AFC ENTERPRISES

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes o No þ

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

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

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Statements regarding future events, future developments and future performance, as well as management’s expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. These forward-looking statements are subject to a number of risks and uncertainties.

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

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

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

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

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

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

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

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

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

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

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

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


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

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


	2.	*Growing Through Our Franchise Network.* We will fuel our business growth principally through franchising activities. From time-to-time, we will also sell company-operated units to franchisees, when strategically desirable. We believe that our focus on franchising provides us with higher profit margins and enhanced investment returns. In addition, a franchising-based growth strategy requires significantly less operating capital. As of December 29, 2002, over 85% of our brands’ 4,071 system-wide units were franchised, and we had development commitments from existing and new franchisees to open 2,622 additional units. As of November 30, 2003, we had commitments to open 2,351 additional units. However, we have been required to temporarily suspend certain domestic franchising activities due to the delay in releasing our financial statements for 2002 and our quarterly financial information for 2003.

	3.	*Building Our Model Markets Program.* Each of our brands will continue to own and operate units in one or more markets. The objective is to have a limited number of company-operated units that are concentrated in only a few geographic markets. This will allow us to focus on establishing best practices and developing new menu items for each of our brands, thereby creating model markets. Innovations and best practices established in each of these model markets will be shared with our franchisees. We believe these best practices, combined with our marketing initiatives, will aid our efforts to improve same-store sales and operating margins throughout our systems.

	4.	*Promoting Uniquely Positioned Brands.* We continually promote and refresh the image of our brands in order to increase consumer interest and sales. In the fourth quarter of 2000, we implemented a new re-imaging program that is designed to update the general public’s perception


		of our brands. We plan to have substantially all of the QSRs in our systems re-imaged by the end of 2007. Most of our Popeyes and Church’s franchisees are contractually required to re-image their restaurants every six to seven years. Most of our Cinnabon franchisees are contractually required to re-image their bakeries within a time frame specified by us. The re-imaging program typically involves an interior and exterior makeover of the QSR along with new logos, dining room upgrades, uniforms, menu boards and menu items.

	5.	*Increasing Domestic Market Penetration.* Currently, most of our brands’ domestic markets are under-penetrated. We are increasing the number of our QSRs in new and existing markets. In addition, we are expanding the number and type of non-traditional formats in which our Popeyes and Church’s chicken restaurants are located, including convenience stores, mall food courts and airports.

	6.	*Expanding Our Franchise Networks Internationally.* We believe that we have the opportunity to establish or expand a leading market position in a number of countries, due to the appeal of our highly recognizable American brands. Our international operations have increased from 346 franchised units in Puerto Rico and 17 foreign countries at the end of 1995, to 823 franchised units in Puerto Rico and 33 foreign countries at the end of 2002. Additionally, commitments to develop international franchised units have increased from 502 at the end of 1995 to 1,261 at the end of 2002.

	7.	*Improving Operational Efficiencies.* Through our purchasing cooperative and various training initiatives, we seek to improve operational efficiencies for company-operated and franchised restaurants. We are also working to strengthen our brands’ franchise systems by inspecting operations and taking curative actions against chronically weak performers.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The principal raw material for our Seattle Coffee brands is green coffee beans. Seattle Coffee typically enters into supply contracts to purchase a pre-determined quantity of green coffee beans at a fixed price per pound. These contracts usually cover periods up to five years. As of December 29, 2002, Seattle Coffee had commitments to purchase green coffee beans at a total cost of approximately $39.5 million through December 2007. Seattle Coffee’s green coffee bean purchase commitments were transferred in connection with the July 14, 2003 sale of Seattle Coffee.

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 2002, our franchisees and we contributed approximately $85.6 million to these advertising funds.

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

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

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


	•	expanding franchise ownership opportunities for minorities and women;

	•	cultivating new supplier relationships for minorities and women;

	•	attracting and developing outstanding employees; and

	•	enhancing the quality of life for people through meaningful community service.

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

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

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

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

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

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

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.

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

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.

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

(1)

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


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


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

(3)	Factors that impact the comparability of revenues for the years presented include:


	(a)	Our fiscal year ends on the last Sunday in December. Fiscal year 2000 included 53 weeks. All other years shown included 52 weeks.

	(b)	In 2000, we began a program to strategically sell company-operated QSRs to franchisees which reduce sales from company-operated restaurants as well as related restaurant costs. These transactions also result in increased franchise revenues. By brand, the number of “unit conversions” and the associated gains and losses on such sales in our consolidated financial statements for the fiscal years presented were as follows.


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


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


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


	(a)	During 2002, we recorded charges for impairment and other write-downs of non-current assets of $44.6 million, versus $13.5 million in 2001, $7.5 million in 2000, $9.4 million in 1999, and $14.8 million in 1998.

	(b)	During the first quarter of 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets, and, at that time, discontinued our prior practice of amortizing goodwill and other


		indefinite-lived intangible assets. These assets are now being accounted for by the impairment-only approach. This change reduced amortization expense for 2002 by approximately $5.4 million.

	(c)	During 2001 and 2000, we recorded charges to write-down inventory balances in our coffee segment of $1.8 million and $0.7 million, respectively.

	(d)	During 2001, general and administrative expenses include $2.9 million relating to the retirement of a former officer. During 2000, general and administrative expenses were reduced by the reversal of a $6.0 million environmental reserve. In 2000, the reversal of the environmental reserve was partially offset by $2.8 million of costs at Seattle Coffee related to personnel reductions and concept development efforts.


(5)	Net income includes the cumulative effect of adopting new accounting standards and the effect of discontinued operations. In 2002, in connection with our adoption of SFAS No. 142, Goodwill and Other Intangible Assets, we recorded a transitional goodwill impairment charge. The cumulative effect from this change in accounting principle reduced net income in 2002 by $11.8 million. In 1999 and 1998, we had net losses associated with discontinued operations of $1.9 million and $5.3 million, respectively.

(6)	Weighted average common shares for the computation of basic earnings per common share were 30.0 million, 29.5 million, 26.3 million, 26.2 million and 24.4 million for 2002, 2001, 2000, 1999 and 1998, respectively. Weighted average common shares for the computation of diluted earnings per common share were 31.5 million, 31.3 million, 28.7 million, 28.4 million and 24.4 million for 2002, 2001, 2000, 1999 and 1998, respectively.

(7)	Total debt includes the long-term and the current portions of debt facilities, capital lease obligations, lines of credits and other borrowings. See Note 10 to the Consolidated Financial Statements as it concerns 2002 and 2001 year-end amounts.

(8)	During 2001, we completed an initial public offering of 3.1 million shares of our common stock and received approximately $46.0 million of proceeds. During 2002, we repurchased 3.7 million shares of our common stock for $77.9 million.

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


(1)	Our fiscal year ends on the last Sunday in December. Fiscal year 2000 included 53 weeks. All other years shown included 52 weeks.

(2)	QSRs are included in the computation of same-store sales after they have been open 15 months for 2002, 2001 and 2000 and 12 months for 1999 and 1998. Prior-year sales figures used to calculate same-store sales include sales from our Cinnabon and Seattle Coffee brands prior to our acquisition of these two businesses in 1998. Same-store sales for 2000 is calculated by comparing the 53 weeks of sales for 2000 to the prior 53 weeks, which includes the 52 weeks from 1999 plus the first week of 2000.

(3)	System-wide unit openings include the openings of both company-operated QSRs and franchised QSRs, which were as follows:


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


	•	Fiscal years 2002 and 2001 include 52 weeks. Fiscal year 2000 includes 53 weeks.

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


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


	•	During 2002, we recorded charges for the impairment and other write-downs of non-current assets of $44.6 million, versus $13.5 million in 2001 and $7.5 million in 2000.

	•	During the first quarter of 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets, and, at that time, discontinued our prior practice of amortizing goodwill and other indefinite-lived intangible assets. These assets are now being accounted for by the impairment-only approach. In 2002, this change reduced amortization expense by approximately $5.4 million. At the same time, upon adopting SFAS No. 142, we recorded a transitional charge of $11.8 million to reduce the carrying value of goodwill associated with our coffee segment.

	•	During 2001 and 2000, we recorded charges to write-down inventory balances in our coffee segment of $1.8 million and $0.7 million, respectively.

	•	During 2001, we accrued expenses relating to the retirement of a former officer. This increased 2001 general and administrative expenses by $2.9 million.

	•	In 2000, general and administrative expenses were reduced by the reversal of a $6.0 million environmental reserve. In 2000, we accrued $2.8 million of costs in our coffee segment related to personnel reductions and concept development efforts.

	•	Included in interest expense are premiums and discounts associated with the repurchase of our Senior Subordinated Notes and the amortization and write-off of debt issuance costs, which aggregate to $10.7 million, $3.2 million and $2.0 million in 2002, 2001 and 2000, respectively.

	•	For periods prior to 2002, certain items in the financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on our reported results of operations.

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


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

(2)	Expressed as a percentage of sales by company-operated restaurants.

(3)	Expressed as a percentage of wholesale revenues.

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


(1)	In the third and fourth quarters of 2003, we made $60.5 million of accelerated payments reducing the Tranche A and Tranche B term loans under our 2002 Credit Facility. The payments were triggered by the July 14, 2003 sale of our Seattle Coffee subsidiary. These payments were in addition to the 2003 payments scheduled above, and they, in turn, reduced payments scheduled for future years. We used proceeds from the Seattle Coffee transaction to make the payments. An additional payment of approximately $2.5 million may be required. See the discussion below and at Note 10 to our Consolidated Financial Statements for more information concerning our long-term borrowings.

(2)	$163.7 million of the minimum lease payments relate to operating leases and the remaining $2.8 million relates to capital leases. See Note 11 to the Consolidated Financial Statements.

(3)	For information concerning the Copeland formula agreement, green coffee bean purchase commitment, the information technology outsourcing agreement, the accounting and tax outsourcing agreement, the King Features agreement, and the equipment purchase agreements see Note 13 to the Consolidated Financial Statements.

(4)	The green coffee bean purchase commitments were transferred to Starbucks in the sale of Seattle Coffee discussed elsewhere in this Annual Report on Form 10-K.

(5)	On April 1, 2003, the Company entered into an additional technology outsourcing agreement, which expires on March 31, 2010. Future minimum payments under the agreement aggregate to $33.4 million. See Note 24 to the Consolidated Financial Statements.

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

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

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

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

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

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

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

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


	•	Extend, for purposes of the facility, the filing deadline for our 2002 Annual Report on Form 10-K to December 15, 2003.

	•	Extend, for purposes of the facility, the filing deadline for our Quarterly Reports on Form 10-Q for the first, second and third quarters of 2003 to February 28, 2004.

	•	Raise the interest rate on outstanding indebtedness under the 2002 Credit Facility (as indicated above) until such time as we satisfy our 2002 annual reporting requirement, our 2003 quarterly reporting requirements and attain a bank credit rating of Ba3 and BB-, or better, by each of Moody’s and Standard & Poor’s, respectively.

	•	Temporarily reduce our revolving line of credit from $75.0 million to $65.0 million until we file and deliver all of the required financial statements and demonstrate a total leverage ratio of not greater than two to one, at which time the revolving line of credit limit will return to the original amount of $75.0 million.

	•	Approve the Seattle Coffee divestiture.

	•	Deposit $2.8 million in a collateral account. This occurred on October 31, 2003.

	•	Adjust the computation of certain loan covenant ratios in 2003 to exclude from the computations certain costs of a productivity study performed in the first quarter of 2003, subject to certain


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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 materially adversely affect our financial position or results of operations.

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

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

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

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

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

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

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

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

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

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

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

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


	*Franchise Agreements.* In general, our franchise agreements provide for the payment of a one-time fee associated with the opening of a new QSR and an ongoing royalty based on a percentage of sales. These agreements also require contributions by the franchisee (and AFC) to an advertising fund, as discussed below.

	*Development Agreements.* In general, our development agreements provide for the development of a specified number of QSRs within a defined geographic territory in accordance with a schedule of opening dates. Development schedules generally cover three to five years and typically have benchmarks for the number of QSRs to be opened at six to twelve month intervals. Development agreement payments are made when the agreement is executed and are nonrefundable.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended December 29, 2002

or

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


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)


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


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



	2002				2001

	High		Low		High		Low

First Quarter	$	34.55	$	26.00	$	23.50	$	16.12
Second Quarter	$	34.81	$	26.04	$	25.00	$	18.90
Third Quarter	$	27.16	$	18.27	$	23.75	$	18.93
Fourth Quarter	$	22.23	$	16.42	$	29.42	$	22.00



		Domestic				International

		Company-				Company-
		Operated		Franchised		Operated		Franchised		Total

Popeyes			96		1,298		—		318		1,712
Church’s			284		963		—		262		1,509
Cinnabon			84		369		—		159		612
Seattle’s Best Coffee			54		79		—		84		217
Torrefazione Italia Coffee			18		—		3		—		21

	Total		536		2,709		3		823		4,071


		Land and		Land and/or
		Building Owned		Building Leased		Total

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

	Total		279		257		536


						2001			2000			1999(1)			1998(1)
			2002			As Restated			As Restated			As Restated			As Restated


			(Dollars in millions, except per share data)
Summary of operations:(2)
Revenues(3)
	Sales by company-operated restaurants		$	413.3		$	507.0		$	567.4		$	560.4		$	487.4
	Franchise revenues			111.3			101.1			88.7			77.5			64.2
	Wholesale revenues			69.5			61.1			55.9			50.7			36.4
	Other revenues			25.5			18.0			11.2			8.6			9.2

		Total revenues	$	619.6		$	687.2		$	723.2		$	697.2		$	597.2

Operating profit(4)			$	38.7		$	53.9		$	67.3		$	54.4		$	22.2
Income (loss) from continuing operations before accounting change				0.1			15.6			18.3			12.0			(5.1	)
Net (loss) income(5)				(11.7	)		15.6			18.3			9.8			(10.4	)

Basic earnings per common share:(6)
Income (loss) from continuing operations before accounting change			$	—		$	0.53		$	0.70		$	0.46		$	(0.21	)
Net (loss) income				(0.39	)		0.53			0.70			0.37			(0.43	)

Diluted earnings per common share:(6)
Income (loss) from continuing operations before accounting change			$	—		$	0.50		$	0.64		$	0.42		$	(0.21	)
Net (loss) income				(0.37	)		0.50			0.64			0.34			(0.42	)

Year-end balance sheet data:
Total assets			$	487.3		$	525.3		$	547.8		$	587.4		$	538.7
Total debt(7)				226.6			209.5			313.1			348.1			360.7
Total shareholders’ equity(8)				109.8			187.3			115.1			95.4			84.9

Cash flow data:
Cash flows provided by operating activities			$	93.8		$	57.4		$	59.9		$	51.7		$	44.9
Proceeds from dispositions of property and equipment				35.4			39.9			28.9			6.3			1.3
Capital expenditures				(49.7	)		(58.0	)		(50.0	)		(53.3	)		(38.9	)


			2002		2001		2000(1)		1999		1998

System-wide same-store sales growth (decline)(2):
Domestic:
	Popeyes			0.7 %		4.2 %		3.4 %		4.4 %		5.2 %
	Church’s			(1.6)%		2.3 %		0.8 %		1.1 %		4.6 %
	Cinnabon retail			(5.7)%		(0.7)%		4.7 %		2.4 %		—
	Seattle Coffee retail			(1.8)%		(2.0)%		0.9 %		3.3 %		—
International:
	Popeyes			(5.4)%		(6.9)%		(0.1)%		(4.8)%		(13.3)%
	Church’s			(1.4)%		0.0 %		(1.5)%		(2.7)%		(1.5)%
	Cinnabon retail			(23.3)%		(21.6)%		6.3 %		11.5 %		—
	Seattle Coffee retail			(7.9)%		3.1 %		—		—		—
System-wide unit openings(3):
	Popeyes			169		177		143		151		198
	Church’s			110		79		98		133		87
	Cinnabon retail			102		121		81		46		6
	Seattle Coffee retail			70		52		39		27		18

		Total		451		429		361		357		309

System-wide units (end of period):
Total system-wide				4,071		3,857		3,618		3,374		3,131
	Total company-operated			539		722		856		940		933
	Total franchised			3,532		3,135		2,762		2,434		2,198
Popeyes				1,712		1,620		1,501		1,396		1,292
	Company-operated			96		96		130		175		171
	Franchised			1,616		1,524		1,371		1,221		1,121
Church’s				1,509		1,517		1,534		1,492		1,399
	Company-operated			284		397		468		494		491
	Franchised			1,225		1,120		1,066		998		908
Cinnabon retail				612		544		451		388		369
	Company-operated			84		152		187		195		212
	Franchised			528		392		264		193		157
Seattle Coffee retail				238		176		132		98		71
	Company-operated			75		77		71		76		59
	Franchised			163		99		61		22		12
Total commitments outstanding (end of year)(4)				2,622		2,390		2,289		1,933		1,608


Unit Openings	2002		2001		2000		1999		1998

Company-operated QSRs		8		26		11		54		96
Franchised QSRs		443		403		350		303		213

Total		451		429		361		357		309


Franchise Commitments	2002		2001		2000		1999		1998

Popeyes		1,198		903		896		713		656
Church’s		677		671		743		561		750
Cinnabon		476		522		426		387		65
Seattle Coffee brands		271		294		224		272		137

Total		2,622		2,390		2,289		1,933		1,608


	*Consolidated Results of Operations: 2002, 2001 and 2000*


									As a
		2002		2001		(Decrease)			Percent


		(Dollars in millions)
Chicken		$	339.0	$	410.9	$	(71.9	)		(17.5	)%
Bakery			46.9		68.4		(21.5	)		(31.4	)
Coffee			27.4		27.7		(0.3	)		(1.1	)

	Total	$	413.3	$	507.0	$	(93.7	)		(18.5	)%


						Increase			As a
		2002		2001		(Decrease)			Percent


		(Dollars in millions)
Rental income		$	17.3	$	12.4	$	4.9			39.5	%
Conversion related fees			8.0		4.9		3.1			63.3
Other			0.2		0.7		(0.5	)		(71.4	)

	Total	$	25.5	$	18.0	$	7.5			41.7	%


													There-
	Total		2003		2004		2005		2006		2007		after


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

	$	577.7	$	72.9	$	60.4	$	59.5	$	63.6	$	93.3	$	228.0


Item 1.	BUSINESS


Item 2.	PROPERTIES