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.

9

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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Nature of Business

     AFC Enterprises, Inc. (“AFC”) develops, operates and franchises quick service restaurants, bakeries and cafes (“QSR’s” or “units”) 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™ (“Church’s”); and our bakery segment operates and franchises under the trade name Cinnabon® (“Cinnabon”) and currently franchises cafes under the trade name Seattle’s Best Coffee®.

     Prior to the July 14, 2003 sale of our Seattle Coffee subsidiary, we also operated a coffee business segment. Seattle Coffee operated and franchised under the names Seattle’s Best Coffee® (“SBC”) and Torrefazione Italia®. In the sale of Seattle Coffee, we retained a portion of SBC’s franchising operations. The divested operations are presented as discontinued operations and previously reported financial information has been restated to present the divested operations in a manner consistent with our current year’s presentation. Unless otherwise noted, discussions and amounts throughout this Quarterly Report on Form 10-Q relate to our continuing operations.

     We adopted Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, as revised in December 2003 (“FIN 46R”) in the first quarter of 2004 and were required to consolidate three franchisees. In each of these relationships, we determined that the franchisee was a variable interest entity (“VIE”) for which we were the primary beneficiary. These franchisees have not been retroactively consolidated in 2003. For the first quarter of 2004, revenues from the operations of these franchisees were $4.9 million and have been included in “sales by company-operated restaurants” in our condensed statement of operations. In conjunction with our adoption of FIN 46R, we recorded a cumulative effect adjustment that decreased net income in the first quarter of 2004 by $0.5 million.

     As of April 18, 2004, we operated and franchised 4,095 QSRs in 46 states, the District of Columbia, Puerto Rico and 38 foreign countries. That total, by brand, was as follows:

     As discussed in our Current Report on Form 8-K, filed on April 23, 2004, we are exploring strategic alternatives with respect to our Cinnabon subsidiary, including a possible sale.

Fiscal Periods

     The Company has a 52/53-week fiscal year that ends on the last Sunday in December. Our first fiscal quarter contains 16 weeks and the remaining quarters contain 12 weeks (13 weeks in the fourth quarter of a 53-week year). Our 2004 and 2003 fiscal years both contain 52 weeks. In this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the sixteen week periods ended April 18, 2004 and April 20, 2003 are referred to as the first quarter of 2004 and the first quarter of 2003, respectively.

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Consolidated Results of Operations

     In reviewing our operating results and the relationships between various components of our statements of operations, we believe the following table can be helpful to readers. The table presents selected revenues and expenses as a percentage of total revenues (or, in certain circumstances, as a percentage of a corresponding revenue line item).

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Comparisons of the First Quarters for 2004 and 2003

Sales by Company-Operated Restaurants

     Chicken. Of the $7.1 million increase in sales by company-operated restaurants, approximately $4.9 million was due to sales added from the consolidation of three franchisee relationships upon our adoption of FIN 46R. Approximately $3.9 million of the increase was attributable to a net increase in same-store sales for the first quarter of 2004 compared to the first quarter of 2003 (a 6.2% increase in same-store sales at Church’s company-operated restaurants and a 0.1% increase in same-store sales at Popeyes company-operated restaurants). The increases were partially offset by the actual number and timing of restaurant openings and closings in 2003.

     Bakery. The $0.2 million decrease in sales by company-operated bakeries was mainly due to a reduction in company-operated bakeries in the first quarter of 2004 compared to the first quarter of 2003. The decrease was partially offset by a $0.3 million increase in sales due to a 3.9% increase in same-store sales in the first quarter of 2004 compared to the first quarter of 2003.

Franchise Revenues

     Within each of our business segments, “franchise revenues” has three basic components: (1) ongoing royalty fees that are determined based on a percentage of franchisee sales; (2) franchise fees associated with new unit openings; and (3) development fees associated with the opening of new franchised units in a given market. Royalty revenues are the largest component of franchise revenues, generally constituting more than 90% of franchise revenues in our chicken segment and more than 85% of franchise revenues in our bakery segment.

     Chicken. Of the $1.9 million increase in franchise revenues, approximately $1.4 million was due to an increase in royalties resulting from an increase in franchised units. The balance of the increase was attributable to an increase in same-store sales for the first quarter of 2004 compared to the first quarter of 2003.

     Bakery. The $0.1 million decrease in franchise revenues was primarily due to a decrease in franchise fees due to lower unit openings in the first quarter of 2004 compared to the first quarter of 2003.

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Other Revenues

     The $0.5 million decrease in rental income was mainly due to franchise unit closures. The $0.5 million decrease in wholesale revenues was primarily due to a decrease in sales of cinnamon rolls under a wholesale arrangement with a major retailer in our bakery segment, which was discontinued in the second quarter of 2003. Our ongoing wholesale revenues relate to our SBC operations.

Restaurants Employee, Occupancy and Other Expenses

     Restaurant employee, occupancy and other costs were $56.5 million in the first quarter of 2004, a $4.6 million increase from the first quarter of 2003. This increase is attributable to $3.1 million of costs resulting from the consolidation of VIE’s and the increase in sales by company-operated restaurants. Restaurant employee, occupancy and other expenses were approximately 53% and 52%, respectively, of sales from company-operated restaurants in the first quarter of 2004 and 2003.

Restaurant Food, Beverages and Packaging

     Restaurant food, beverages and packaging costs were $31.8 million in the first quarter of 2004, a $2.5 million increase from the first quarter of 2003. This increase is attributable to $1.5 million of costs resulting from the consolidation of VIE’s, an increase in sales by company-operated restaurants and an increase in chicken prices per pound. The increase was partially offset by a decrease in operating costs related to underperforming units which were closed throughout 2003. Restaurant food, beverages and packaging costs were approximately 30% and 29%, respectively, of sales from company-operated restaurants in the first quarter of 2004 and 2003.

General and Administrative Expenses

     General and administrative expenses were $35.5 million in the first quarter of 2004, a $2.4 million increase from the first quarter of 2003. The increase is primarily due to $1.7 million of higher bad debt expense in the first quarter 2004 compared to the first quarter of 2003 associated with three franchisees in our bakery segment and one in our chicken segment. In addition, Church’s had an increase of $0.5 million in business conference expense as they held their bi-annual franchisee conference in the first quarter of 2004. General and administrative expenses were approximately 24% of total revenues in the first quarter of both 2004 and 2003.

Depreciation and Amortization

     Depreciation and amortization was $8.1 million in the first quarter of 2004, a $0.8 million increase from the first quarter of 2003. The increase was mainly due to capital additions between the second quarter of 2003 through the first quarter of 2004 plus $0.1 million in added depreciation from consolidating our VIE’s. Depreciation and amortization was approximately 6% and 5%, respectively, of total revenues in the first quarter of 2004 and 2003.

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Impairment Charges and Other

     Impairment charges and other includes (1) asset impairments; (2) professional fees and other related charges associated with the restatement and the re-audit of 2001 and 2000 financial information; (3) costs associated with unit closures; (4) gains and losses on the sale of assets; (5) costs associated with shareholder litigation; and (6) wholesale costs associated with bakery wholesale sales. The net impact of these items was zero in the first quarter of 2004, a $4.9 million decrease from the first quarter of 2003.

     The decrease was mainly due to a $3.2 million decrease in asset impairment charges in the first quarter of 2004 compared to the first quarter of 2003, a $1.6 million decrease in restatement costs, a $0.6 million decrease in wholesale costs at our bakery segment due to the discontinuance of a wholesale arrangement with a major retailer in the second quarter of 2003 and $0.3 million of lower costs associated with unit closures; partially offset by $0.4 million of higher special investigation costs and $0.4 million of lower gains on asset sales.

Operating Profit (Loss)

     On a consolidated basis, operating profit increased by $2.6 million in the first quarter of 2004 when compared to the first quarter of 2003. Fluctuations in the various components of revenue and expense giving rise to this change are discussed above. The following is a general discussion of the fluctuations in operating profit by business segment.

     The $0.1 million increase in operating profit associated with our chicken segment was principally due to an increase in sales from company-operated restaurants, a $2.0 million decrease in asset impairment charges and franchise revenue growth, partially offset by an increase in restaurant related expenses and higher bad debt expense.

     The $0.8 million decline in operating profit associated with our bakery segment was principally due to higher bad debt and depreciation expenses.

     The $3.5 million increase in operating profit associated with our corporate operations was principally due to a $1.9 million decrease in professional fees, a $1.6 million decrease of restatement related expenses and $0.6 million of lower corporate salaries expense.

Interest Expense, Net

     Interest expense was $2.0 million in the first quarter of 2004, a $0.5 million decrease from the first quarter of 2003. The decrease was principally due to lower debt balances in 2004.

Income Taxes

     Our effective tax rate in the first quarter of 2004 was 38.1% compared to an effective tax rate of 38.5% in the first quarter of 2003. The decrease in our effective tax rate was primarily impacted by changes in our state income taxes.

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Minority Interest

     Minority interest in the first quarter of 2004 was $0.1 million compared to zero in the first quarter of 2003. The minority interest resulted from our adoption of FIN 46R in 2004 and the resulting consolidation of three franchisee relationships.

Loss from Discontinued Operations, Net of Income Taxes

     In the first quarter of 2003, we recognized a net loss of $0.3 million relating to Seattle Coffee.

Cumulative Effect of Accounting Changes, Net of Income Taxes

     In the first quarter of 2004, we adopted FIN 46R and were required to consolidate three franchisee relationships. In conjunction with our adoption of FIN 46R, we recorded a cumulative effect adjustment that decreased net income by $0.5 million.

     In the first quarter of 2003, we adopted SFAS No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). SFAS 143 addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. As a result of obligations under certain leases that are within the scope of SFAS 143, we recorded a cumulative effect adjustment of $0.7 million ($0.4 million after tax) in the first quarter of 2003.

Consolidated Cash Flows: Comparisons of the First Quarters for 2004 and 2003

     Cash flows provided by operating activities. Net cash flows provided by operating activities were $20.8 million in the first quarter of 2004, a $5.2 million increase from the first quarter of 2003. The increase was principally the result of a $2.7 million increase in income from continuing operations before consideration of non-cash charges for accounting changes, deferred taxes, depreciation and amortization, asset write-downs, provisions for bad debts, non-cash interest, gains and losses and minority interest in VIE’s, a $0.6 million higher net provision of cash resulting from changes in operating assets and liabilities and a $1.9 million use of cash from the operating activities of discontinued operations in 2003 that was non-recurring in 2004.

     Cash flows used in investing activities. Net cash flows used in investing activities were $4.7 million in the first quarter of 2004, a $2.4 million decrease from the first quarter of 2003. The decrease was principally due to lower capital expenditures. In the first quarter of 2004, capital expenditures were $5.9 million compared to $7.7 million in the first quarter of 2003. The decrease was further attributable to a $0.5 million increase in proceeds from the disposition of property and equipment in the first quarter of 2004 compared to 2003.

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Cash flows used in financing activities. Net cash used in financing activities was $14.5 million in the first quarter of 2004. This was principally composed of $7.0 million of net repayments under our revolver; $5.4 million of principal payments on the term loans associated with our 2002 Credit Facility and a $4.4 million increase in restricted cash, partially offset by a net $2.3 million associated with other financing activities.

     Net cash used in financing activities was $12.7 million in the first quarter of 2003. This was principally composed of $12.4 million of principal payments on the term loans associated with our 2002 Credit Facility; $4.1 million decrease in bank overdrafts and $2.0 million of principal payments on other notes payable. This was partially offset by net borrowings of $5.0 million associated with the revolving portion of our 2002 Credit Facility and $0.8 million associated with other financing activities.

Liquidity and Capital Resources

     We have financed our business activities primarily with funds generated from operating activities, sale of our Seattle Coffee Company subsidiary 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 and available borrowings under our lines of credit ($39.9 million available as of April 18, 2004) will be adequate to meet our anticipated future requirements for working capital, including various contractual obligations, and for capital expenditures throughout 2004 and 2005.

     In Note 4 to our condensed consolidated financial statements included at Part 1, Item 1 herein, we describe several legal proceedings in which we are involved that relate to our announcements on March 23, 2003 and April 22, 2003 that we would restate certain previously issued 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.

     Due to the diminishing availability of fast-food sized chickens and other market forces, we are experiencing, and for the balance of 2004 we expect to experience, rising chicken costs. Presently, the SMS chicken pricing contracts are under review as we seek to minimize the effect of these rising chicken costs. We are also considering adjustments to our menus and pricing.

Capital Expenditures

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

     During the first quarter of 2004, we invested $5.9 million in various capital projects, including $1.1 million in new and relocated QSRs, $1.1 million in our re-imaging program, $0.9 million in other capital assets to maintain, replace and extend the lives of company-operated QSR equipment and facilities, $1.9 million for information technology systems, and $0.9 million to complete other projects.

     During the first quarter of 2003, we invested $7.7 million in various capital projects, including $1.1 million in new and relocated QSRs, $0.9 million in our re-imaging program, $0.2 million in our Seattle Coffee wholesale operations, $2.2 million in other capital assets to maintain, replace and extend the lives of company-operated QSR equipment and facilities and $3.3 million for information technology systems.

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     Substantially all of our capital expenditures have been financed using cash provided from operating activities and borrowings under our 2002 Bank Credit Facility.

Long Term Debt

     For a discussion of our long-term debt, see Note 3 to our condensed consolidated financial statements at Part 1, Item 1 of this report on Form 10-Q. That note is herby incorporated by reference into this Item 2.

Impact of Inflation

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

Seasonality

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

Forward-Looking Statements

     This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws. Statements regarding future events and developments and our future performance, as well as management’s current 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 or 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 cost 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 and the other risk factors detailed in our 2003 Annual Report on Form 10-K/A and other documents we file with the Securities and Exchange Commission. Therefore, you should not place undue reliance on any forward-looking statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

     In order to ensure favorable pricing for fresh chicken purchases and maintain an adequate supply of fresh chicken for AFC and its franchisees, SMS (a not-for-profit purchasing cooperative formed by AFC and its franchisees) has entered into chicken pricing contracts with chicken suppliers. These contracts establish pricing arrangements, but do not establish any firm purchase commitments on the part of AFC or its franchisees.

     Due to the diminishing availability of fast-food sized chickens and other market forces, we are experiencing, and for the balance of 2004 we expect to experience, rising chicken costs. Presently, the SMS chicken pricing contracts are under review as we seek to minimize the effect of these rising chicken costs. We are also considering adjustments to our menus and pricing.

     Foreign Currency Exchange Risk. We are exposed to currency risk from the potential changes in foreign currency rates that directly impact our revenues and cash flows from our international franchise operations. For the first quarters of 2004 and 2003, foreign-sourced revenues represented 3.7% and 3.5% of total revenues, respectively. As of April 18, 2004, approximately $5.3 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.

     Interest Rate Risk. Our net exposure to interest rate risk consists of our borrowings under our 2002 Credit Facility. Borrowings made pursuant to that facility include interest rates that are benchmarked to U.S. and European short-term floating-rate interest rates. As of April 18, 2004, the balances outstanding under our 2002 Credit Facility totaled $116.9 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 $1.2 million.

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Item 4. CONTROLS AND PROCEDURES.

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

     CEO and CFO certifications. Attached as Exhibit 31.1 and 31.2 to this Quarterly Report on Form 10-Q are certifications by our CEO and CFO. These certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This portion of our Quarterly Report on Form 10-Q describes the results of our controls evaluation referred to in the Section 302 Certifications.

     Our evaluation of AFC’s disclosure controls and procedures. We evaluated the effectiveness of the design and operation of AFC’s disclosure controls and procedures as of April 18, 2004, as required by Rule 13a-15 of the Exchange Act. This evaluation was carried out under the supervision and with the participation of our management, including our CEO and CFO. This evaluation included a review of certain deficiencies in internal controls noted during the audit of our 2002 financial statements (and the re-audit of our 2001 and 2000 financial statements). In connection with those audits, our independent auditors, KPMG LLP (“KPMG”), assessed our internal controls and those of our subsidiaries and advised our Audit Committee that certain identified deficiencies constituted material control weaknesses (as defined by standards established by the Public Company Accounting Oversight Board). In their communications with our Audit Committee, KPMG stated that the more significant deficiencies were:

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inadequate and untimely resolution of balance sheet account reconciliation discrepancies,

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absence of appropriate reviews and approvals of transactions and accounting,

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inadequate procedures for appropriately assessing and applying accounting principles, and

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failure of identified controls in preventing or detecting misstatements of accounting information.

     Additionally, during 2003, independent legal counsel to our Audit Committee and a forensic accounting firm performed an independent investigation into several accounting issues that arose in connection with the restatement. That investigation concluded that there was no evidence that our management intentionally used improper accounting practices to manipulate earnings and that there was no evidence of any fraud or intentional misconduct on the part of AFC, our officers or our employees. The Audit Committee, however, also concluded that our accounting, financial reporting and internal control functions needed significant improvement, including our system of documenting transactions. The Audit Committee further concluded that our internal technical accounting expertise was weak, and that enhanced training, staffing and discipline in the accounting and internal audit areas were needed.

     Actions taken in response to our evaluation. As a result of the findings described above, during 2003 we began implementing the following actions to address the issues we identified in our evaluation of controls and procedures:

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We sought to thoroughly understand the nature of the issues through discussions with KPMG and the independent counsel and forensic accountants engaged by our Audit Committee.

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Our Audit Committee has exercised increased oversight over management’s assessment of internal controls and response to control weaknesses identified in the above assessments.

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•		We hired outside consultants to assist our internal audit group in documenting our accounting and business processes and identifying areas that require control or process improvement.
•		We are establishing new internal control processes based on discussions with the Audit Committee’s independent counsel and forensic accountants, KPMG and other consultants we have engaged to help us in this regard and our own management team seeking to remedy the problems identified.
•		We initiated a search for a new CFO (and in the first quarter of 2004, we hired a new CFO).
•		We employed a new Vice President, Finance who has an extensive public accounting background, as a former audit partner of a Big-Four accounting firm, and broad SEC reporting experience.
•		We hired a Director of Internal Control whose primary responsibilities are to oversee the establishment of formalized policies and procedures throughout our organization and to document and assess our system of internal controls.
•		We established processes whereby the chief financial officers at each of our brands have responsibility for the accuracy of their brand’s financial statements and other accounting information associated with their brand’s operation.
•		We hired controllers for each of our brands who are responsible for the daily maintenance of each respective brand’s accounting system (such tasks were previously performed through a centralized corporate function).
•		We instituted more rigorous procedures for quarter-end analysis of balance sheet and income statement accounts, quarter-end reconciliations of subsidiary ledgers, and the correction of reconciling items in a timely manner. We are also enhancing our accounting documentation policies.
•		We began upgrading our IT systems throughout our organization including in-store systems, our general ledger packages, our fixed assets, accounts receivable, accounts payable, and payroll systems, and our corporate reporting packages. We are redesigning our internal reporting packages and standardizing our internal reporting tools, all with the purpose of improving the quality and flow of financial information within our organization.
•		We began instituting new procedures around our quarterly reporting processes whereby significant accounting issues are discussed and documented, reviewed with our external auditors and our Audit Committee, formally approved by our management, and given timely effect in our books and records.
•		We formed a Disclosure Committee and adopted a Disclosure Committee Manual to assist our CEO and CFO in certifying our public filings, and complying with all SEC rules and regulations.
•		We broadened the scope of our internal audit function and changed its reporting responsibility. It now reports directly to the Audit Committee and CEO.
•		We established a whistle-blower policy to accommodate confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters as required by Section 307 of the Sarbanes-Oxley Act of 2002.

     In the first quarter of 2004, we continued implementing the improvements described above, which we believe will further strengthen our controls and procedures.

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     We believe that our disclosure controls, including our internal control over financial reporting, and procedures have improved due to the actions described above. We believe our controls and procedures will continue to improve as we complete these actions.

     Based in part upon the changes described above, our CEO and CFO believe that as of the end of the first quarter of 2004, our disclosure controls and procedures were reasonably designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. In addition, except as described above, there has been no change in our internal control over financial reporting that occurred during the first quarter of 2004 identified in connection with the evaluation described above that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART 2. OTHER INFORMATION

Item 1. Legal Proceedings

     For a discussion of our legal matters, see Note 4 to our condensed consolidated financial statements at Part 1, Item 1 of this report on Form 10-Q. That note is hereby incorporated by reference into this Item 1.

Item 4. Submission of Matters to a Vote of Security Holders

     At our 2003 Annual Shareholders Meeting held on February 12, 2004, the shareholders elected the following nominees to the board of directors to serve a one-year term with votes cast as follows:

Item 6. Exhibits and Reports on Form 8-K

     (a) Exhibits

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(b) Current Reports on Form 8-K.

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

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

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

     We furnished a Current Report on Form 8-K on March 30, 2004, to announce that we had filed our Annual Report on Form 10-K for 2003, that we would host a conference call on Tuesday, March 30, 2004 to review business results, and to provide certain supplemental information about our business units.

     We filed a Current Report on Form 8-K on April 23, 2004, to announce our intention to explore strategic alternatives with respect to our Cinnabon subsidiary, including a possible sale.

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SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AFC Enterprises, Inc.
May 28, 2004	By:	Date:/s/ Frederick B. Beilstein
		Frederick B. Beilstein
		Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)

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