SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
| X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 6, 2000
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 1-10711
SIZZLER INTERNATIONAL, INC.
________________________________________________________________________________
(Exact Name of Registrant as specified in its Charter)
Delaware 95-4307254
________________________________________________________________________________
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6101 West Centinela Avenue, Suite 200, Culver City, California 90230
________________________________________________________________________________
(Address of Principal Executive Offices, including zip code)
(310) 568-0135
____________________________________________________________
(Registrant's telephone number, including area code)
____________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 17, 2000
- ---------------------------- ------------------------------------
Common Stock $0.01 Par Value 28,066,706 shares
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
February 6, April 30,
ASSETS 2000 1999
- -------------------------------------------------------------- ------------ ---------------
(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 44,157 $ 14,691
Receivables, net of reserves of $1,862 at
February 6, 2000 and $1,726 at April 30, 1999 2,060 3,546
Inventories 4,043 4,346
Prepaid expenses and other current assets 1,163 1,669
- -------------------------------------------------------------- ------------ -------------
Total current assets 51,423 24,252
- -------------------------------------------------------------- ------------ -------------
Property and equipment, net 43,602 77,836
Property held for sale, net 10,989 711
Long-term notes receivable, net of reserves of $528
at February 6, 2000 and $508 at April 30, 1999 1,403 1,553
Deferred income taxes 7,877 795
Intangible assets, net of accumulated amortization of
$937 at February 6, 2000 and $887 at April 30, 1999 1,980 2,104
Other assets, net of accumulated amortization and reserves
of $10 at February 6, 2000 and $6 at April 30, 1999 1,505 1,418
- -------------------------------------------------------------- ------------ -------------
Total assets $ 118,779 $ 108,669
============================================================== ============ =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
February 6, April 30,
LIABILITIES AND STOCKHOLDERS' INVESTMENT 2000 1999
- -------------------------------------------------- ------------ ---------
(Unaudited) (Audited)
Current Liabilities:
Current portion of long-term debt $ 5,629 $ 5,898
Accounts payable 6,998 7,892
Other current liabilities 9,772 8,853
Income taxes payable 4,625 2,449
--------- ---------
Total current liabilities 27,024 25,092
--------- ---------
Long-term Liabilities:
Long-term debt, net of current portion 24,366 26,918
Other liabilities 17,686 3,916
--------- ---------
Total long-term liabilities 42,052 30,834
--------- ---------
Stockholders' Investment:
Capital stock -
Preferred, authorized 1,000,000 shares, $5 par value;
no shares issued - -
Common, authorized 50,000,000 shares, $0.01 par value;
28,773,406 shares issued and 28,066,706 shares
outstanding at February 6, 2000 and 28,797,828 shares
issued and outstanding at April 30, 1999 288 288
Additional paid-in capital 278,385 278,365
Accumulated deficit (222,473) (222,191)
Treasury stock, 706,700 shares at cost at February 6, 2000
and none at April 30, 1999 (1,948) -
Accumulated other comprehensive income (4,549) (3,719)
--------- ---------
Total stockholders' investment 49,703 52,743
--------- ---------
Total liabilities and stockholders' investment $ 118,779 $ 108,669
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
Forty Weeks Ended
-----------------
February 6, February 7,
2000 1999
- -------------------------------------------------------- ----------- -----------
(Unaudited)
Revenues
Restaurants $ 177,878 $ 165,853
Franchise operations 6,295 5,841
- -------------------------------------------------------- ------------ ------------
Total revenues 184,173 171,694
- -------------------------------------------------------- ------------ ------------
Costs and Expenses
Cost of sales 65,376 61,249
Labor and related expenses 48,554 45,568
Other operating expenses 38,055 36,426
Depreciation and amortization 6,884 7,459
Non-recurring items 12,087 -
General and administrative expenses 15,465 12,728
- -------------------------------------------------------- ------------ ------------
Total operating costs 186,421 163,430
- -------------------------------------------------------- ------------ ------------
Interest expense 2,778 2,656
Investment income (896) (577)
- -------------------------------------------------------- ------------ ------------
Total costs and expenses 188,303 165,509
- -------------------------------------------------------- ------------ ------------
Income (loss) before income taxes (4,130) 6,185
- -------------------------------------------------------- ------------ ------------
Provision (benefit) for income taxes (3,848) 1,308
- -------------------------------------------------------- ------------ ------------
Net income (loss) $ (282) $ 4,877
======================================================== ============ ============
Basic and diluted earnings (loss) per share $ (0.01) $ 0.17
======================================================= ============= ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
Sixteen Weeks Ended
-------------------
February 6, February 7,
2000 1999
- -------------------------------------------------------- -------------- --------------
(Unaudited)
Revenues
Restaurants $ 69,828 $ 66,147
Franchise operations 2,077 1,955
- -------------------------------------------------------- ----------- ------------
Total revenues 71,905 68,102
- -------------------------------------------------------- ----------- ------------
Costs and Expenses
Cost of sales 25,666 24,728
Labor and related expenses 19,177 18,380
Other operating expenses 14,783 15,238
Depreciation and amortization 2,652 3,048
Non-recurring items 12,087 -
General and administrative expenses 6,713 4,228
- -------------------------------------------------------- ----------- ------------
Total operating costs 81,078 65,622
- -------------------------------------------------------- ----------- ------------
Interest expense 1,090 952
Investment income (516) (217)
- -------------------------------------------------------- ----------- ------------
Total costs and expenses 81,652 66,357
- -------------------------------------------------------- ----------- ------------
Income (loss) before income taxes (9,747) 1,745
- -------------------------------------------------------- ----------- ------------
Provision (benefit) for income taxes (4,896) 533
- -------------------------------------------------------- ----------- ------------
Net income (loss) $ (4,851) $ 1,212
======================================================== =========== ============
Basic and diluted earnings (loss) per share $ (0.17) $ 0.04
======================================================== ============== ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Forty Weeks Ended
------------------------------
February 6, February 7,
2000 1999
- ------------------------------------------------------------------------ ------------- --------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net income (loss) ($282) $4,877
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,884 7,459
Deferred income taxes (5,629) 218
Provision for bad debts 176 229
Non-recurring items 12,087 -
Other 807 103
Changes in operating assets and liabilities:
Receivables 1,423 (779)
Inventories 287 (68)
Prepaid expenses and other current assets (36) 58
Accounts payable (877) 933
Accrued liabilities 3,453 (3,194)
Income taxes payable 608 937
- ------------------------------------------------------------------------ ------------- --------------
Net cash provided by operating activities 18,901 10,773
- ------------------------------------------------------------------------ ------------- --------------
INVESTING ACTIVITIES
Additions to property and equipment (4,826) (6,451)
Disposal of property and equipment 23,100 2,192
Other, net (23) (443)
- ------------------------------------------------------------------------ ------------- --------------
Net cash used in investing activities 18,251 (4,702)
- ------------------------------------------------------------------------ ------------- --------------
FINANCING ACTIVITIES
Reduction of long-term debt (1,711) (5,556)
Payment of allowed claims pursuant to
the reorganization plan (4,047) (5,007)
Repurchase of common stock (1,948) -
Other, net 20 (66)
- ------------------------------------------------------------------------ ------------- --------------
Net cash used in financing activities (7,686) (10,629)
- ------------------------------------------------------------------------ ------------- --------------
Net increase (decrease) in cash and cash equivalents 29,466 (4,558)
- ------------------------------------------------------------------------ ------------- --------------
Cash and cash equivalents at beginning of period 14,691 21,167
- ------------------------------------------------------------------------ ------------- --------------
Cash and cash equivalents at end of period $44,157 $16,609
======================================================================== ============= ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 6, 2000
1. General:
The condensed consolidated financial statements include Sizzler
International, Inc. and its wholly owned subsidiaries ("Sizzler" or the
"Company"). The financial statements include the Company's worldwide
operation of the Sizzler Family Steakhouse concept, including company-owned
outlets, activity related to the development and operation of Sizzler
franchises, and the operation of Kentucky Fried Chicken ("KFC") franchises
in Queensland, Australia. References to the Company throughout these Notes
to Financial Statements may be made using the first person notations of
"we" or "us."
The condensed consolidated financial statements have been prepared without
audit in accordance with generally accepted accounting principles. Pursuant
to the rules and regulations of the Securities and Exchange Commission,
certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been omitted or condensed. In our
opinion, the condensed interim consolidated financial statements include
all adjustments necessary for a fair presentation of financial position and
results of operations for the periods presented. The results of operations
for the periods presented should not necessarily be considered indicative
of operations for the full year. Certain reclassifications have been made
to prior period financial statements in order to conform to the current
period presentation. It is recommended that these condensed consolidated
financial statements be read in conjunction with the financial statements
and the notes thereto included in the Company's 1999 annual report on Form
10-K.
2. The 1996 Restructuring:
As a result of continued domestic operating losses in the early 1990's the
Company's management enacted a restructuring strategy designed to return
its U.S. operations to profitability. In June 1996, the Company and four
subsidiaries filed for protection from creditors under Chapter 11 of the
federal Bankruptcy Code. The plans of reorganization were confirmed by the
Bankruptcy Court and all plans became effective by September 23, 1997.
Of the five companies that filed Chapter 11, final decrees have been
entered in all of the cases except the case involving Sizzler Restaurants
International, Inc., predecessor of Sizzler USA Restaurants, Inc., which
remains open with approximately three non-insured claims pending.
7
After an assessment of all the costs associated with the reorganization,
management has determined that the original reorganization charge of $108.9
million was lower than the final cost is now expected to be. During the
third quarter, an additional charge of $6.6 million was recorded. The final
payment for pending claims was made to the creditor trust in January 2000,
and the company does not anticipate any further cash outlay.
3. Earnings Per Share:
The following table sets forth the computation of basic and diluted EPS:
Sixteen weeks ended Forty weeks ended
--------------------------- ---------------------------
February 6, February 7, February 6, February 7,
In thousands, except EPS 2000 1999 2000 1999
---- ---- ---- ----
Numerator for basic and diluted EPS -
Net income (loss) $ (4,851) $ 1,212 $ (282) $ 4,877
============ =========== ========== ===========
Denominator:
Denominator for basic EPS - weighted average
shares of common stock outstanding 28,598 28,805 28,723 28,819
Effect of dilutive stock options 305 64 242 57
Denominator for diluted EPS - adjusted ------------ ---------- --------- -----------
weighted average shares outstanding 28,903 28,869 28,965 28,876
============ =========== ========== ===========
Basic and diluted earnings (loss) per share $ (0.17) $ 0.04 $ (0.01) $ 0.17
============ =========== ========== ===========
4. Comprehensive Income:
In fiscal year 1999, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". Other
comprehensive income may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
investments in equity securities. Comprehensive income for the forty weeks
ended February 6, 2000 and February 7, 1999 is as follows (in thousands):
8
Sixteen weeks ended Forty weeks ended
---------------------------- ---------------------------
February 6, February 7, February 6, February 7,
2000 1999 2000 1999
---- ---- ---- ----
Net Income (loss) $ (4,851) $ 1,212 $ (282) $ 4,877
Foreign currency translation
adjustments (no tax effect) 254 555 830 (203)
--------- -------- ------- --------
Total comprehensive income (loss) $ (4,597) $ 1,767 $ 548 $ 4,674
========= ========= ======== =========
5. Segment Information:
The Company's reportable segments are based on geographic area and product
type. Sizzler USA consists of all domestic and Latin American Sizzler
restaurant and franchise operations. Sizzler International consists of all
foreign Sizzler restaurants and franchise operations. KFC consists of KFC
restaurants in Australia. Corporate and other includes any items not
included in the reportable segments listed above as well as the non-
recurring items described below in Note 6. The effect of all intercompany
transactions are eliminated when computing revenues and earnings before
interest and taxes.
The corporate and other component of earnings before interest and taxes
represents indirect corporate selling, and general and administrative
expenses prior to being allocated to the operating segments.
Sixteen weeks ended Forty weeks ended
---------------------------------- ------------------------------------
February 6, February 7, February 6, February 7,
2000 1999 2000 1999
---- ---- ---- ----
Revenues (in thousands):
- -----------------------
Sizzler - USA $ 29,248 $ 28,529 $ 79,131 $ 77,248
Sizzler - International 13,561 13,249 33,190 30,902
KFC 29,096 26,324 71,852 63,544
---------- ---------- ---------- ---------
Total revenues $ 71,905 $ 68,102 $ 184,173 $ 171,694
========== ========== ========== =========
Earnings (loss) before Interest and Taxes (in thousands):
- ---------------------------------------------------------
Sizzler - USA $ 2,426 $ 1,483 $ 7,713 $ 6,185
Sizzler - International 869 569 1,804 1,015
KFC 3,509 2,516 8,051 6,429
Corporate and other (15,977) (2,088) (19,816) (5,365)
---------- ---------- ---------- ---------
Total earnings (loss) before interest and taxes $ (9,173) $ 2,480 $ (2,248) $ 8,264
========== ========== ========== =========
9
6. Non-recurring items:
Results for the quarter include two non-recurring items. During the
quarter the Company completed the sale and leaseback of 43 of its 67
Australian KFC and Sizzler restaurant properties. The Company realized US
$25 million in cash from the transactions that closed during the quarter.
In addition, in accordance with Statement of Financial Accounting Standard
No. 28 ("SFAS 28"), "Accounting for Sales with Leasebacks", the Company has
immediately recognized a $5.5 million loss on the transaction and has
deferred an $8.8 million gain. The gain will be recognized over the life of
the leases which average 8 years. The Company does not anticipate any
further losses in connection with the anticipated sale and leaseback of its
remaining Australian properties.
Also during the quarter the Company completed an evaluation of the
remaining financial matters related to the 1996 restructuring. As a result
of this evaluation that included an extensive review of the numerous claims
filed during the reorganization and other related costs, the Company
determined that the original $108.9 million estimate was lower that the
final expected cost by $6.6 million. Therefore, an additional $6.6 million
charge was recorded. Because the final payment was made to the creditor
trust in January, 2000 the Company does not expect any further cash outlay
related to the reorganization.
7. Income Tax Benefit:
An Income tax benefit of $5,890,000 was recorded during the current quarter
because, in accordance with Statement of Accounting Standard No. 109 ("SFAS
109), "Accounting For Income Taxes" Sizzler has demonstrated that it is
more likely than not capable of realizing the benefits of a portion of its
$134 million net operating loss (NOL) carryforward. This has been
demonstrated through 12 consecutive quarters of operating profitability. In
addition, Sizzler has the $8.8 million of deferred gain related to the
sale1 and leaseback.
10
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
SIXTEEN WEEKS ENDED FEBRUARY 6, 2000 VERSUS FEBRUARY 7, 1999
- ------------------------------------------------------------
CONSOLIDATED OPERATIONS
- -----------------------
Consolidated revenues for the quarter ended February 6, 2000 were $71,905,000
compared to $68,102,000 for the quarter ended February 7, 1999, an increase of
$3,803,000 or 5.6 percent. Approximately half of the increase is due to same
store sales increases at KFC primarily driven by higher guest counts. Another
17.0 percent of the increase is due to same store sales increases at Sizzler USA
primarily driven by higher guest counts. Approximately 28 percent, or $1,077,000
of the increase is due to a 2.6 percent increase in the Australian dollar
exchange rate. Due to recent fluctuations in the Australian dollar exchange rate
we cannot determine whether we will realize a similar benefit from favorable
exchange rates in the fourth quarter.
Company-operated restaurant sales and franchised restaurant revenues (including
franchise fees, royalties and rental income) represent the Company's primary
sources of revenue. The Company has three reportable segments: U.S. Sizzler
operations; International Sizzler operations; and KFC operations.
The following table shows the increase in Company-operated same store sales over
the prior year.
FY 1999 FY 2000
--------------------------------- -------------------------
QTR 1 QTR 2 QTR 3 QTR 4 QTR 1 QTR 2 QTR 3
----- ----- ----- ----- ----- ----- -----
SIZZLER
- -------
U.S.A. 7.2% 7.4% 6.5% 3.3% 2.9% (0.2%) 2.9%
AUSTRALIA
(Based on A$) (5.3%) (0.3%) 2.2% 0.8% 4.3% 2.0% (0.6%)
KFC
- ---
(Based on A$) 1.3% (0.8%) (1.2%) 10.5% 2.8% 6.4% 6.4%
Consolidated operating expenses, excluding the non-recurring items, for the
quarter ended February 6, 2000 were $68,991,000 compared to $65,622,000 for the
quarter ended February 7, 1999, an increase of $3,369,000 or 5.1 percent.
Approximately $749,000 of the increase is due to a 2.6 percent increase in the
Australian dollar
11
exchange rate. The remaining increase is primarily due to increases in sales
volumes and to increases in prime costs from commodity price increases and to
additional labor costs incurred to increase guest service. We also experienced
an increase in rent expense due to the sale and leaseback of certain properties
in Australia. This increase is partially offset by a reduction in depreciation
and income tax expense.
Interest expense was $1,090,000 in the current quarter compared to $952,000 in
the same period of the prior year, an increase of $138,000, or 14.5 percent.
Interest expense is primarily related to the Company's debt with Westpac and to
a lesser extent, the Company's executive supplemental plan covering ten former
and one active employee. Interest income was $516,000 in the current quarter
compared to $217,000 in the same period of the prior year, an increase of
$299,000 reflecting higher cash balances primarily associated with the sale and
leaseback transaction.
Income tax expense, excluding a $5,890,000 tax benefit was $994,000 in the
current quarter compared to $533,000 in the same period of the prior year, an
increase of $461,000 due primarily to an increase in Australian taxable income
relating to the Company's International operations. The $5,890,000 income tax
benefit was recorded this quarter because, in accordance with Statement of
Accounting Standard No. 109 ("SFAS 109), "Accounting For Income Taxes" Sizzler
has demonstrated that it is more likely than not capable of realizing the
benefits of a portion of its $134 million net operating loss (NOL) carryforward.
This has been demonstrated through 12 consecutive quarters of operating
profitability. In addition, Sizzler has the $8.8 million of deferred gain
related to the sale and leaseback.
U.S. SIZZLER OPERATIONS
- -----------------------
Revenues for the quarter ended February 6, 2000 were $29,248,000 compared to
$28,529,000 for the quarter ended February 7, 1999, an increase of $719,000 or
2.5 percent. Restaurant sales for the current quarter were $27,596,000 compared
to $26,949,000 in the same period of the prior year and were produced by 65
restaurants operating during the current quarter and 66 restaurants in the same
period of the prior year. Sales for the quarter reflect higher guest counts and
to a lesser extent higher check averages due to successful marketing promotions
and menu repositioning. Franchise revenue was $1,652,000 in the current quarter
compared to $1,580,000 in the same period of the prior year, an increase of
$72,000 or 4.6 percent. This increase is due to an increase in franchise same
store sales and franchise fees. In addition, franchise revenues were produced by
201 franchised Sizzlers, including 13 in Latin America, in the current quarter
compared to 199 franchised Sizzlers, including 12 in Latin America, in the same
period of the prior year.
Prime costs were $18,429,000 in the current quarter compared to $18,061,000 in
the same period of the prior year. Prime costs, which include food, paper and
labor, decreased to 66.8 percent of sales compared to 67.0 percent in the same
period of the prior year.
12
Other operating expenses amounted to $5,975,000 for the current quarter compared
to $6,919,000 for the same period of the prior year primarily due to a $790,000
gain on the sale of a Sizzler property due to imminent domain.
Management is continuing its plan to reposition the Sizzler concept back to a
midscale family steakhouse by upgrading the quality of the food and improving
cooking methods and equipment and by recertifying all restaurant employees with
updated training programs. We are also improving the quality of the Sizzler
customer experience by remodeling existing restaurants with a new design that is
currently being rolled out and supporting these initiatives with appropriate
marketing programs. In addition, during the quarter a new USA president was
hired, filling a position that had been vacant since July, 1999.
INTERNATIONAL SIZZLER OPERATIONS
- --------------------------------
Total revenues for the quarter ended February 6, 2000 were $13,561,000 compared
to $13,249,000 for the quarter ended February 7, 1999, an increase of $312,000
or 2.4 percent. Approximately $342,000, was due to an increase in the Australian
dollar exchange rate partially offset by a slight decrease in same store sales
driven by decreases in customer counts. During the quarter most advertising
programs were temporarily suspended while management was focusing on operational
training. Restaurant sales for the current quarter were $13,136,000 compared to
$12,874,000 in the same period of the prior year and were produced by 31
restaurants operating during the current quarter and the same period of the
prior year. Franchise revenue was $425,000 in the current quarter compared to
$375,000 in the same period of the prior year, an increase of $50,000 or 13.3
percent due to same store sales increases and favorable Australian and Asian
exchange rates. Franchise revenues were produced by three joint ventures and 48
franchised Sizzlers in the current quarter compared to three joint ventures and
47 franchised Sizzlers in the same period of the prior year. Current
international franchise restaurants are located in Japan, Taiwan, Thailand,
South Korea, Singapore and Indonesia.
Prime costs were $8,727,000 in the current quarter compared to $8,673,000 in the
same period of the prior year. Prime costs, which include food, paper and labor,
decreased to 66.4 percent of sales compared to 67.4 percent in the same period
of the prior year.
Other operating expenses amounted to $2,942,000 for the current quarter compared
to $2,799,000 for the same period of the prior year primarily due to the
increased exchange rates and to higher rent from the sale and leaseback,
partially offset with lower depreciation expense.
Management is continuing its plan to reposition the Sizzler concept in Australia
by implementing the upgraded food quality and cooking methods that are
contributing to positive sales growth in the Company's domestic operations.
Additionally, more emphasis will be placed on providing customers with better
service by increasing the
13
number of restaurant personnel. There are currently two units being tested with
plans for adding one more remodel to the test. If the results are consistent
with the domestic sales, the Company plans to implement the remodel program in
Australia beginning in fiscal year 2001.
KFC OPERATIONS
- --------------
Revenues for the quarter ended February 6, 2000 were $29,096,000 compared to
$26,324,000 for the quarter ended February 7, 1999, an increase of 10.5 percent.
Approximately 2.6 points of the increase, or $735,000, is due to an increase in
the Australian dollar exchange rate. In addition, sales for the current quarter
reflect 101 restaurants operating during the current quarter compared to 100
restaurants in the same period of the prior year. Sales for the quarter also
reflect higher guest counts and check averages due to successful marketing
promotions.
Prime costs were $17,513,000 in the current quarter compared to $16,001,000 in
the same period of the prior year. Prime costs, which include food, paper and
labor, decreased to 60.2 percent of sales compared to 60.8 percent in the same
period of the prior year.
Other operating expenses amounted to $6,890,000 for the current quarter compared
to $6,539,000 for the same period of the prior year. This increase was due to
the increased Australian dollar exchange rate, increased sales and higher rent
partially offset with lower depreciation expense associated with the sale and
leaseback of certain properties.
RESULTS OF OPERATIONS
- ---------------------
FORTY WEEKS ENDED FEBRUARY 6, 2000 VERSUS FEBRUARY 7, 1999
- ----------------------------------------------------------
CONSOLIDATED OPERATIONS
- -----------------------
Consolidated revenues for the forty weeks ended February 6, 2000 were
$184,173,000 compared to $171,694,000 for the forty weeks ended February 7,
1999, an increase of $12,479,000 or 7.3 percent. Approximately 36 percent of the
increase is due to same store sales increases primarily driven by higher guest
counts at KFC. Another 12.5 percent or $1,565,000 of the increase is due to same
store sales increases primarily driven by higher check averages at Sizzler USA.
Approximately 45 percent or $5,589,000 of the increase is due to a 5.6 percent
increase in the Australian dollar exchange rate. Due to recent fluctuations in
the Australian dollar exchange rate we do not expect to realize a similar
benefit from favorable exchange rates in the fourth quarter.
Company-operated restaurant sales and franchised restaurant revenues (including
franchise fees, royalties and rental income) represent the Company's primary
sources
14
of revenue. The Company has three reportable segments: U.S. Sizzler operations;
International Sizzler operations; and KFC operations.
Consolidated operating expenses for the forty weeks ended February 6, 2000 were
$174,334,000 compared to $163,430,000 for the forty weeks ended February 7,
1999, an increase of $10,904,000 or 6.7 percent. Approximately $5,648,000 of the
increase, is due to a 5.6 percent increase in the Australian dollar exchange
rate. The remaining increase is primarily due to increases in sales volumes and
to increases in prime costs from commodity price increases and to additional
labor costs incurred to increase guest service. We also experienced an increase
in rent expense due to the sale and leaseback of certain properties in
Australia. This increase is partially offset by a reduction in depreciation and
income tax expense.
Interest expense was $2,778,000 for the forty weeks ended February 6, 2000
compared to $2,656,000 in the same period of the prior year, an increase of
$122,000, or 4.6 percent. Interest expense is primarily related to the Company's
debt with Westpac and to a lesser extent, the Company's executive supplemental
plan covering ten former and one active employee. Interest income was $896,000
compared to $577,000 in the same period of the prior year, an increase of
$319,000 or 55.3 percent reflecting higher cash balances primarily associated
with the sale and leaseback transaction.
Income tax expense, excluding a $5,890,000 tax benefit, was $2,042,000 in the
first forty weeks of fiscal year 2000 compared to $1,308,000 in the same period
of the prior year, an increase of $734,000 due primarily to an increase in
Australian taxable income relating to the Company's International operations.
The $5,890,000 income tax benefit was recorded this quarter because, in
accordance with Statement of Accounting Standard No. 109 ("SFAS 109),
"Accounting For Income Taxes" Sizzler has demonstrated that it is more likely
than not capable of realizing the benefits of a portion of its $134 million net
operating loss (NOL) carryforward. This has been demonstrated through 12
consecutive quarters of operating profitability. In addition, Sizzler has the
$8.8 million of deferred gain related to the sale and leaseback.
U.S. SIZZLER OPERATIONS
- -----------------------
Revenues for the forty weeks ended February 6, 2000 were $79,131,000 compared to
$77,248,000 for the forty weeks ended February 7, 1999, an increase of
$1,883,000 or 2.4 percent. Restaurant sales were $73,900,000 compared to
$72,335,000 in the same period of the prior year and were produced by 65
restaurants operating during the current year and 66 restaurants in the same
period of the prior year. Sales for the year reflect higher check averages due
to successful marketing promotions and menu repositioning. Franchise revenue was
$5,231,000 for the first forty weeks of this year compared to $4,913,000 in the
same period of the prior year, an increase of $318,000 or 6.5 percent primarily
due to an increase in franchise same store sales and franchise fees. Franchise
revenues were produced by 201 franchised Sizzlers, including 13 in Latin
America, in the current quarter compared to 199 franchised Sizzlers, including
12
15
in Latin America, in the same period of the prior year.
Prime costs were $48,186,000 for the forty weeks ended February 6, 2000 compared
to $47,127,000 in the same period of the prior year. Prime costs, which include
food, paper and labor, were 65.2 percent of sales this year and in the same
period of the prior year.
Other operating expenses amounted to $16,467,000 for the current year compared
to $17,170,000 for the same period of the prior year primarily due to a $790,000
gain on the sale of a Sizzler property due to imminent domain.
Management is continuing its plan to reposition the Sizzler concept back to a
midscale family steakhouse by upgrading the quality of the food and improving
cooking methods and equipment and by recertifying all restaurant employees with
updated training programs. We are also improving the quality of the Sizzler
customer experience by remodeling existing restaurants with a new design that is
currently being rolled out and supporting these initiatives with appropriate
marketing programs.
INTERNATIONAL SIZZLER OPERATIONS
- --------------------------------
Total revenues for the forty weeks ended February 6, 2000 were $33,190,000
compared to $30,902,000 for the forty weeks ended February 7, 1999, an increase
of $2,288,000 or 7.4 percent. Approximately $1,766,000 of the increase was due
to an increase in the Australian dollar exchange rate. The balance of the
increase is primarily due to higher same store sales and check averages
associated with menu repositioning and successful marketing promotions.
Restaurant sales for the forty weeks ended February 6, 2000 were $32,126,000
compared to $29,974,000 in the same period of the prior year and were produced
by 31 restaurants operating during the current year and the same period of the
prior year. Franchise revenue was $1,064,000 in the current year compared to
$928,000 in the same period of the prior year, an increase of $136,000 or 14.7
percent. Franchise revenues were produced by three joint ventures and 48
franchised Sizzlers in the current year compared to three joint venture and 47
franchised Sizzlers in the same period of the prior year. Current international
franchise restaurants are located in Japan, Taiwan, Thailand, South Korea,
Singapore and Indonesia.
Prime costs were $21,674,000 for the forty weeks ended February 6, 2000 compared
to $20,337,000 in the same period of the prior year. Prime costs, which include
food, paper and labor, were 67.5 percent of sales for the forty weeks ended
February 6, 2000 and 67.9 percent for the same period last year.
Other operating expenses amounted to $7,180,000 for the current fiscal year
compared to $6,625,000 for the same period of the prior year, reflecting
increased exchange rates and higher rent from the sale and leaseback, partially
offset with lower depreciation expense.
16
Management is continuing its plan to reposition the Sizzler concept in Australia
by implementing upgraded food quality and cooking methods that are contributing
to positive sales growth in the Company's domestic operations. Additionally,
more emphasis will be placed on providing customers with better service by
increasing the number of restaurant personnel. There are currently two units
being tested with plans for one more remodel and if the results are consistent
with the domestic sales, the Company plans to implement the remodel program in
Australia beginning in fiscal year 2001.
KFC OPERATIONS
- --------------
Revenues for the forty weeks ended February 6, 2000 were $71,852,000 compared to
$63,544,000 for the forty weeks ended February 7, 1999, an increase of
$8,308,000 or 13.1 percent. Approximately $3,823,000 of the increase, is due to
an increase in the Australian dollar exchange rate. In addition, sales for the
current year reflect 101 restaurants operating compared to 100 restaurants in
the same period of the prior year. Sales for the year also reflect higher check
averages and guest counts due to successful marketing promotions.
Prime costs were $43,533,000 in the current year compared to $38,443,000 in the
same period of the prior year. Prime costs, which include food, paper and labor,
increased to 60.6 percent of sales compared to 60.5 percent in the same period
of the prior year.
Other operating expenses amounted to $17,172,000 for the current year compared
to $15,447,000 for the same period of the prior year. This increase was due to
the increased Australian dollar exchange rate, increased sales and higher rent
partially offset with lower depreciation expense associated with the sale and
leaseback of certain properties.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working Capital
- ---------------
The Company's principal source of working capital is net cash provided by
operations, which amounted to $18,901,000 for the first forty weeks of fiscal
year 2000 compared to $10,773,000 for the same period of the prior year.
The Company's working capital at February 6, 2000 was $24,399,000 including cash
and cash equivalents of $44,157,000. At April 30, 1999 the Company had a working
capital deficit of $840,000. The surplus as of February 6, 2000 is primarily due
to the proceeds from the sale and leaseback of 43 of the Company's 67 KFC and
Sizzler
17
Australia properties.
Total Assets / Capital Expenditures
- -----------------------------------
At February 6, 2000, total assets were $118,779,000, an increase of $10,110,000
or 9.3 percent from April 30, 1999. The increase in total assets is primarily
due to an increase in deferred income taxes of $7,082,000. Property and
equipment, net of depreciation and amortization, represented approximately 36.7
percent of total assets at February 6, 2000 and 71.6 percent at April 30, 1999.
Capital expenditures were $4,826,000 for the forty weeks ended February 6, 2000
and $6,451,000 for the same period last year. The current year's capital
expenditures were primarily used for equipment replacements, building
improvements and remodels to existing restaurants. The Company anticipates
continuing to grow international operations through additional investment in
Company-operated restaurants, expanding its KFC's with other Tricon concepts,
joint ventures and the development of the franchise system.
The Company is achieving positive sales results from its Sizzler USA program
that includes updated decor and new cooking equipment. As of February 6, 2000
three locations were completed and another four were in progress. The Company
expects to remodel all Company-operated restaurants by the end of calendar year
2000 at a total cost of approximately $14.6 million. The Company plans to fund
its remodel program with operating cash flow, cash generated from the sale and
leaseback of its real estate in Australia or other outside lending sources.
The cost of completing point of sale and corporate office systems upgrades in
connection with a lease that expired in the quarter ended July 25, 1999 was
approximately $1,700,000. The Company has a new lease in place to finance these
costs.
Debt
- ----
On September 23, 1997, the Company obtained a $63,500,000 AUD (approximately
$46,900,000 US) bank facility from Westpac Banking Corporation in order to
refinance the claims of the Company's Chapter 11 unsecured creditors. The
Westpac loan provides for a five-year term at an interest rate equal to the
Australian interbank borrowing rate, plus a margin. The margin is based on a
formula tied to the Company's international operations ratio of debt to earnings
before interest and taxes, and will vary between 1.25% and 2.25%. The Westpac
loan involved the collateralization of the Company's principal operating assets
of its international division. The Westpac loan is subject to a number of
financial covenants and other restrictions.
Based on current levels of operations and anticipated sales growth, management
believes that cash flow from operations will be sufficient to meet all of its
debt service
18
requirements when due and to fund its capital expenditure and
working capital requirements.
Sale and Leaseback
- ------------------
To date, Sizzler has closed sale-leaseback transactions for 43 of the 67 KFC and
Sizzler Australian restaurants included in the sale-leaseback program the
company announced in November 1999. Sizzler expects to close sale-leaseback
transactions for 16 properties during the fourth quarter of fiscal 2000, which
will end on April 30, 2000. The company expects to realize approximately US $34
million in cash once the sale-leaseback program is complete. Of this amount,
Sizzler has received approximately US $25 million from the transactions that
have closed. The company expects to utilize the proceeds of the sale-leaseback
to finance the capital expenditures made as part of its strategic growth plan,
including the aforementioned restaurant remodeling and repositioning.
The sale-leaseback transactions are being conducted on a property-by-property
basis. Overall, the transactions are expected to generate a net gain of
approximately US $3.3 million. Those that are sold for more than the book value
are expected to produce a net gain of approximately US $8.8 million. Those that
are sold at less than the book value are expected to generate a net loss of
approximately US $5.5 million.
Under the provisions of SFAS 28 the company is required to recognize all losses
immediately and defer any gains over the life of the leases. As such, the
company recorded a non-cash charge of $5.5 million in the third quarter and will
defer the $8.8 million gain over the life of the leases, which average 8 years.
The net effect of the sale-leaseback is expected to affect Sizzler's fiscal 2001
earnings by less than $0.01 per share. The company does not anticipate the
recognition of any further losses in connection with the anticipated sale-
leaseback of its Australian properties.
Stock Repurchase
- ----------------
On November 11, 1999, the Board of Directors authorized a plan to repurchase up
to 1.5 million shares of Sizzler common stock. During the first forty weeks of
fiscal 2000, the Company has repurchased 706,700 shares for a total of $1.9
million.
YEAR 2000
- ---------
In fiscal 1998, the Company established a comprehensive enterprise-wide program
to prepare its computer systems and applications for the year 2000 issue. This
program consisted of three areas: information systems, supply chain and critical
third party readiness and business equipment. Utilizing both internal and
external resources to inventory, assess, remediate, replace and test its sytems
for Year 2000 compliance the Company has completed all necessary modifications
to its mission-critical systems.
19
To reduce the risks associated with the Year 2000 the Company closely assessed
the vendors supplying the Company's restaurants with food and other products to
ensure that they were aware of the Year 2000 business risks and were
appropriately addressing them. Surveys were sent to critical suppliers, service
providers and the Company's franchisees to obtain reasonable assurance that
plans were in place to address the Year 2000 issue. Contingency plans have been
developed for those vendors that did not provide the Company with satisfactory
evidence of their readiness to handle Year 2000 issues. The Company also
communicated with its franchise business partners regarding the potential
business risks associated with the Year 2000 issue.
Equipment and software critical to restaurant and corporate office operations
was replaced in calendar 1999 in connection with a lease that ended in the
ordinary course of business. The new equipment is Year 2000 compliant and
installation was completed in November, 1999. The cost of this hardware and
software was approximately $1,700,000 and, along with an additional $410,000 in
costs related to accounting software upgrades, has been financed with a new
lease. These costs have not had and are not expected to have a material impact
on the Company's financial position.
To date, the Company has not experienced any material difficulties related to
Year 2000 issues. The Company's information technology staff continues to
monitor its computer hardware and software to assure any Year 2000 issues not
anticipated are immediately addressed.
All Year 2000 statements contained herein are designated as "Year 2000 Readiness
Disclosures" pursuant to the Year 2000 Information and Readiness Disclosure Act
of 1998.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
- ----------------------------------------------------
The Company is protected against the risk of foreign exchange fluctuations
associated with its bank facility with Westpac Banking Corporation because both
the borrowings and principal and interest payments are denominated in Australian
dollars and the Company funds its principal and interest payments from cash
generated by its restaurant operations in Australia. The Company may however
enter into interest rate cap contracts and interest rate swap contracts to limit
the variable interest rate exposure on its Westpac bank facility.
FORWARD-LOOKING STATEMENTS
- --------------------------
With the exception of any historical information contained in this report, the
matters described herein contain forward-looking statements that are made
pursuant to the Safe Harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements involve various risks and may cause actual
results to differ materially. Such
20
forward-looking statements include, but are not limited to, statements regarding
(i) the successful implementation, and the timing of the implementation, of the
Company's current operating strategies, including but not limited to food
product enhancement, facilities remodeling, co-branding, sale and leaseback and
stock repurchase programs; (ii) the positive impact on financial performance of
the implementation of the Company's operating strategies; (iii) the completion
of the acquisition of a restaurant chain. The Company cautions that these
statements are qualified by important factors that could cause actual results to
differ materially from those reflected by the forward-looking statements
contained herein. Such factors include, but not are limited to, (a) the
Company's ability to implement its operating strategies efficiently and on
schedule; (b) the strength and duration of positive consumer response of the
Company's new food offerings and restaurant remodeling; (c) the availability on
favorable terms of acquisition opportunities meeting the Company's criteria, and
the Company's ability successfully to expand the acquired concept; (d) exchange
rate fluctuations and other financial market changes that could affect the
Company's revenues and earnings and (e) other risks as detailed from time to
time in the Company's SEC reports.
21
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
The Company filed a report on Form 8-K on November 12, 1999 relating to a
press release dated November 11, 1999 announcing authorization by the Board
of Directors to repurchase up to 1.5 million shares of Sizzler Common
stock.
The Company filed a report on Form 8-K on November 19, 1999 relating to a
press release dated November 17, 1999, reporting the earnings for the
period ended October 17, 1999.
The Company filed a report on Form 8-K on December 3, 1999 relating to a
press release dated December 1, 1999, announcing the proposed sale and
leaseback of 49 of its Australian properties.
The Company filed a report on Form 8-K on January 6, 2000 relating to a
press release dated January 5, 2000, announcing that Thomas E. Metzger has
been appointed President and Chief Executive Officer of Sizzler USA.
22
SIGNATURES
Pursuant to the requirement 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.
SIZZLER INTERNATIONAL, INC.
Registrant
Date: March 17, 2000 /s/ Charles L. Boppell
--------------------------------------------
Charles L. Boppell
Chief Executive Officer
Date: March 17, 2000 /s/ Steven R. Selcer
---------------------------------------------
Steven R. Selcer
Vice President
(Principal Financial Officer)
23