UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended April 18, 2004
OR

For the transition period from ____________ to __________

Commission file number 000-32369

(Exact name of registrant as specified in its charter)

(770) 391-9500
(Registrant’s telephone number, including area code)

     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.

     Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

     As of April 18, 2004 there were 28,054,209 shares of the registrant’s common stock, par value $.01 per share, outstanding.

AFC ENTERPRISES, INC.
INDEX

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Part 1. Financial Information

Item 1. Financial Statements

AFC Enterprises, Inc.
Condensed Consolidated Statements of Operations (unaudited)
(In millions, except per share data)

See accompanying notes to condensed consolidated financial statements.

3

AFC Enterprises, Inc.
Condensed Consolidated Balance Sheets (unaudited)
(In millions, except share data)

See accompanying notes to condensed consolidated financial statements

4

AFC Enterprises, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(In millions)

See accompanying notes to condensed consolidated financial statements

5

AFC Enterprises, Inc.
Notes to Condensed Consolidated Financial Statements

1. Description of Business

     AFC Enterprises, Inc. and its subsidiaries (“AFC” or “the Company”) develop, operate and franchise quick-service restaurants, bakeries and cafes (generally referred to as “QSRs” or “units” throughout these notes) in two distinct business segments: chicken and bakery. The Company’s chicken segment operates and franchises under the trade names Popeyes® Chicken & Biscuits (“Popeyes”) and Church’s Chicken™ (“Church’s”); its bakery segment operates and franchises under the trade name Cinnabon® (“Cinnabon”) and currently franchises cafes under the trade name Seattle’s Best Coffee® (“SBC”). The Company’s SBC operations are contractually limited to Hawaii, certain international markets and certain U.S. military bases.

     Discontinued Operations. As discussed in Note 7, on July 14, 2003, the Company sold Seattle Coffee Company (“Seattle Coffee”), a subsidiary which was the parent company for the Company’s SBC and Torrefazione Italia® Coffee brands. In the transaction, the Company retained a portion of SBC’s franchising operations. In the accompanying financial statements, financial results relating to the divested operations are presented as a discontinued operation. Unless otherwise noted, discussions and amounts throughout these notes relate to the Company’s continuing operations.

2. Summary of Significant Accounting Policies

     Basis of Presentation. The accompanying condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, certain information and footnotes required by generally accepted accounting principles in the United States for complete financial statements are not included. The consolidated balance sheet data as of December 28, 2003, that is presented herein, was derived from the Company’s audited consolidated financial statements for the fiscal year then ended. The accompanying condensed consolidated financial statements have not been audited by independent registered public accountants, but in the opinion of management, they contain all adjustments necessary for a fair presentation of the Company’s financial condition and results of operations for the interim periods presented. Interim period operating results are not necessarily indicative of the results expected for the full fiscal year.

     Principles of Consolidation. The consolidated financial statements include the accounts of AFC Enterprises, Inc., all its wholly-owned subsidiaries and certain variable interest entities that the Company is required to consolidate pursuant to Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, as revised in December 2003 (“FIN 46R”). All significant intercompany balances and transactions are eliminated in consolidation.

     FIN 46R addresses the consolidation of certain entities in which (a) the equity investment at risk does not provide its holders with the characteristics of a controlling financial interest or (b) the equity investment at risk is not sufficient for the entity to finance its activities without additional subordinated financial support. For such entities, a controlling financial interest cannot be identified based upon voting equity interests. FIN 46R refers to such entities as “variable interest entities” (“VIEs”). FIN 46R requires consolidation of VIEs by its primary beneficiary.

     The Company adopted FIN 46R at the beginning of the first quarter of 2004 and was required to consolidate three franchisees. In each of these relationships, the Company determined that the franchisee was a VIE for which the Company was the primary beneficiary. These franchisees have not been retroactively consolidated in 2003. For the first quarter of 2004, total revenue associated with the operations of these franchisees was $4.9 million. In conjunction with its adoption of FIN 46R, the Company recorded a cumulative effect adjustment that decreased net income in the first quarter of 2004 by $0.5 million, or $0.02 per diluted share.

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AFC Enterprises, Inc.
Notes to Condensed Consolidated Financial Statements — Continued

     The Company does not have a common equity interest in any of these three franchisees. Generally, earnings and losses of these franchisees are allocated to the common equity holders as a component of minority interest. However, the Company does not allocate any losses to the common equity holders if doing such would reduce their common equity interests below zero.

     Property and equipment, with a net book value of $3.1 million at April 18, 2004, held by these franchisees is included in the condensed consolidated balance sheet. This property and equipment is pledged as collateral under obligations of the franchisees.

     The Company has other VIE relationships for which it is not the primary beneficiary. These relationships are in connection with certain loan guarantees that are described at Note 13 to the Company’s consolidated financial statements for the fiscal year ended December 28, 2003, which are contained in the Company’s 2003 Annual Report on Form 10-K/A.

     Significant Accounting Policies. The accounting and reporting policies practiced by the Company are set forth in Note 2 to the Company’s consolidated financial statements for the fiscal year ended December 28, 2003, which are contained in the Company’s 2003 Annual Report on Form 10-K/A.

     Fiscal Periods. The Company has a 52/53-week fiscal year that ends on the last Sunday in December. The Company’s first fiscal quarter contains 16 weeks and its remaining quarters contain 12 weeks (13 weeks in the fourth quarter of a 53-week year). The 2004 and 2003 fiscal years both contain 52 weeks.

     Other Accounting Standards Adopted During The Periods Presented. In the first quarter of 2003, the Company adopted Financial Accounting Standards Board Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). Pursuant to FIN 45, 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. At the time of adoption, FIN 45 did not have a material effect on the Company’s consolidated financial statements.

     In the first quarter of 2003, the Company adopted 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. SFAS 143 requires that the fair value of an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. For obligations under certain leases that are within the scope of SFAS 143, the Company recorded a cumulative effect adjustment that decreased net income in the first quarter of 2003 by $0.4 million ($0.7 million, pre-tax). The changes in the asset retirement obligation during the quarter were not significant.

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AFC Enterprises, Inc.
Notes to Condensed Consolidated Financial Statements — Continued

3. Long-Term Debt and Other Borrowings

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

     The term loans and the revolving credit facility bear interest at LIBOR plus an applicable margin based on certain financial leverage ratios and the Company’s credit rating. The margins may fluctuate because of changes in these ratios. As of December 29, 2002, the margins were 2.0% for the revolving credit facility and the Tranche A term loan and 2.25% for the Tranche B term loan. On July 14, 2003, the start of the Company’s third quarter for 2003, these margins changed to 2.25% for the revolving credit facility and the Tranche A term loan and 2.50% for the Tranche B term loan due to an amendment to the 2002 Credit Facility. On August 22, 2003, these margins changed to 2.75% for the revolving credit facility and the Tranche A term loan and 3.00% for the Tranche B term loan due to another amendment to the 2002 Credit Facility and remained at those rates through April 18, 2004. The Company also pays a quarterly commitment fee of 0.125% (0.5% annual rate divided by 4) on the unused portions of the revolving credit facility.

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

     The 2002 Credit Facility is secured by a first priority security interest in substantially all of the Company’s assets. The Company’s subsidiaries are required to guarantee its obligations under the 2002 Credit Facility.

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

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AFC Enterprises, Inc.
Notes to Condensed Consolidated Financial Statements — Continued

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

•		Extend, for purposes of the facility, the deadline for providing the Company’s 2002 annual report to its lenders to December 15, 2003 (this requirement was satisfied as of that date).
•		Extend, for purposes of the facility, the deadline for filing the Company’s quarterly financial information to its lenders for the first, second and third quarters of 2003 to February 28, 2004 (this requirement was satisfied as of that date).
•		Raise the interest rate on outstanding indebtedness under the 2002 Credit Facility until such time as the Company has satisfied its 2002 annual reporting requirement, its 2003 quarterly reporting requirements and attained a bank credit rating of Ba3 and BB-, or better, by each of Moody’s and Standard & Poor’s, respectively.
•		Temporarily reduce the Company’s revolving line of credit from $75.0 million to $65.0 million until the Company delivers all of the required quarterly financial statements and demonstrates a total leverage ratio of not greater than two to one for 2003, at which time the revolving line of credit limit will return to the original commitment amount of $75.0 million (this requirement came into effect during the fourth quarter of 2003 and was satisfied during the first quarter of 2004).
•		Approve the Seattle Coffee divestiture.
•		Require the Company to use proceeds from the sale of Seattle Coffee to pay down $31.3 million of the facility’s term loans and deposit $32.0 million in a collateral account. The pay down occurred on July 17, 2003 and the deposit occurred on July 15, 2003.
•		Require the Company to use $29.2 million of the amounts deposited in the aforementioned collateral account to further pay down the facility’s term loans. The pay down occurred on October 31, 2003.
•		Adjust the computation of certain loan covenant ratios in 2003 to exclude from the computations certain fees associated with a productivity initiative performed in the first quarter of 2003, subject to certain monetary limits, and the various costs associated with the restatement of the Company’s previously issued financial statements.
•		Extend, for purposes of the facility, the filing deadline for the Company’s 2003 annual report to its lenders to April 12, 2004 (this requirement was satisfied with the filing of the Company’s Annual Report on Form 10-K on March 29, 2004).

     Because the 2003 amendments were necessitated by the delays in filing the Company’s annual report for 2002 and quarterly reports for 2003, a consequence of the restatement and re-audits of previously issued financial information, the related amendment fees are included as a component of the 2003 restatement costs discussed at Note 5.

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

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AFC Enterprises, Inc.
Notes to Condensed Consolidated Financial Statements — Continued

     Under the terms of the revolving credit facility, the Company may also obtain short-term borrowings and letters of credit up to the amount of unused borrowings under that facility. As of April 18, 2004, there were $26.7 million in outstanding borrowings under the revolving credit facility and $8.4 million of outstanding letters of credit, leaving amounts available for short-term borrowings and additional letters of credit of $39.9 million. The revolving credit facility is due in full without installments in May 2007.

4. Shareholder Litigation

     The Company is involved in several matters relating to its announcement on March 24, 2003 indicating it would restate its financial statements for fiscal year 2001 and the first three quarters of 2002 and its announcement on April 22, 2003 indicating that it would also restate its financial statements for fiscal year 2000.

     On March 25, 2003, plaintiffs filed the first of eight securities class action lawsuits in the United States District Court for the Northern District of Georgia against AFC and several of its current and former directors and officers. By order dated May 21, 2003, the district court consolidated the eight lawsuits into one consolidated action. On January 26, 2004, the plaintiffs filed a Consolidated Amended Class Action Complaint (the “Consolidated Complaint”) on behalf of a putative class of persons who purchased or otherwise acquired AFC stock between March 2, 2001 and March 24, 2003. In the Consolidated Complaint, plaintiffs allege that the registration statement filed in connection with AFC’s March 2001 initial public offering (“IPO”) contained false and misleading statements in violation of Sections 11 and 15 of the Securities Act of 1933 (“1933 Act”). The defendants to the 1933 Act claims include AFC, certain of AFC’s current and former directors and officers, an institutional shareholder of AFC, and the underwriters of AFC’s IPO. Plaintiffs also allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“1934 Act”) and Rule 10b-5 promulgated 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 alleged stock sales. The Consolidated Complaint seeks certification as a class action, compensatory damages, pre-judgment and post-judgment interest, attorney’s 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 insider 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 the Company’s board of directors and the Company’s largest shareholder. On July 24, 2003, a different shareholder filed a substantially identical lawsuit in the same court against the same defendants. By order dated September 23, 2003, the District Court consolidated the two lawsuits into one consolidated action. On November 24, 2003, the plaintiffs filed a consolidated amended complaint that added as defendants three additional current or former officers of AFC and two other large shareholders of AFC. The consolidated complaint alleges, among other things, that the director defendants breached their fiduciary duties by permitting AFC to issue financial statements that were materially in error. The lawsuit seeks, on behalf of AFC, unspecified compensatory damages, disgorgement or forfeiture of certain bonuses and options earned by certain defendants, disgorgement of profits earned through alleged insider selling by certain defendants, recovery of attorneys’ fees and costs, and other relief. On February 23, 2004, the defendants moved to dismiss the consolidated complaint.

     On August 7, 2003, a shareholder claiming to be acting on behalf of AFC filed a shareholder derivative suit in Gwinnett County Superior Court, State of Georgia, against certain current and former members of the Company’s board of directors. The complaint alleges that the defendants breached their fiduciary duties by permitting AFC to issue financial statements that were materially in error and by failing to maintain adequate internal accounting controls. The lawsuit seeks, on behalf of AFC, unspecified compensatory damages, attorneys’ fees, and other relief. On January 20, 2004, the defendants moved to dismiss or,

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AFC Enterprises, Inc.
Notes to Condensed Consolidated Financial Statements — Continued

alternatively, to stay the case. On May 17, 2004, the court entered an order staying the proceedings until October 11, 2004, unless the stay is lifted earlier by any of the parties or by the court.

     On May 15, 2003, a plaintiff filed a securities class action lawsuit in Fulton County Superior Court, State of Georgia, against AFC and certain current and former members of the Company’s board of directors on behalf of a class of purchasers of the Company’s common stock “in or traceable to” AFC’s December 2001 $185.0 million public offering of common stock. The lawsuit asserts claims under Sections 11 and 15 of the 1933 Act. The complaint alleges that the registration statement filed in connection with the offering was false or misleading because it included financial statements issued by the Company that were materially in error. The complaint seeks certification as a class action, compensatory damages, attorneys’ fees and costs, and other relief. The plaintiff claims that as a result of AFC’s announcement that it was restating its financial statements for fiscal year 2001 (and at the time of the complaint, were examining restating its financial statements for fiscal year 2000), AFC will be absolutely liable under the 1933 Act for all recoverable damages sustained by the putative class. On July 20, 2003, the defendants removed the action to the United States District Court for the Northern District of Georgia. The plaintiff filed a motion to remand the case to state court. The defendants opposed the motion to remand. On November 25, 2003, the federal district court entered an order remanding the case to state court but staying the order to allow the defendants to appeal the decision. The United States Court of Appeals for the Eleventh Circuit agreed to hear the defendants’ appeal.

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

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

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

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AFC Enterprises, Inc.
Notes to Condensed Consolidated Financial Statements — Continued

5. Impairment Charges and Other

     Of the $3.3 million of impairment charges recognized in the first quarter of 2003, $2.0 million relates to a new restaurant concept, associated with the Company’s chicken segment, which was abandoned during the first quarter of 2003.

     During 2003, the Company incurred costs associated with the re-audit and restatement of its 2001 and 2000 financial statements. Included therein are fees for outside auditors, fees for accountants engaged to assist in the restatement, attorney fees, credit facility amendment fees and various ancillary costs.

     As a consequence of the restatement, the Company also incurred costs associated with an independent investigation commissioned by the Company’s Audit Committee, attorney fees associated with certain shareholder litigation and certain other related costs. While these costs were significant for the balance of 2003, they were insignificant in the first quarter of 2003. These costs are ongoing into 2004. A discussion of the shareholder litigation can be found at Note 4 to these condensed consolidated financial statements.

     The $0.3 million credit associated with unit closures in the first quarter of 2004 results from the revision of estimates for future lease obligations on closed facilities, due to settlement of certain obligations.

6. Interest Expense, Net

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AFC Enterprises, Inc.
Notes to Condensed Consolidated Financial Statements — Continued

7. Discontinued Operations – Seattle Coffee

     On July 14, 2003, the Company sold Seattle Coffee to Starbucks Corporation for $72.0 million. Net proceeds of the sale were approximately $62.1 million. In this transaction, the Company sold substantially all of the continental U.S. and Canadian operations of Seattle Coffee and its wholesale coffee business. Following this transaction, the Company continues to franchise the Seattle’s Best Coffee brand in retail locations in Hawaii, in certain international markets and on certain U.S. military bases.

     For the first quarter of 2003, total revenues and net loss from discontinued operations were as follows:

8. Stock-Based Employee Compensation

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

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AFC Enterprises, Inc.
Notes to Condensed Consolidated Financial Statements — Continued

9. Components of Earnings Per Share Computation

10. Segment Information (Continuing Operations)

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

     Inter-segment revenue is eliminated through corporate revenue. The corporate revenues include rental income from leasing and sub-leasing agreements with third parties.