Back to GetFilings.com

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

FORM 10-K

Commission file number 1-10711

WORLDWIDE RESTAURANT CONCEPTS, INC.
(Exact name of registrant as specified in its charter)

15301 Ventura Blvd., Suite 300, Building B, Sherman Oaks, California 91403
(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (818) 662-9800

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

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

NONE
(TITLE OF CLASS)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    ý YES    o NO

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the second quarter, October 12, 2003, as computed by reference to the closing sale price of such shares on the New York Stock Exchange on such date, was $91,992,852.

The number of shares outstanding of common stock, $0.01 par value, as of June 30, 2004, was 27,493,484.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ý

Portions of the registrant's proxy statement for its 2004 annual meeting of stockholders are incorporated by reference in Part III of this Form 10-K.

TABLE OF CONTENTS

2

PART I

Item 1: Business

General

        Worldwide Restaurant Concepts, Inc. and its subsidiaries (hereinafter collectively referred to as "WRC" or the "Company") are principally engaged in the operation, development and franchising of the Sizzler® concept, the operation and development of the Pat & Oscar's® concept and the operation of KFC® franchises.

Restaurant Concepts

Sizzler® Restaurants

        The Company operates and franchises 311 Sizzler® restaurants in the United States, Australia, Latin America, Asia and New Zealand. Sizzler® restaurants operate in the quick-casual dining market, featuring a selection of grilled steak, chicken and seafood entrées, sandwiches and specialty platters, as well as a fresh fruit and salad bar in a casual dining environment. Sizzler® restaurants provide guests with a service system in which guests place orders and pay upon entering the restaurant and are then seated and assisted by a server who delivers entrées and follows-up on guest service. This system combines the benefits of convenience with the experience of a full service restaurant. Sizzler® restaurants in Asia have moved to full table service where customers are served at the table and pay after their meal.

        Sizzler® restaurants are typically free-standing buildings that are 5,000 to 6,000 square feet providing seating for 150 to 200 guests. The restaurants are generally open for lunch and dinner seven days a week. During fiscal year 2004, lunch and dinner sales were approximately 41.0 percent and 59.0 percent, respectively, in the United States. In Australia, lunch and dinner sales were approximately 34.0 percent and 66.0 percent, respectively. The average restaurant guest check was approximately $10.18 in the United States and $11.21 in Australia ($15.00 Australian dollars).

        In addition to operating Sizzler® restaurants, the Company franchises the Sizzler® concept. Individual franchise agreements for a Sizzler® restaurant generally provide for a term of 20 years. Payment of the initial franchise fee entitles the franchisee to assistance with planning and construction of the restaurant and initial management training. Additionally, franchisees pay royalties based on a percentage of gross sales. Multi-unit franchise development agreements may offer reduced initial franchise fees. Franchisees are required to contribute a percentage of gross sales to a national advertising fund and may contribute to regional cooperative advertising funds.

        Operating segment information for fiscal years 2004, 2003 and 2002 is included in Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 11—Information by Industry Segment and Geographic Area, to the Consolidated Financial Statements.

Pat & Oscar's® Restaurants

        On August 30, 2000, the Company completed the acquisition of 82.0 percent of the outstanding membership interests of FFPE, LLC ("FFPE"), a then newly organized entity that owns the assets used in the operation of Pat & Oscar's® restaurants (formerly doing business under the name "Oscar's"). The terms of the acquisition included the Company's payment of approximately $15.2 million in cash and issuance of warrants to purchase up to 1,250,000 shares of WRC common stock at $4.00 per share. An earn out of $1.0 million was paid September 4, 2003. See Note 8—Commitments and Contingencies, to the Consolidated Financial Statements.

        The terms of the acquisition also included put and call options for the purchase of the remaining 18.0 percent minority interest. On April 16, 2002, the Company received a notice of intent to exercise

3

one of the put options. This resulted in the Company acquiring an additional 5.2 percent of the outstanding membership interests of FFPE, subject to that put, for approximately $1.0 million on June 28, 2002. On October 9, 2002, the Company exercised its call option for the remaining 12.8 percent minority interest in Pat & Oscar's and accrued approximately $1.4 million for its purchase, which was included within other current liabilities and goodwill in the fiscal year 2003 consolidated balance sheets. Mr. Sarkisian, the former owner, disputed the $1.4 million amount and the payment and tender of the remaining 12.8 percent interest was delayed pending the resolution of the litigation initiated by Mr. Sarkisian. On November 11, 2003, the parties entered into a settlement agreement which provided for dismissal of the plaintiffs' appeal, thereby permitting the Court's judgment to become final, and finalizing the Company's purchase of the plaintiffs' 12.8 percent interest in Pat & Oscar's under the call option agreement. See Note 8—Commitments and Contingencies, to the Consolidated Financial Statements. To date, the acquisition has resulted in goodwill of approximately $21.9 million including the put, call and earn-out amounts.

        Under the Pat & Oscar's® concept, the Company operates 22 restaurants in Southern California and features a selection of pizza, pasta, chicken, ribs and salad entrées as well as fresh home-made breadsticks served hot from the oven. Founded in 1991, Pat & Oscar's® was a pioneer in the quick-casual restaurant market that offers great tasting, homemade food promptly served in a clean, relaxed and friendly atmosphere. This system combines the benefits of convenience with the experience of a full service restaurant.

        Pat & Oscar's® restaurants are typically mall units, free-standing buildings or end-cap sites located in strip malls that are 5,500 to 6,500 square feet including patios ranging from 500 to 2,000 square feet. Approximately 200 to 250 seats are available. Pat & Oscar's® also offers catering, home-delivery and carry-out services, which represent approximately 44.0 percent of total revenues. During fiscal year 2004, lunch and dinner sales including catering and home delivery were approximately 47.5 percent and 52.5 percent, respectively. The average transaction, including dine-in, take-out, delivery and catering was $7.27.

        Operating segment information for fiscal years 2004, 2003 and 2002 is included in Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 11—Information by Industry Segment and Geographic Area, to the Consolidated Financial Statements.

KFC® Restaurants

        The Company operates 111 KFC® restaurants in Queensland, Australia and one KFC® restaurant in New South Wales, Australia under franchise agreements with Yum! Brands, Inc. KFC® restaurants in Australia operate in the quick-service dining market and feature fried chicken, sandwiches and various side orders such as fries, sodas and mashed potatoes. During fiscal year 2004, lunch and dinner sales were approximately 39.0 percent and 61.0 percent, respectively. The average guest check was approximately $7.25 ($9.70 in Australian dollars). KFC® restaurants are typically free-standing buildings that are 1,875 to 2,500 square feet, providing seating for 20 to 65 guests. Approximately 70.0 percent of the restaurants offer drive-thru windows and approximately 21.0 percent are located in shopping mall food courts. At the end of fiscal year 2004, the Company operated 19 KFC® restaurants that offered "face-to-face" drive-thru windows where customers place their order with a restaurant staff member in person. The remaining term of the Company's franchise agreements vary from one to 15 years and require payment of royalties based on a percentage of sales. Agreements with remaining terms of less than 10 years have renewal options for terms varying from eight to 12 years. As a franchisee, the Company is required to contribute a percentage of revenues to a national Australian cooperative advertising fund administered by the franchisor and contribute to local advertising initiatives.

4

        Operating segment information for fiscal years 2004, 2003 and 2002 is included in Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 11—Information by Industry Segment and Geographic Area, to the Consolidated Financial Statements.

Suppliers

        The Company has entered into distribution arrangements with a number of suppliers of food and other products and services used by its restaurants. From time to time the Company makes advance purchases of selected commodity items to minimize cost fluctuations. Although wholesale commodity prices are subject to change due to various economic conditions, the Company has in the past been able to obtain sufficient supplies to carry on its businesses and believes that it will be able to do so in the future.

Trademarks and Service Marks

        The Company owns certain domestic and international registered trademarks, trade names and service marks which are of material importance to its business. The Company owns the Sizzler® trademark and certain other registered trademarks, trade names and service marks that it licenses to its franchisees. The Company also owns the Pat & Oscar's® trademark and has been granted a license to use certain trademarks, trade names and service marks, which relate to the operation of KFC® restaurants in Australia pursuant to the franchise agreements with the franchisor. The Company has a first right of refusal to open Taco Bell® restaurants in Queensland, Australia subject to certain conditions in the event the franchisor commences development of this market.

Research and Development

        The Company continually evaluates and updates its menus and restaurant concepts. The Company's research and marketing staff, in conjunction with outside consultants and food suppliers, develop new products. Before being introduced, new menu items are tested and evaluated for guest satisfaction, quality and profitability.

        The Company intends to continue its existing research programs to develop and test new food products. The costs associated with these activities are not expected to be material to the Company.

Seasonality

        The Company's operations are subject to seasonal fluctuation in sales with the summer months being slightly stronger followed by the spring months. The fall and winter seasons are weaker due to weather and other conditions; however Pat & Oscar's® catering sales are typically higher during the winter holidays. The overall effect of seasonality is moderated to a limited extent because the Australian seasons are in reverse of the seasons in the United States.

Working Capital Requirements

        The Company's working capital requirements generally do not fluctuate significantly during the year because revenues consist primarily of cash sales and there is a rapid turnover of inventory. The Company does not carry significant inventories of beef, poultry, seafood, produce or other food products because these items are ordered and delivered two or more times per week.

Competition

        The restaurant business is highly competitive and is impacted by changes in consumer eating preferences, demographic and socio-cultural patterns, and local and national economic conditions that may affect spending habits. The Company's restaurants compete directly and indirectly with a large

5

number of national and regional restaurant establishments, as well as with independently owned restaurants that offer moderately priced steak, chicken, salads and other menu items. The Company relies on innovative concept development, marketing techniques and promotions and competes with other restaurants in terms of perceived value, variety and quality of menu items, service and price. There are other companies engaged in restaurant operations and franchising programs similar to the Company's that have greater financial resources and a higher volume of sales than the Company.

Environmental Matters

        Federal and state environmental regulations have not had a material effect on the Company, but increasingly more stringent and unique requirements of various local government bodies with respect to zoning, land use and environmental factors sometimes impact construction of new restaurants or remodels of existing restaurants.

Employees

        At April 30, 2004, the Company had approximately 3,100 employees in the United States and approximately 5,200 employees in Australia. The majority of the Company's employees in Australia are covered by union contracts that are negotiated between the Company and national and state governments and applicable unions on behalf of all hourly restaurant employees. Labor relations with employees have traditionally been good. The majority of the Company's employees work part-time and are paid on an hourly basis.

Government Regulation

        Each of the Company's domestic and international restaurants is subject to various federal, state, local and Australian laws where applicable, and regulations governing, among other things health, sanitation, environmental matters, safety, the sale of alcoholic beverages, wages, hiring and employment practices. The Company believes it has all material licenses and approvals required to operate its business, and that its operations are in material compliance with applicable laws and regulations.

Inflation

        Increases in interest rates and the costs of labor, food, utilities and construction can significantly affect the Company's operating results. Management believes that the current practices of maintaining adequate operating margins through an appropriate combination of menu price increases and cost controls, careful management of working capital and evaluation of property and equipment needs are its most effective means of dealing with inflation.

Other

        The Company is aware of industry concerns regarding the potential impact of possible further increases in the minimum wage, increases in utility costs, the marketing of prepared foods by grocery and convenience stores, customer resistance to increases in menu prices, the growth of home delivery of prepared foods, increased concerns over the nutritional value of foods, compliance with existing or proposed health and safety legislation, changes in domestic and international economies, threats regarding potential terrorist activities and other similar contingencies. The Company is unable to predict the possible impact of such factors on its business. However, in the past, the Company has been able to address these changes in the business climate by passing certain associated costs along to its customers. These changes have typically impacted all restaurant companies.

6

Risks Associated With Food-Borne Illnesses

        As a participant in the food service industry, the Company is exposed to a continuing risk of liability arising from outbreaks of E.coli and other food-borne illnesses alleged to be caused by food contaminated by its suppliers or by personnel employed at its franchised or Company-operated restaurants. Although the Company believes that neither of the two such incidents referenced in Note 8—Commitments and Contingencies, to the Consolidated Financial Statements, will have a long-term material adverse impact on the Company's financial condition or results of operations, there can be no assurance to that effect or that this will be the case in the event a similar incident occurs in the future. In the event of any such future incident, there may be a short-term and long-term material adverse impact on the Company's financial condition and/or results of operations.

Risks Associated With Foreign Operations

        The Company operates Sizzler® restaurants in several Australian states and one in New Zealand, as well as KFC® restaurants in Queensland and one KFC® restaurant in New South Wales, Australia. The Company also licenses the right to operate Sizzler® restaurants to franchisees in a number of countries and U.S. territories. Possible risks associated with such operations include fluctuations in currency exchange rates, higher rates of inflation, changes in tax rates and tax structures and foreign political and economic conditions.

Company Website and Information

        The Company's website address is www.wrconcepts.com. The Company makes available, free of charge, through its website, its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to these reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. These reports can be found under the "SEC Filings" section of the Company's website. The information contained on the Company's website is not incorporated by reference into this annual report on Form 10-K.

Whistle Blower Hotline

        The Company has instituted the Whistle Blower hotline as mandated by the Sarbanes-Oxley Act of 2002. The toll-free phone number for the Whistler Blower hotline is 866-607-5884 and may also be found on the Company's website at www.wrconcepts.com. All reports to the Whistle Blower hotline are transcribed and forwarded to the Chairman of the Audit Committee for investigation.

7

Item 2: Properties

        At April 30, 2004 the Company operated and franchised 445 locations in 17 states and 10 countries and territories (including the USA) as illustrated below:

8

        The Company operates substantially all of its restaurants subject to real property leases. The leases are generally for primary terms of 5 to 20 years, with two or three five-year renewal options and expire on various dates up to the year 2027. There are 11 franchised restaurants located on property owned or leased by the Company. Periodically the Company reviews the appropriateness of owning versus leasing restaurant locations.

        In addition to the restaurant locations set forth above, the Company leases office space in Sherman Oaks, California that serves as its corporate headquarters. The Company also leases regional offices in San Diego, California and Queensland, Australia to support Pat & Oscar's® and its international operations, respectively.

Item 3: Legal Proceedings

        The Company is a party to certain litigation arising in the ordinary course of business which, in the opinion of management, should not have a material adverse effect upon either the Company's consolidated financial position or results of operations. The following is a summary of the more significant cases filed against the Company:

        Two subsidiaries of the Company were named as defendants in 12 lawsuits arising out of an E.coli incident at two Sizzler® franchised locations in Milwaukee, Wisconsin in July 2000. The plaintiffs sought monetary damages for sickness, and in one case, death as a result of consuming allegedly contaminated food at the two restaurants. The Company's former meat supplier, Excel Corporation ("Excel") and the Company's former franchisee, E&B Management Company, and E&B Management Company's principals were named defendants in some of the cases. The Company filed cross-claims against its franchisee and Excel. Approximately 130 claims have been resolved and all but two cases have been settled. On June 19, 2002, the trial court issued an order dismissing all claims against Excel, including those filed by the Company and the plaintiffs. On May 13, 2003, that order was reversed in a unanimous decision by a three-judge panel of the Court of Appeals of the State of Wisconsin, and as a result all claims filed by the Company and the plaintiffs were reinstated. On June 12, 2003, Excel filed a Petition For Review in the Supreme Court of Wisconsin to appeal the decision of the court of appeals. The petition was denied on September 12, 2003. On December 11, 2003, Excel filed a Petition

9

For A Writ Of Certiorari in the United States Supreme Court, which was denied on March 22, 2004. The Company believes that the resolution of all claims associated with the Milwaukee E.coli incident will not have a material adverse impact on the Company's financial position or results of operations.

        On October 3, 2001, upon the petition of the Insurance Commissioner of the Commonwealth of Pennsylvania, Reliance Insurance Company ("Reliance") was declared insolvent and became subject to Pennsylvania state law liquidation proceedings. Reliance was the Company's primary general liability and workers' compensation carrier, during the period May 1, 1997 through May 1, 1999, and was the Company's first level excess general liability carrier with respect to claims against the Company arising out of the July 2000 E.coli incident in Milwaukee. As a result of the legal proceedings affecting Reliance, the Company's ability to recover funds under its liability policies with this carrier, whether relating to the Milwaukee incident or otherwise, may be substantially limited. However, based on the amount of its primary general liability coverage under policies with other carriers, as well as anticipated results of the pending litigation in Milwaukee and other claims, the Company does not believe that Reliance's liquidation proceedings are likely to have a material adverse impact on the Company's financial position or results of operations.

        On June 1, 2001, The Independent Insurance Co., the Company's primary general liability insurance carrier in Australia for the period May 1, 2000 through April 30, 2001, commenced liquidation proceedings. Based upon an assessment of the pending and possible future claims which may be filed over a five-year period, the Company's ability to recover funds under its general liability policies with this carrier may be substantially limited. Nevertheless, the Company does not believe that The Independent Insurance Co.'s liquidation is likely to have a material impact on the Company's financial position or results of operations.

        John Sarkisian, former CEO of the Company's Pat & Oscar's division, filed a lawsuit against the Company and its President/CEO alleging wrongful termination, breach of contract, fraud and misrepresentation relating to the Company's acquisition of Pat & Oscar's. The lawsuit sought monetary damages, injunctive relief and rescission of the purchase agreement. On August 22, 2003, a California Superior Court judge in San Diego County entered a judgment in favor of the Company on all claims at issue. On August 26, 2003, Mr. Sarkisian filed a notice of appeal and on November 11, 2003, the parties entered into a settlement agreement which provided for dismissal of the plaintiff's appeal, thereby permitting the Court's judgment to become final. As a result, the Company's purchase of the plaintiff's 12.8 percent interest in Pat & Oscar's under the Call Option Agreement between Mr. Sarkisian and the Company was completed on November 13, 2003 based on the option exercise price specified in the original agreement with Mr. Sarkisian.

        On October 7, 2003, the Company was notified by various health department officials that Pat & Oscar's was the focal point of an investigation into a potential outbreak of E.coli at certain of its restaurants. Approximately 45 cases of E.coli were confirmed by the health departments. Pat & Oscar's has been named as a defendant in several lawsuits filed by patrons who allegedly became ill with E.coli from consuming salad at Pat & Oscar's® restaurants in San Diego and Orange Counties. The lawsuits, one of which was filed as a class action, also name Pat & Oscar's produce distributor, F.T. Produce, Inc. ("Family Tree") and Gold Coast Produce ("Gold Coast"), the processor of lettuce supplied to Pat & Oscar's® restaurants. Family Tree's insurance company has accepted tender of the Company's defense pursuant to an insurance certificate issued by Family Tree's insurance company naming the Company and Pat & Oscar's as additional insureds. The Company does not believe that the resolution of this case or the claims of any other individuals who became ill as a result of the alleged E.coli incident at Pat & Oscar's will have any material impact on the Company's financial position or results of operations. (See Note 17—E.coli Incident, to the Consolidated Financial Statements.)

10

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

        None.

Executive Officers of the Registrant as of June 30, 2004

The following are the Executive Officers of the Company as of June 30, 2004:

11

12

PART II

Item 5: Market For Registrant's Common Stock and Related Stockholder Matters

Market Information

        The Company's common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "SZ." As of June 30, 2004, the number of record holders of the Company's common stock was 1,598. The high and low closing sales prices for a share of the Company's common stock as reported on the NYSE, by quarter, for the past two fiscal years are as follows:

Common Stock Dividends

        The Company has not declared any cash dividends during the three most recent fiscal years and does not expect to pay any dividends in the foreseeable future. Future dividends, if any, will depend on a number of factors, including earnings, financial position, capital requirements and other relevant factors.

Equity Compensation Plans

        The table below sets forth information with respect to the securities authorized for issuance under the Company's equity compensation plans that were in effect April 30, 2004:

13

Item 6: Selected Financial Data

        The following table sets forth consolidated financial data with respect to the Company and should be read in conjunction with the consolidated financial statements, including the notes thereto, and Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented elsewhere herein.

(a)

Includes revenues of all franchised locations as reported by franchisees and Company-owned locations.

(b)

Includes a pre-tax charge of $12.1 million or $0.42 per share, of which $5.5 million was related to the sale and leaseback of certain properties in Australia and $6.6 million which was the final reorganization charge. In addition to these charges, the Company recorded an income tax benefit of $5.9 million or $0.20 per share.

14

Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

        The following discussion should be read in conjunction with Item 6: "Selected Financial Data," the Consolidated Financial Statements, including the notes thereto, and other financial information appearing elsewhere herein.

        The Company's revenues are generated from four primary segments: (1) domestic Company-operated Sizzler® restaurant sales and franchise revenues (including franchise fees, royalties and rental income), (2) international Company-operated Sizzler® restaurant sales and franchise revenues, (3) revenues from international KFC® franchises operated by the Company and (4) domestic Company-operated Pat & Oscar's® restaurant sales.

        During fiscal year 2004, the Company opened two new Pat & Oscar's® locations in Southern California and closed its one location in Phoenix, Arizona due to low sales volumes caused, in part, by poor site characteristics. The Company currently operates Pat & Oscar's® in five counties in Southern California. The Company plans to open two to four additional Pat & Oscar's® in fiscal year 2005 and will focus its expansion in Southern California with an emphasis on areas outside San Diego County. The Company continued its strategy of providing high quality food in a fast-casual setting served by employees who are trained in a culture that emphasizes cheerful service and the value of its employees and guests. However, the division experienced significant declines in same store sales as a result of an E.coli incident that occurred in the second quarter of fiscal year 2004 (see Notes 8—Commitments and Contingencies and 17—E.coli Incident, to the Consolidated Financial Statements.) The Company also continued its equity plan for the division's regional and restaurant management. See Note 16—Market and Operating Partnerships, to the Consolidated Financial Statements.

        The Company continued to implement its program to update the exterior façade and began a new interior remodel program at its U.S. Sizzler® restaurants during fiscal year 2004. The Company substantially completed remodels at 13 Company-operated restaurant locations in fiscal year 2004. The Company also continued its franchise reinvestment program whereby its franchisees are implementing the décor and menu upgrades implemented by the Company. At the end of fiscal year 2004, approximately 60.0 percent of U.S. Sizzler® franchisee locations had completed full restaurant remodels that included an interior remodel and an updated exterior façade. During fiscal year 2004, the Company signed an area development agreement with a new Sizzler® franchisee to open five restaurants in the Las Vegas area over the next three years and another area development agreement with an existing Sizzler® franchisee to open five restaurants in Puerto Rico over the next five years. In addition, during fiscal year 2004, the Company reached a strategic decision to grow the Sizzler® brand in the United States primarily through franchising. As part of the initiative the Company identified 11 Company-owned locations in California that it plans to transition to existing or new franchisees. The Company is continuing its plan to transition seven New York area restaurants to existing or new franchisees, or to third parties, and expects this transition to be completed early in fiscal year 2005. See Note 20—Restaurant Assets Held for Sale, to the Consolidated Financial Statements.

        Management is continuing its plan to reposition the Sizzler® concept in Australia by implementing the upgraded food quality and cooking methods consistent with those implemented in the Company's domestic operations. The Company is presently testing an interior remodel that provides a softer, warmer grill concept feel. During fiscal year 2004, the Company completed one remodel. The Company plans to complete remodels for eight restaurants and relocate one restaurant in fiscal year 2005.

        During fiscal year 2004, the Company opened one new KFC® restaurant. The Company has also continued its facilities upgrade program for its KFC® locations and has completed three remodels, one relocation and two scrape and rebuilds that include "face-to-face" drive through window operations.

15

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management evaluates its estimates and judgments, including those related to its most critical accounting policies, on an ongoing basis. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Franchise revenues

        Franchise revenues consist of royalties and franchise fees. The Company recognizes royalties on a franchisee's sales in the period in which the sales occur. The Company also receives a franchise fee for each restaurant that a franchisee opens. The recognition of franchise fees is deferred until the Company has performed substantially all of its related obligations as a franchisor, typically when a restaurant opens.

Property and equipment

        The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. The Company considers a history of operating losses and insufficient future revenue potential to be its primary indicators of potential impairment. Assets are grouped and evaluated for impairment at the lowest level, typically the restaurant level for which there are identifiable cash flows independent of the cash flows of other groups of assets. The Company deems an asset to be impaired if a forecast of undiscounted projected future operating cash flows directly related to the asset, including disposal value, if any, is less than its carrying amount. Projected future operating cash flows are based on budgeted future operating results and forecast estimates. Considerable management judgment is necessary to estimate projected future operating cashflows. Accordingly, if actual results fall short of such estimates, significant future impairments could result.

Goodwill

        In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," intangible assets with finite useful lives are amortized; estimated useful lives range from 10 to 40 years. Goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment annually or more frequently if events or changes in circumstances indicate that an asset might be impaired. SFAS No. 142 requires a two-step process for testing impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. If an impairment is indicated, then the fair value of the reporting unit's goodwill is determined by allocating the unit's fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The amount of impairment for goodwill and other intangible assets is measured as the excess of its carrying value over its fair value. The Company has established its reporting units based on its current reporting structure and all recognized assets, liabilities and goodwill have been

16

assigned to these reporting units. Considerable management judgment is necessary to estimate fair value. Accordingly, actual results could vary from such estimates.

Income taxes

        At April 30, 2004, the book value of the Company's deferred income tax assets, prior to considering any valuation allowance, was approximately $62.3 million, of which approximately $56.2 million was domestic. The principal component of the domestic deferred income tax assets was comprised of federal and state net operating loss carryforwards. The provisions of SFAS No. 109, "Accounting for Income Taxes," require a valuation allowance when in management's judgment, based upon currently available information and other factors, it is more likely than not that all or a portion of the deferred income tax asset will not be realized. The Company bases its determination of the need for a valuation allowance on an on-going evaluation of current information including, among other things, estimates of future earnings in different tax jurisdictions and the expected timing of deferred income tax asset reversals. A charge or credit to income tax expense is made for any adjustments to the valuation allowance in the period in which these determinations are made. During the year ended April 30, 2004, the valuation allowance was reduced by approximately $0.8 million, an amount that resulted in the net domestic deferred tax asset remaining at $7.7 million. At April 30, 2004, the Company's valuation allowance against its domestic deferred income tax assets was approximately $48.5 million.

        The Company believes that the determination to record a valuation allowance to reduce deferred income tax assets is a critical accounting estimate because it is based on an estimate of future taxable income in the United States, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material.

Self-Insurance

        The Company self-insures a significant portion of its workers compensation, general liability and health insurance plans. The full extent of certain claims, in many cases, may not become fully determined for several years. The Company, therefore, estimates the potential obligation for liabilities which have been incurred as well as those which have been incurred but not yet reported based upon historical data and experience, and utilizes an outside consulting firm to assist the Company in developing these estimates. Although management believes that the amounts accrued for these obligations are sufficient, any significant increase in either the number of claims and/or costs associated with claims made under these plans could have a material adverse effect on the Company's financial results.

Supplemental Executive Retirement Plan

        The Company terminated its supplemental executive retirement plan ("SERP") but continues to remain obligated under the SERP for 11 former employees. The Company accounts for the SERP under SFAS No. 87 "Employers' Accounting for Pensions." The Company makes significant assumptions used in determining the net pension cost and benefit obligation. Significant assumptions used include discount rates and mortality estimates, which are determined with the assistance of an outside consulting firm. Although management believes that the amounts accrued for these benefit obligations are sufficient, any changes in these assumptions could have a material adverse effect on the Company's financial results. In connection with the SERP, the Company has several life insurance policies covering certain former employees including those in the SERP. See Note 1—Summary of Significant Accounting Policies (Cash Surrender Value), to the Consolidated Financial Statements.

17

Market and Operating Partnerships

        During fiscal year 2003, Pat & Oscar's® began offering equity interests to its regional and restaurant management (each participant, an "Equity Partner"). This equity plan was established to create and promote a strong sense of ownership among its key managers and enhance the development, operation and performance of Pat & Oscar's. Each Equity Partner, generally a regional market manager or a restaurant general manager, is allowed to purchase an ownership interest in a limited liability company that operates and owns or leases substantially all of the restaurant assets from Pat & Oscar's®. The ownership interest purchased by the Equity Partner is based on fair market value and ranges from two percent to eight percent of the partnership, which includes only the restaurants that the Equity Partner oversees. The Equity Partner is restricted from selling the ownership interest for an initial period of five years. At the end of the initial term the Equity Partner has the option to continue operating on a month-to-month basis, renew the agreement for another five years and purchase an additional one to two percent interest or sell their interest to Pat & Oscar's at the then prevailing fair market value. Fair market value will be determined in accordance with reasonable and consistent valuation methods and procedures and will consider among other things such factors as the restaurant's remaining lease life, historic profitability and continued profitability of the restaurant(s). The price paid by Pat & Oscar's to repurchase the ownership interest, at the option of the Equity Partner, subject to the Company's approval, may be made either in the form of a note, the Company's common stock or 50 percent cash and 50 percent Company common stock.

        There is no public market for these interests, therefore the fair market value determinations are subjective and require the use of estimates for which significant judgments are required. Periodically, the Company may engage outside experts to assess the reasonableness of the methodology the Company uses to estimate fair market value.

        During fiscal year 2004, the initial investment made by three Equity Partners was offset by operating losses which were allocated to the Equity Partners (resulting, in part, from the E.coli incident, see note 17—E.coli Incident, to Consolidated Financial Statements). As a result, all losses incurred subsequent to the reduction of a Equity Partner's investment to zero were allocated to the Company.

18

RESULTS OF OPERATIONS

        The following table sets forth, for the periods indicated, the Consolidated Statements of Income of the Company expressed as a percentage of total revenues.

RESULTS OF OPERATIONS FOR THE FIFTY-THREE WEEKS ENDED APRIL 30, 2004 VS. FIFTY-TWO WEEKS ENDED APRIL 30, 2003

        Consolidated revenues were $347.2 million in fiscal year 2004 compared to $293.5 million in fiscal year 2003, an increase of $53.7 million or 18.3 percent. The increase is due to a $56.3 million increase in revenue from the international division partially offset by declines of approximately $2.6 million from the domestic division. The international division increase was primarily due to a 24.3 percent increase in the average Australian dollar exchange rate that represents approximately $39.2 million in revenues, along with the same store sales increases from KFC and Sizzler International divisions and the addition of one new KFC® restaurant. The impact on consolidated revenue for fiscal year 2004 of the additional week of operations was approximately $6.8 million. These increases were partially offset by a decrease in domestic revenues. Sizzler U.S. revenues were lower due to having seven fewer Company-owned restaurants open (of which five were converted to franchise operations) and to a decline in same store sales at Company-operated restaurants. There was one additional Pat & Oscar's® restaurant opened compared to the prior year, but the revenue increase was partially offset by significant declines in the same store sales following the E.coli incident and related news stories (see Notes 8—Commitments and Contingencies and 17—E.coli Incident, to the Consolidated Financial Statements.)

        The Company anticipates that as a result of this E.coli incident, Pat & Oscar's will continue to experience weakened sales and profitability at least through the first half of fiscal year 2005 in an amount not presently quantifiable. As of the date of this report's filing, weekly same store sales

19

subsequent to the end of fiscal year 2004 were running approximately 10.0 to 12.0 percent below prior year. Nevertheless, the Company does not believe these sales decreases will have a long-term material adverse impact on the Company's financial position, results of operations or cash flows. Although the Compa