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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 000-32369

(770) 391-9500

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

Securities registered pursuant to Section 12(g) of the Exchange Act:

Title of each class

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

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

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

    The aggregate market value of the voting stock held by non-affiliates of the registrant as of July 13, 2003 (the last day of the registrant’s second quarter for 2003), as quoted by The Nasdaq National Market, was approximately $327,106,000. As of February 22, 2004, there were 28,050,137 shares of the registrant’s common stock outstanding.

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

AFC ENTERPRISES, INC.

INDEX TO FORM 10-K

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PART I.

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

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

General

      AFC Enterprises, Inc. (“AFC”) develops, operates and franchises quick service restaurants, bakeries and cafes (generally referred to as “QSRs,” “units” or “stores” throughout this filing) in two distinct business segments: chicken and bakery. Our chicken segment operates and franchises under the trade names Popeyes® Chicken & Biscuits (“Popeyes”) and Church’s Chicken^TM (“Church’s”); our bakery segment operates and franchises under the trade name Cinnabon® (“Cinnabon”) and currently franchises cafes under the trade name Seattle’s Best Coffee®. Financial information for these segments can be found in Note 24 to the Consolidated Financial Statements.

      On July 14, 2003, we sold Seattle Coffee Corporation (“Seattle Coffee” — the parent company for what had been our Seattle’s Best Coffee® and Torrefazione Italia® Coffee brands) to Starbucks Corporation for $72.0 million. Net proceeds of the sale, after transaction costs and adjustments, were approximately $62.1 million. In this transaction, we sold substantially all the continental U.S. and Canadian operations of Seattle Coffee and its wholesale coffee business. We continue to franchise the Seattle’s Best Coffee® brand in retail locations in Hawaii, in certain international markets and on certain U.S. military bases.

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

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Brand Profiles

      Popeyes® Chicken & Biscuits. Founded in New Orleans, Louisiana in 1972, our Popeyes brand is renowned for its signature spicy and mild fried chicken and its Louisiana inspired side items. As of December 28, 2003, there were 1,806 Popeyes restaurants worldwide. These restaurants were located in 42 states, the District of Columbia, Puerto Rico and 21 foreign countries. During 2003, the Popeyes restaurant system generated $1.5 billion of sales. Measured by system-wide sales, Popeyes is currently the third largest chicken QSR concept in the world.

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

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

      Church’s Chicken^TM. Founded in San Antonio, Texas in 1952, our Church’s brand is one of the oldest QSR systems in the United States. Church’s restaurants focus on serving traditional Southern fried chicken and other Southern specialties. As of December 28, 2003, there were 1,521 Church’s restaurants worldwide. These restaurants were located in 29 states, Puerto Rico and 12 foreign countries. During 2003, the Church’s restaurant system generated $0.9 billion of sales. Measured by system-wide sales, Church’s is currently the fourth largest chicken QSR concept in the world.

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

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

      Cinnabon®. Founded in Seattle, Washington in 1985, our Cinnabon brand is the market leader among cinnamon roll bakeries. Cinnabon serves fresh, aromatic, oven-hot cinnamon rolls as well as a variety of other baked goods and specialty beverages. As of December 28, 2003, there were 626 Cinnabon bakeries worldwide. These

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

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

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

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AFC’s Overall Business Strategy

	1.	Improving Operational Efficiencies. Through our purchasing cooperative, technology enhancements and various training initiatives, we seek to improve operational efficiencies for company-operated and franchised restaurants. We are also working to strengthen our brands’ franchise systems by inspecting operations and taking curative actions against chronically weak performers. We intend to continuously improve our customer’s experience when visiting our QSRs by offering appetizing food, friendly service, clean and appealing dining environments, and quick service times.
	2.	Increasing the Efficiency and Effectiveness of Our Corporate and Brand Overhead. We will continue a process initiated in 2003 to improve the benefit and reduce the cost of our corporate and brand overhead. In particular, we will work to (a) eliminate any and all spending that creates minimal value, (b) eliminate redundancies and duplicated resources and (c) review and improve the terms of key vendor relationships.
	3.	Growing Through Our Franchise Network. We will fuel our business growth principally through franchising activities. We believe that our focus on franchising provides us with higher profit margins and enhanced investment returns. In addition, a franchising-based growth strategy requires significantly less operating capital. As of December 28, 2003, approximately 89% of our brands’ 4,091 system-wide units were franchised, and we had development commitments from existing and new franchisees to open 2,154 additional units. Our emphasis on franchising includes the periodic sale of company-operated QSRs to franchisees (“unit conversions”). This strategic initiative began in 2001. We have not completed this initiative nor have we, as yet, fully achieved the anticipated overhead cost reduction we expect to result from those unit conversions.
	4.	Building Our Model Markets Program. For each of our brands, we will continue to own and operate units in one or more markets. The objective of this program is to have a number of company-operated units that are concentrated in certain strategic geographic markets. This will allow us to focus on establishing best practices and developing new menu items for each of our brands, thereby creating model markets. Innovations and best practices established in each of these model markets will be shared with our franchisees.
	5.	Promoting Uniquely Positioned Brands. We continually promote and refresh the image of our brands in order to increase consumer interest and sales. During 2000, we initiated a new re-imaging program that is designed to update the general public’s perception of our brands. We plan to have substantially all of the QSRs in our systems re-imaged by the end of 2007. The re-imaging program typically involves an interior and exterior makeover of the QSR along with new logos, dining room upgrades, uniforms, menu boards and menu items.
	6.	Increasing Domestic Market Penetration. Currently, most of our brands’ domestic markets are under-penetrated. We are increasing the number of our QSRs in new and existing markets. In addition, we are expanding the number and type of non-traditional formats in which our Popeyes and Church’s chicken restaurants are located, including convenience stores, travel plazas and airports.
	7.	Expanding Our Franchise Networks Internationally. We believe that we have the opportunity to establish or expand a leading market position in a number of countries, due to the appeal of our highly recognizable American brands. Our international operations have increased from 346 franchised units in Puerto Rico and 17 foreign countries at the end of 1995, to 952 franchised units in Puerto Rico and 36 foreign countries at the end of 2003. Additionally, commitments to develop international franchised units have increased from 502 at the end of 1995 to 1,172 at the end of 2003.
	8.	Enhancing Stakeholder Value by Unlocking the Potential within Our Portfolio of Brands. We believe that our portfolio of brands has significant intrinsic value, which we are committed to unlocking and enhancing. Within the brands, we will continue to manage our operations so that menu offerings and advertising campaigns remain fresh and appealing to our customers. Within the portfolio, we will pursue appropriate acquisitions and dispositions that serve to improve the portfolio’s quality and value. Our sale of Seattle Coffee in 2003 constitutes a strategic divestiture designed to improve the overall performance of our brand portfolio.

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Franchise Development

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

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

      International Development Agreements. Our international franchise development agreements are similar to our domestic franchise development agreements, though the fee can be as much as $45,000 for each unit developed, depending upon the brand. Our international franchisees are also required to prepay as much as $15,000 per unit in franchise fees at the time their franchise development agreement is executed.

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

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

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

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

Site Selection

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

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      AFC Loan Guarantee Programs. In March 1999, we implemented a program to assist qualified current and prospective franchisees in obtaining the financing needed to purchase or develop franchised units at competitive rates. Under the program, we guarantee up to 20% of the loan amount toward a maximum aggregate liability for the entire pool of $1.0 million. For loans within the pool, we assume a first loss risk until the maximum liability for the pool has been reached. Such guarantees typically extend for a three-year period. As of December 28, 2003, approximately $9.1 million was borrowed under this program, of which we were contingently liable for $1.0 million in the event of default.

      In November 2002, we implemented a second loan guarantee program to provide qualified franchisees with financing to fund new construction, re-imaging and facility upgrades. Under the program, we assume a first loss risk on the portfolio up to 10% of the sum of the original funded principal balances of all program loans. As of December 28, 2003, approximately $1.5 million was borrowed under this program, of which we were contingently liable for $0.2 million in the event of default.

Suppliers and Purchasing Cooperative

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

      Purchasing Cooperative. Supplies are generally provided to our franchised and company-operated QSRs pursuant to supply agreements negotiated by Supply Management Services, Inc. (“SMS”), a not-for-profit purchasing cooperative. We and our Popeyes, Church’s and Cinnabon franchisees hold ownership interests in SMS in proportion to the number of QSRs we each own. As of December 28, 2003, AFC owned approximately 14% of SMS and held three of its eleven board seats. AFC does not guarantee the operations, indebtedness, or the contracts entered into by SMS.

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

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

      Supply Agreements. The principal raw material for our Popeyes and Church’s systems is fresh chicken, representing approximately half of their “restaurant food, beverages and packaging” costs. Our company-operated and franchised restaurants purchase fresh chicken from approximately 11 suppliers who service us from 34 plant locations. These costs are significantly affected by increases in the cost of fresh chicken, which can result from a number of factors, including increases in the cost of grain, disease, declining market supply of fast-food sized chickens and other factors that affect availability.

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

      We have entered into long-term beverage supply arrangements with certain beverage vendors. These contracts are customary to the QSR industry. Pursuant to the terms of these arrangements, marketing rebates are provided to us and our franchisees from the beverage vendors based upon the dollar volume of purchases for our company-operated QSRs and franchised QSRs, respectively, which will vary according to our demand for beverage syrup and fluctuations in the market rates for beverage syrup.

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

Marketing and Advertising

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

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

      Together with our franchisees, we contribute to a national advertising fund to pay for the development of marketing materials and also contribute to local advertising funds to support programs in our local markets. In markets where there is sufficient unit concentration to affect such savings, our franchisees and we have experienced significant savings in our marketing programs through our advertising cooperatives. In 2003, we, our franchisees and certain of our vendors contributed approximately $86.1 million to these advertising funds.

Employees

      As of December 28, 2003, we had 7,376 hourly employees working in our company-operated QSRs. This includes approximately 250 Cinnabon employees hired for the holiday shopping season between Thanksgiving Day and New Year’s Day. Additionally, we had 988 employees involved in the management of our company-operated QSRs, comprised of multi-unit managers and field management employees. We also had 324 employees responsible for corporate administration, franchise administration and business development. None of our employees is covered by a collective bargaining agreement. We believe that the dedication of our employees is critical to our success and that our relationship with our employees is good.

Community Activity

      We believe strongly in supporting the communities we serve. Through the AFC Foundation, Inc. and through our franchisees and employees, we have sponsored and helped construct more than 300 homes worldwide in conjunction with Habitat for Humanity, a non-profit builder of housing for the poor. In addition, each of our brands is involved in various community support programs. For example, Popeyes promotes music and culinary education. Church’s sponsors summer camp programs through the Boys and Girls Clubs. Cinnabon encourages reading awareness through its Reading Rewards Program. In 2003 and 2002, we contributed approximately $0.4 million to these programs and our franchisees and employees contributed thousands of volunteer hours. We believe, through our involvement with these programs, we have established a meaningful presence in the communities we serve, while building customer loyalty and positive brand awareness.

New Age of Opportunity®

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

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

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

Intellectual Property and Other Proprietary Rights

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

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

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

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

International Operations

      An important component of our overall business strategy is to expand our operations internationally through franchising. As of December 28, 2003, we had franchised internationally 359 Popeyes QSRs, 286 Church’s QSRs, 185 Cinnabon QSRs and 122 Seattle’s Best Coffee QSRs. In 2003, franchise revenues from these operations represented approximately 15.6% of our total franchise revenues. For each of 2003, 2002 and 2001, foreign-sourced revenues represented 3.9%, 3.5% and 2.9% of total revenues, respectively.

Insurance

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

Seasonality

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

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Competition

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

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

      Our Seattle’s Best Coffee franchisees compete directly with specialty coffees sold at retail through supermarkets, specialty retailers and a growing number of specialty coffee cafes and kiosks and all restaurant and beverage outlets that serve coffee.

Government Regulation

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

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

      Many states and the Federal Trade Commission, as well as certain foreign countries, require franchisors to transmit specified disclosure statements to potential franchisees before granting a franchise. Additionally, some states and certain foreign countries require us to register our franchise offering documents before we may offer a franchise. We currently do not have effective domestic uniform franchise offering circulars due to the delay in releasing our 2002 and 2003 financial statements and the financial filings due thereafter. See “Risk Factors — The number of new units to be opened by franchisees has been adversely affected by our delay in releasing audited financial statements for 2002 and for 2003” included in Item 7 hereof. We believe that our international disclosure statements, franchise offering documents and franchising procedures comply with the laws of the foreign countries in which we have offered franchises.

Environmental Matters

      We are subject to various federal, state and local laws regulating the discharge of pollutants into the environment. We believe that we conduct our operations in substantial compliance with applicable environmental laws and regulations, as well as other applicable laws and regulations governing our operations. However, approximately 150 of our currently and formerly owned and/or leased properties are known or suspected to have been used by prior owners or operators as retail gas stations, and a few of these properties may have been used for other environmentally sensitive purposes. Many of these properties previously contained underground storage tanks, and some of these properties may currently contain abandoned underground storage tanks. It is possible that petroleum products and other contaminants may have been released at these properties into the soil or groundwater. Under applicable federal and state environmental laws, we, as the current or former owner or operator of these sites, may be jointly and severally liable for the costs of remediation of any contamination, as well as any other environmental conditions at our properties that are unrelated to underground storage tanks. In 2000, after an analysis of our property portfolio and an initial assessment of our properties, including testing of soil and groundwater at a representative sample of our facilities, we obtained insurance coverage that we believe is adequate

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Where You Can Find Additional Information

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

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Facilities

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

      The following table sets forth the locations by state of our domestic company-operated restaurants and bakeries as of December 28, 2003:

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

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

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

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

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      We are involved in several matters relating to our announcement on March 24, 2003 indicating we would restate our financial statements for fiscal year 2001 and the first three quarters of 2002 and our announcement on April 22, 2003 indicating that we would also restate our financial statements for fiscal year 2000. See our Annual Report on Form 10-K for 2002 for a discussion of the restatements.

      On March 25, 2003, plaintiffs filed the first of eight securities class action lawsuits in the United States District Court for the Northern District of Georgia against AFC and several of its current and former directors and officers. By order dated May 21, 2003, the district court consolidated the eight lawsuits into one consolidated action. On January 26, 2004, the plaintiffs filed a Consolidated Amended Class Action Complaint (the “Consolidated Complaint”) on behalf of a putative class of persons who purchased or otherwise acquired AFC stock between March 2, 2001 and March 24, 2003. In the Consolidated Complaint, plaintiffs allege that the registration statement filed in connection with AFC’s March 2001 initial public offering (“IPO”) contained false and misleading statements in violation of Sections 11 and 15 of the Securities Act of 1933 (“1933 Act”). The defendants to the 1933 Act claims include AFC, certain of AFC’s current and former directors and officers, an institutional shareholder of AFC, and the underwriters of AFC’s IPO. Plaintiffs also allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“1934 Act”) and Rule 10b-5 promulgated thereunder. The plaintiffs’ 1934 Act allegations are pled against AFC, certain current and former directors and officers of AFC, and two institutional shareholders. The plaintiffs also allege violations of Section 20A of the 1934 Act against certain current and former directors and officers and two institutional shareholders based upon certain alleged stock sales. The Consolidated Complaint seeks certification as a class action, compensatory damages, pre-judgment and post-judgment interest, attorneys’ fees and costs, an accounting of the proceeds of certain defendants’ alleged stock sales, disgorgement of bonuses and trading profits by AFC’s CEO and former CFO, injunctive relief, including the imposition of a constructive trust on certain defendants’ alleged trading proceeds and other relief. AFC has not yet filed a response to the Consolidated Complaint.

      On June 5, 2003, a shareholder claiming to be acting on behalf of AFC filed a shareholder derivative suit in the United States District Court for the Northern District of Georgia against certain current and former members of our board of directors and our largest shareholder. On July 24, 2003, a different shareholder filed a substantially identical lawsuit in the same court against the same defendants. By order dated September 23, 2003, the District Court consolidated the two lawsuits into one consolidated action. On November 24, 2003, the plaintiffs filed a consolidated amended derivative complaint that added as defendants three additional current or former officers of AFC and two other large shareholders of AFC. The consolidated complaint alleges, among other things, that the director defendants breached their fiduciary duties by permitting AFC to issue financial statements that were materially in error. The lawsuit seeks, on behalf of AFC, unspecified compensatory damages, disgorgement or forfeiture of certain bonuses and options earned by certain defendants, disgorgement of profits earned through alleged stock sales by certain defendants, recovery of attorneys’ fees and costs, and other relief. On February 23, 2004, the defendants moved to dismiss the consolidated complaint. The plaintiffs have not yet responded to the defendants’ motion to dismiss.

      On August 7, 2003, a shareholder claiming to be acting on behalf of AFC filed a shareholder derivative suit in Gwinnett County Superior Court, State of Georgia, against certain current and former members of our board of directors. The complaint alleges that the defendants breached their fiduciary duties by permitting AFC to issue financial statements that were materially in error and by failing to maintain adequate internal accounting controls. The lawsuit seeks, on behalf of AFC, unspecified compensatory damages, attorneys’ fees, and other relief. On January 20, 2004, the defendants moved to dismiss or, alternatively, to stay the case. The plaintiff has not yet responded to the defendants’ motion.

      On May 15, 2003, a plaintiff filed a securities class action lawsuit in Fulton County Superior Court, State of Georgia, against AFC and certain current and former members of our board of directors on behalf of a class of purchasers of our common stock “in or traceable to” AFC’s December 2001 $185.0 million public offering of common stock. The lawsuit asserts claims under Sections 11 and 15 of the 1933 Act. The complaint alleges that the registration statement filed in connection with the offering was false or misleading because it included financial statements issued by us that were materially in error. The complaint seeks certification as a class action, compensatory damages, attorneys’ fees and costs, and other relief. The plaintiff claims that as a result of AFC’s announcement that it was restating its financial statements for fiscal year 2001 (and at the time of the complaint,

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

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

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

Other Matters

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

      Not applicable.

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Item 4A. EXECUTIVE OFFICERS

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

      Frank J. Belatti, age 56, has served as our Chairman of the Board and Chief Executive Officer since we commenced operations in November 1992, following the reorganization of our predecessor. Mr. Belatti served as our interim Chief Financial Officer from April 28, 2003 until January 2004. From 1990 to 1992, Mr. Belatti was employed as President and Chief Operating Officer of HFS, the franchisor of hotels for Ramada and Howard Johnson. From 1989 to 1990, Mr. Belatti was President and Chief Operating Officer of Arby’s, Inc., and from 1985 to 1989 he served as the Executive Vice President of Marketing at Arby’s. From 1986 to 1990, Mr. Belatti also served as President of Arby’s Franchise Association Service Corporation, which created and developed the marketing programs and new products for the Arby’s system. Mr. Belatti received the 1999 Entrepreneur of the Year Award from the International Franchise Association. Mr. Belatti serves as a member of the board of directors of Radio Shack Corporation and Galyan’s Trading Company, Inc.

      Dick R. Holbrook, age 51, has served as our President and Chief Operating Officer since August 1995. From November 1992 to July 1995, Mr. Holbrook served as our Executive Vice President and Chief Operating Officer. He has been a director since April 1996. Mr. Holbrook has served as our interim President of Popeyes Chicken & Biscuits since the resignation of our prior President of Popeyes Chicken & Biscuits in January 2003. From 1991 to 1992, Mr. Holbrook served as Executive Vice President of Franchise Operations for HFS. From 1972 to 1991, Mr. Holbrook served in various management positions with Arby’s, most recently as Senior Vice President of Franchise Operations. Mr. Holbrook serves on the board of directors of Rare Hospitality International, Inc.

      Frederick B. Beilstein, age 56, has served as our Chief Financial Officer since January 2004. From January 2002 to December 2003, Mr. Beilstein was the Principal and founder of Beilstein & Company, a financial and operational consulting practice with concentration in advising companies on strategic issues such as refinancing and recapitalization opportunities. From January 1997 to December 2001, Mr.&n