004 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.
Any subsequently recognized tax benefits relating to the
valuation allowance for deferred tax assets as of
December 28, 2003 would be allocated to goodwill and other
non-current intangible assets. 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.

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


Included in accounts payable at December 28,
2003 and December 29, 2002 are current income taxes payable
in the amount of $6.2 million and $7.2 million,
respectively.

Note  21 Components of Earnings Per
Share Computation

|                                                                       |  |      |      |      |  |      |       |   |  |   |      |  
|---------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ----- | - |  | - | ---- | -
|                                                                      
|(In millions)                                                          |  | 2003 |      | 2002 |  | 2001
|                                                                      
|Numerators for earning per share computation:                          |  |      |      |      |  |      |       |   |  |   |      |  
|(Loss) income before discontinued operations and
    accounting change |  | $    | (6.0 | )    |  | $    | 29.0  |   |  | $ | 22.6 |  
|Loss from discontinued operations                                      |  |      | (2.7 | )    |  |      | (40.7 | ) |  |   | (7.0 | )
|Loss from the cumulative effect of an accounting
    change            |  |      | (0.4 | )    |  |      |      |   |  |   |     |  
|Net (loss) income                                                      |  | $    | (9.1 | )    |  | $    | (11.7 | ) |  | $ | 15.6 |  
|Denominator for basic earnings per
    share  weighted average shares |  |      | 27.8 |      |  |      | 30.0  |   |  |   | 29.5 |  
|Dilutive employee stock options and warrants                           |  |      | 0.9  |      |  |      | 1.5   |   |  |   | 1.8  |  
|Denominator for diluted earnings per share                             |  |      | 28.7 |      |  |      | 31.5  |   |  |   | 31.3 |  

Note  22 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 stock
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 28, 2003
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 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 28, 2003 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.

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


Of the $3.4 million of notes receivable
(including accrued interest and unamortized discounts) due from
officers outstanding at December 28, 2003,
$1.6 million is due December 31, 2003 and the
remainder is due in 2005.

From December 28, 2003 to March 26,
2004, $1.9 million of notes receivable from officers were
paid down pursuant to the terms and conditions of the notes.

Note  23 Discontinued
Operations

|                                                                   |  |      |      |      |  |      |       |   |  |   |      |  
|------------------------------------------------------------------ |  | ---- | ---- | ---- |  | ---- | ----- | - |  | - | ---- | -
|                                                                  
|(In millions)                                                      |  | 2003 |      | 2002 |  | 2001
|                                                                  
|Loss from discontinued operations                                  |  | $    | (0.8 | )    |  | $    | (42.2 | ) |  | $ | (9.6 | )
|Income tax (expense) benefit                                       |  |      | 0.2  |      |  |      | 1.5   |   |  |   | 2.6  |  
|Loss on sale of Seattle Coffee, including $1.9 of
    income taxes |  |      | (2.1 | )    |  |      |      |   |  |   |     |  
|                                                                   |  | $    | (2.7 | )    |  | $    | (40.7 | ) |  | $ | (7.0 | )

On July 14, 2003, the Company sold Seattle
Coffee to Starbucks Corporation for $72.0 million. Net
proceeds of the sale, after transaction costs and adjustments,
were approximately $62.1 million, which is subject to
possible post-closing adjustments. 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 and on
certain U.S. military bases.

During 2003, 2002 and 2001, revenues associated
with these discontinued operations were approximately
$49.5 million, $94.9 million, and $89.7 million,
respectively. Balance sheet data associated with these
operations, as of December 29, 2002, was as follows:

|              |                                                           |                   |   |      |      | 
|------------- | --------------------------------------------------------- | ----------------- | - | ---- | ---- | 
|             
|(In millions) |                                                           | 2002             
|             
|Assets:       |                                                           |                   |   |     
|              | Cash and cash equivalents                                 |                   | $ | 1.2  |     
|              | Accounts receivable, net                                  |                   |   | 10.6 |     
|              | Other current assets (including $11.8 of
    inventories) |                   |   | 12.3 |     
|              | Property and equipment, net                               |                   |   | 23.9 |     
|              | Intangible assets (including $5.6 of goodwill)            |                   |   | 18.0 |     
|              | Other long-term assets, net                               |                   |   | 4.8  |     
|              |                                                           | Total assets      |   | $    | 70.8 | 
|Liabilities:  |                                                           |                   |   |     
|              | Accounts payable and accrued liabilities                  |                   | $ | 8.6  |     
|              | Deferred credits and other long-term liabilities          |                   |   | 2.1  |     
|              |                                                           | Total liabilities |   | $    | 10.7 | 

Note  24 Segment Information
(Continuing Operations)

The Companys operating segments combine
Popeyes and Churchs operations to form its chicken segment
and its Cinnabon and Seattles Best Coffee operations to
form its bakery segment.

Inter-segment revenue is eliminated through
corporate revenue. The corporate revenues include rental income
from leasing and subleasing agreements with third parties.
During 2003, the Company allocated certain information
technology costs to its chicken and bakery segments which in
previous years had been reported in the Companys corporate
segment. Prior years allocations were adjusted to be
consistent with the 2003 approach. This had the

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##### Table of Contents



AFC ENTERPRISES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For Fiscal Years 2003, 2002 and 2001


effect of changing previously reported operating
profits for the segments and corporate, but it had no effect on
total operating profit.

|                              |  |         |       |        |  |           |       |       |  |   |       |   |  |   |       | 
|----------------------------- |  | ------- | ----- | ------ |  | --------- | ----- | ----- |  | - | ----- | - |  | - | ----- | 
|                             
|(In millions)                 |  | Chicken |       | Bakery |  | Corporate |       | Total
|                             
|2003                          |  |         |       |        |  |           |       |       |  |   |       |   |  |   |       | 
|                              |  |         |       |        |  |           |       |       |  |   |       |   |  |   |       | 
|Total revenues                |  | $       | 409.5 |        |  | $         | 48.7  |       |  | $ | 1.1   |   |  | $ | 459.3 | 
|Operating profit              |  |         | 76.6  |        |  |           | (31.4 | )     |  |   | (44.6 | ) |  |   | 0.6   | 
|Depreciation and amortization |  |         | 16.3  |        |  |           | 2.9   |       |  |   | 3.8   |   |  |   | 23.0  | 
|Capital expenditures          |  |         | 11.6  |        |  |           | 1.9   |       |  |   | 10.8  |   |  |   | 24.3  | 
|Goodwill  year end           |  |         | 10.6  |        |  |           | 4.1   |       |  |   |      |   |  |   | 14.7  | 
|Total assets  year end       |  |         | 252.6 |        |  |           | 40.5  |       |  |   | 62.4  |   |  |   | 355.5 | 
|                             
|2002                          |  |         |       |        |  |           |       |       |  |   |       |   |  |   |       | 
|                              |  |         |       |        |  |           |       |       |  |   |       |   |  |   |       | 
|Total revenues                |  | $       | 454.9 |        |  | $         | 67.7  |       |  | $ | 2.1   |   |  | $ | 524.7 | 
|Operating profit              |  |         | 103.9 |        |  |           | (12.3 | )     |  |   | (22.5 | ) |  |   | 69.1  | 
|Depreciation and amortization |  |         | 18.6  |        |  |           | 5.0   |       |  |   | 1.7   |   |  |   | 25.3  | 
|Capital expenditures          |  |         | 30.1  |        |  |           | 3.9   |       |  |   | 9.5   |   |  |   | 43.5  | 
|Goodwill  year end           |  |         | 10.6  |        |  |           | 11.7  |       |  |   |      |   |  |   | 22.3  | 
|Total assets  year end(a)    |  |         | 274.0 |        |  |           | 67.1  |       |  |   | 146.2 |   |  |   | 487.3 | 
|                             
|2001                          |  |         |       |        |  |           |       |       |  |   |       |   |  |   |       | 
|                              |  |         |       |        |  |           |       |       |  |   |       |   |  |   |       | 
|Total revenues                |  | $       | 514.8 |        |  | $         | 81.1  |       |  | $ | 1.6   |   |  | $ | 597.5 | 
|Operating profit              |  |         | 84.6  |        |  |           | (4.6  | )     |  |   | (16.5 | ) |  |   | 63.5  | 
|Depreciation and amortization |  |         | 27.6  |        |  |           | 7.2   |       |  |   | 1.0   |   |  |   | 35.8  | 
|Capital expenditures          |  |         | 36.8  |        |  |           | 9.4   |       |  |   | 2.9   |   |  |   | 49.1  | 
|Goodwill  year end           |  |         | 10.6  |        |  |           | 13.0  |       |  |   |      |   |  |   | 23.6  | 
|Total assets  year end(a)    |  |         | 275.9 |        |  |           | 81.5  |       |  |   | 167.9 |   |  |   | 525.3 | 



---



|    |  |                                                                                                                                                           
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Included in corporate assets for 2002 and 2001
    are $70.8 million and $107.9 million, respectively,
    representing assets of discontinued operations.

F-33