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 July 22, 2001
[_] 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.
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(Exact Name of Registrant as specified in its Charter)
Delaware 95-4307254
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6101 West Centinela Avenue, Suite 200, Culver City, California 90230
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(Address of Principal Executive Offices, including zip code)
(310) 568-0135
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(Registrant's telephone number, including area code)
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(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 August 31, 2001
- ---------------------------- -------------------------------------
Common Stock $0.01 Par Value 27,133,599 shares
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
July 22, April 30,
ASSETS 2001 2001
- -------------------------------------------------------------------------- ----------- ----------
(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 18,528 $ 9,997
Restricted cash 1,713 7,852
Receivables, net of reserves of $979 at
July 22, 2001 and $965 at April 30, 2001 2,721 2,464
Inventories 4,084 4,211
Current tax asset 3,680 3,324
Prepaid expenses and other current assets 1,880 2,554
- -------------------------------------------------------------------------- ---------- ----------
Total current assets 32,606 30,402
- -------------------------------------------------------------------------- ---------- ----------
Property and equipment, net 58,927 60,011
Property held for sale, net 3,891 3,996
Long-term notes receivable, net of reserves of $ 3
at July 22, 2001 and $17 at April 30, 2001 953 994
Deferred income taxes 2,294 2,425
Goodwill, net of accumulated amortization of
$848 at July 22, 2001 and $843 at April 30, 2001 19,824 19,762
Intangible assets, net of accumulated amortization of
$751 at July 22, 2001 and $709 at April 30, 2001 1,900 1,937
Other assets 3,065 3,035
- -------------------------------------------------------------------------- ---------- ----------
Total assets $ 123,460 $ 122,562
========================================================================== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
July 22, April 30,
LIABILITIES AND STOCKHOLDERS' INVESTMENT 2001 2001
- -------------------------------------------------------------------------- ----------- -----------
(Unaudited) (Audited)
Current Liabilities:
Current portion of long-term debt $ 5,346 $ 5,597
Accounts payable 9,291 9,078
Other current liabilities 10,593 9,626
Income taxes payable 1,995 1,870
- -------------------------------------------------------------------------- ----------- -----------
Total current liabilities 27,225 26,171
- -------------------------------------------------------------------------- ----------- -----------
Long-term debt, net of current portion 22,915 24,085
Deferred gains and revenues 8,126 8,307
Pension liability 9,379 9,482
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;
outstanding 27,601,499 shares at July 22, 2001
and 27,744,799 shares at April 30, 2001 291 291
Additional paid-in capital 279,860 279,846
Accumulated deficit (215,382) (217,046)
Treasury stock, 1,507,100 shares at July 22, 2001
and 1,363,800 shares at April 30, 2001, at cost (3,404) (3,189)
Accumulated other comprehensive loss (5,550) (5,385)
- -------------------------------------------------------------------------- ----------- -----------
Total stockholders' investment 55,815 54,517
- -------------------------------------------------------------------------- ----------- -----------
Total liabilities and stockholders' investment $ 123,460 $ 122,562
========================================================================== =========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TWELVE WEEKS ENDED JULY 22, 2001 AND JULY 23, 2000
(In thousands, except per share data)
July 22, July 23,
2001 2000
- -------------------------------------------------------------------------- ----------- -------------
(Unaudited) (Unaudited)
Revenues
Restaurant sales $ 59,273 $ 52,312
Franchise revenues 1,999 2,346
- -------------------------------------------------------------------------- ------------ -------------
Total revenues 61,272 54,658
- -------------------------------------------------------------------------- ------------ -------------
Costs and Expenses
Cost of sales 20,201 18,943
Labor and related expenses 16,899 14,234
Other operating expenses 14,274 11,930
Depreciation and amortization 2,160 1,805
General and administrative expenses 5,477 4,312
- -------------------------------------------------------------------------- ------------ -------------
Total operating costs 59,011 51,224
- -------------------------------------------------------------------------- ------------ -------------
Interest expense 1,119 747
Investment income (472) (559)
Gain on Sale of Assets (412) -
- -------------------------------------------------------------------------- ------------ -------------
Total costs and expenses 59,246 51,412
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Income before income taxes 2,026 3,246
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Provision for income taxes 362 381
- -------------------------------------------------------------------------- ------------ -------------
Net income $ 1,664 $ 2,865
========================================================================== ============ =============
Basic and diluted earnings per share $ 0.06 $ 0.10
========================================================================== ============ =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWELVE WEEKS ENDED JULY 22, 2001 AND JULY 23, 2000
(in thousands)
July 22, July 23,
2001 2000
- ----------------------------------------------------------------------------- ----------- ------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net income $ 1,664 $ 2,865
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,160 1,805
Net gain on sale of assets (412) -
Deferred income taxes 128 (80)
Other (251) (34)
Changes in operating assets and liabilities:
Receivables (225) (1,238)
Inventories 118 217
Prepaid expenses and other current assets 464 248
Accounts payable 258 1,528
Accrued liabilities 712 (8)
Income taxes payable 139 280
- ----------------------------------------------------------------------------- ----------- ------------
Net cash provided by operating activities 4,755 5,583
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INVESTING ACTIVITIES
Additions to property and equipment (1,762) (7,716)
Proceeds from sale of assets 1,048 2,163
Other, net 16 (644)
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Net cash used in investing activities (698) (6,197)
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FINANCING ACTIVITIES
Reduction of long-term debt (1,329) (1,219)
Repurchase of common stock (215) (355)
Other, net 38 221
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Net cash used in financing activities (1,506) (1,353)
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Net increase (decrease) in cash, cash equivalents and restricted cash 2,551 (1,967)
- ----------------------------------------------------------------------------- ----------- ------------
Effect of foreign exchange on cash (160) 83
- ----------------------------------------------------------------------------- ----------- ------------
Cash, cash equivalents and restricted cash
at beginning of period 17,850 38,789
- ----------------------------------------------------------------------------- ----------- ------------
Cash, cash equivalents and restricted cash
at end of period $ 20,241 $36,905
============================================================================= =========== ============
Supplemental Cash Flow Disclosures
Cash paid during the year for:
Interest $ 1,399 $ 825
Income taxes $ 265 -
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JULY 22, 2001
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(R) family steak house concept, including
company-owned outlets, activity related to the development and
operation of Sizzler(R) franchises, the operation of Kentucky Fried
Chicken(R) ("KFC(R)") franchises in Queensland, Australia and the
operation of Pat & Oscar's(SM) in the United States. 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 are read in conjunction with the financial
statements and the notes thereto included in the Company's 2001 annual
report on Form 10-K.
2. Earnings Per Share:
The following table sets forth the computation of basic and diluted
EPS:
6
Twelve weeks ended
--------------------------
July 22, July 23,
In thousands, except EPS 2001 2000
---- ----
Numerator for both basic and diluted EPS - Net income $ 1,664 $ 2,865
======= =======
Denominator:
Denominator for basic EPS - weighted average
shares of common stock outstanding 27,662 27,986
Effect of dilutive stock options 122 385
------- -------
Denominator for diluted EPS - adjusted
weighted average shares outstanding 27,784 28,371
======= =======
Basic and diluted earnings per share $ 0.06 $ 0.10
======= =======
3. Comprehensive Income:
Comprehensive income for the quarters ended July 22, 2001 and July 23,
2000 are as follows (in thousands):
Twelve weeks ended
-----------------------------
July 22, July 23,
2001 2000
---- ----
Net Income $ 1,664 $ 2,865
Foreign currency translation adjustments (no tax effect) 3 (42)
Adoption of SFAS 133: Cumulative effect
of change in accounting principle, net of tax (242) -
Gain on derivative instrument, net of tax 74 -
------------- --------------
Net comprehensive income $ 1,499 $ 2,823
============= ==============
4. Segment Information:
Substantially all of the Company's revenues result from the sale of
menu items at restaurants operated by the Company or by franchisees.
The Company's reportable segments are based on geographic area and
product type. Sizzler USA consists of all USA and Latin America
Sizzler(R) restaurant and franchise operations. Pat & Oscar's consists
of all Pat & Oscar's(SM) restaurant and catering operations. Sizzler
International consists of all foreign Sizzler(R) company and franchise
operated restaurants. KFC consists of KFC(R) franchise restaurants in
Australia. Corporate and other includes any items not included in the
reportable segments listed above. The effects of all intercompany
transactions are eliminated when computing revenues, earnings before
interest, taxes, and corporate overhead.
7
TWELVE WEEKS ENDED
------------------
July 22, July 23,
2001 2000
---- ----
Revenues (in thousands):
- ------------------------
Sizzler - USA $ 25,842 $ 25,466
Pat & Oscar's 8,791 --
Sizzler - International 7,584 8,808
KFC 19,055 20,384
-------- --------
Total revenues $ 61,272 $ 54,658
======== ========
Earnings before Interest and Taxes (in thousands):
- --------------------------------------------------
Sizzler - USA $ 2,437 $ 2,605
Pat & Oscar's 513 --
Sizzler - International 168 354
KFC 2,173 2,083
Corporate and other (2,618) (1,608)
-------- --------
Total earnings before interest and taxes $ 2,673 $ 3,434
======== ========
Reconciliation to Pre-tax Income:
- ---------------------------------
Interest expense $ (1,119) $ (747)
Investment income, net 472 559
-------- --------
Income (loss) before income taxes $ 2,026 $ 3,246
======== ========
Earnings before interest and taxes include segment operating results
before investment income, interest expense, income taxes and allocated
corporate overhead. The corporate and other component of earnings
before interest, taxes, and corporate overhead represents corporate
selling, and general and administrative expenses prior to being
allocated to the operating segments.
5. Pat & Oscar's
On August 30, 2000, the Company completed the acquisition of 82 percent
of the outstanding membership interests of FFPE, LLC, a newly organized
entity that owns the assets used in the operation of restaurants
formerly doing business under the name "Oscar's." The Company has
accounted for the acquisition under the purchase method; accordingly
the statements of operations include the results of Pat & Oscar's since
the date of acquisition. The acquisition resulted in goodwill of
approximately $18.6 million before potential earn-outs.
Presented below is unaudited selected pro forma financial information,
which includes the results of operations of the Company as if the
acquisition had taken place April 30, 2001 and 2000 (in thousands,
except share amounts):
8
TWELVE WEEKS ENDED
------------------
July 22, July 23,
2001 2000
---- ----
Revenues 61,272 62,007
Net income 1,456 2,831
Basic and diluted net income per share 0.05 0.10
Shares used in per share calculation 27,784 28,371
The above net income amounts include $208,000 in goodwill amortization
consistent with Accounting Principles Board Opinion No.16, Business
Combinations and Accounting Principles Board Opinion No.17, Intangible
Assets.
6. Goodwill and Intangible Assets:
Effective May 1, 2001, the Company adopted Financial Accounting
Standard Board ("FASB") No. 142 "Goodwill and Other Intangible Assets
("SFAS 142")." On adoption, the Company established its reporting units
based on its current reporting structure all recognized asset,
liabilities and goodwill have been assigned to these reporting units.
The Company will complete the first step of the transitional goodwill
impairment test during the second quarter. The following sets forth the
intangible assets by major asset class:
July 22, 2001 April 30, 2001
--------------------- ----------------------
Amortized intangibles -
Franchise rights $ 2,191 $ 2,174
Accumulated amortization (696) (662)
Unamortized intangible assets:
Trademarks 274 286
Accumulated amortization (55) (47)
Other intangibles 186 186
--------------------- ----------------------
Total intangibles 2,651 2,646
Total accumulated amortization (751) (709)
--------------------- ----------------------
Net intangibles $ 1,900 $ 1,937
===================== ======================
Aggregate amortization expense on intangible assets was approximately
$0.03 million for the quarter ended July 22, 2001. There was no
impairment loss recorded during the quarter. Amortization expense is
expected to be approximately $0.1 million in each of the next five
fiscal years.
9
The changes in the carrying amount of goodwill for the quarter ended July 22,
2001, are as follows:
Sizzler Sizzler
USA Pat & Oscar's International Total
--- ------------- ------------- -----
Balance as of April 30, 2001 $ 1,449 $ 18,042 $ 271 $ 19,762
Goodwill acquired during the year 66 - - 66
Impairment losses - - - -
Effect of foreign currency translation - - (4) (4)
----------- ------------- ------------ -------------
Balance as of July 22, 2001 $ 1,515 $ 18,042 $ 267 $ 19,824
=========== ============= ============ =============
A reconciliation of reported net income to net income adjusted to reflect
adoption of SFAS 142 in the quarter ended July 23, 2000 is provided below.
July 22, 2001 July 23, 2000
------------- -------------
Reported net income $ 1,664 $ 2,865
Add back: goodwill amortization - -
------------- -------------
Adjusted net income $ 1,664 $ 2,865
============= =============
Basic and diluted earnings per share:
Adjusted and reported basic and
diluted earnings per share $ 0.06 $ 0.10
7. Interest Rate Swaps and Hedges
The Company is a party to four derivative contracts. The two interest
rate swap contracts and two interest rate cap contracts were a required
condition of the loan agreement entered by the Company's International
Division. The loan agreement requires that sixty-six percent of the
outstanding principal balance be hedged and converted to fixed rate
debt using derivative contracts. The four contracts cover the required
sixty-six of the remaining principal balance. The Company entered the
contracts to hedge the future cash interest payments related to the
variable rate debt. The Company has designated these derivatives as
cash flow hedges and recorded the existing liability and unrecognized
losses. All of the change in value of the derivatives is recorded in
other comprehensive income as no ineffectiveness exists. The net
liability recorded on the balance sheet and the unrecognized loss in
other comprehensive income will be reduced as interest payments are
made by the Company's International Division. A portion of each payment
represents a settlement of a portion of the recognized liability. The
net liabilities recorded on the balance sheet will be reduced to zero
at the expiration of the contracts that corresponds with the repayment
of the loan by the Company's International Division expected in August
of 2003.
10
8. Commitment:
On July 9, 2001 the Company entered into a ten-year lease agreement
with Galleria Park Partners, LLC commencing approximately October 1,
2001. The agreement commits the Company to pay $0.05 million in monthly
fixed rent. The location will be used for the Company's corporate
office.
11
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
TWELVE WEEKS ENDED JULY 22, 2001 VERSUS JULY 23, 2000
- -----------------------------------------------------
CONSOLIDATED OPERATIONS
- -----------------------
Company-operated restaurant sales and franchised restaurant revenues (including
franchise fees, royalties and rental income) represent the Company's primary
sources of revenue. Consolidated revenues for the quarter ended July 22, 2001
were $61.3 million compared to $54.7 million for the quarter ended July 23,
2000, an increase of $6.6 million or 12.1 percent. The increase is primarily due
to the addition of Pat & Oscar's which accounted for $8.8 million in sales this
quarter compared to no sales in the prior year quarter. In addition there were
eight more domestic Sizzler(R) locations than in the same period in the prior
year. These increases were partially offset by an 11.9 percent decrease in the
Australian dollar exchange rate that reduced revenues by $3.6 million and a
decline in same store sale for both the domestic and international Sizzler(R)
restaurants.
The following table shows the change in Company-operated same store sales over
the prior year.
FY 2001 FY 2002
------------------------------------------ ----------
QTR 1 QTR 2 QTR 3 QTR 4 QTR 1
----- ----- ----- ----- -----
SIZZLER
- -------
Sizzler USA 1.9% 0.7% 0.1% -1.6% -3.2%
Sizzler International
(Based on A$) 0.6% -4.1% -0.5% -1.8% -2.0%
KFC
- ---
(Based on A$) 6.1% 4.0% 2.6% -2.7% 1.3%
OSCAR'S
- -------
n/a 4.9% 5.5% 2.5% -0.9%
Consolidated operating expenses for the quarter ended July 22, 2001 were $59.0
million compared to $51.2 million for the quarter ended July 23, 2000, an
increase of $7.8 million or 15.2 percent. The increase is primarily related to
the addition of Pat & Oscar's, which accounted for $7.2 million in the current
quarter and zero in the prior year quarter, net of $3.4 million decline in
expenses resulting from an 11.9 percent
12
decline in the Australian dollar exchange rate. The remaining change in
operating expenses are primarily the result of higher labor costs and utilities.
Interest expense was $1.1 million in the current quarter compared to $0.7
million in the same period of the prior year, an increase of $0.4 million, or
57.1 percent. The increase in interest expense is primarily due to higher debt
assumed with the Company's acquisition of Pat & Oscar's, that accounted for $0.2
million or 50 percent of the increase. The remainder of the increase is
primarily related to the Company's loan with Heller Financial Services. Interest
expense also includes interest on the Company's debt with Westpac and to a
lesser extent, the Company's executive supplemental retirement plan covering ten
former and one active employee. Investment income was $0.5 million in the
current quarter compared to $0.6 million in the same period of the prior year, a
decrease of $0.1 million or 16.7 percent which was primarily due to lower cash
balances.
Other income represents a gain on the disposition of one property by Sizzler USA
due to a redevelopment initiative.
The provision for income taxes has been computed based on management's estimate
of the annual effective income tax rate applied to income before taxes and was
$0.4 million in the current quarter compared to $0.4 million in the same period
of the prior year.
SIZZLER USA OPERATIONS
- ----------------------
Total revenues for the quarter ended July 22, 2001 were $25.8 million compared
to $25.5 million for the quarter ended July 23, 2000, an increase of $0.3
million or 1.2 percent. Restaurant sales for the current quarter were $24.2
million compared to $23.5 million an increase of $0.7 million or 3.0 percent.
The sales increase is primarily due to an increase in Company-owned stores to 67
compared to 60 last year that were partially offset by a decrease in same store
sales. Since the first quarter of last year, the Company closed one store due to
redevelopment, acquired three previously owned restaurants from a franchisee in
Las Vegas, acquired four franchised restaurants in Sacramento, and opened one
new company store in Cathedral City. From time to time, the Company may sell
Company-operated restaurants to its franchisees or acquire restaurants from its
franchisees in accordance with the Company's strategic objectives. Same store
sales have decreased 3.2 percent from the same period last year due to a slowing
economy, particularly in California which has been hit hard by the utility and
gasoline price increases.
Franchise revenue was $1.7 million in the current quarter compared to $1.9
million in the same period of the prior year, a decrease of $0.2 million or 10.5
percent. Franchise revenues were produced by 189 franchised Sizzlers(R),
including 13 in Latin America, in the current quarter compared to 203 franchised
Sizzlers(R), including 13 in Latin America, in the same period of the prior
year. The decrease is due to fewer franchise locations.
13
Prime costs were $15.6 million in the current quarter compared to $15.2 million
in the same period of the prior year. Prime costs, which include food, paper and
labor, decreased to 64.5 percent of sales compared to 64.6 percent in the same
period of the prior year. The decrease is due to reductions in food costs
associated with tighter controls slightly offset by increased labor costs, which
have resulted from a higher workers compensation rate and to additional managers
added to promote sales growth and guest service. The Company recently rolled out
a computer-based labor scheduling system that is expected to provide better
control over labor costs.
Other operating expenses amounted to $6.0 million for the current quarter
compared to $5.4 million for the same period of the prior year. This increase is
primarily due to increases in utility costs and a vendor rebate in the prior
year.
Management is continuing its plan to re-image the Sizzler(R) concept as an
affordable, mid-scale family grill concept by offering a selection of grilled
steak, chicken, seafood, sandwiches and specialty platters as well as a salad
bar with a selection of fresh fruit, soups and appetizers served in a casual
dining environment. The Company has substantially completed its interior
remodels with its Company-operated locations and will focus on re-imaging its
franchise locations during the next two years. In addition, the Company will
continue to focus on quality service by training its restaurant employees with
new training programs. These initiatives will be supported with appropriate
marketing programs.
PAT & OSCAR'S OPERATIONS
- ------------------------
Pat & Oscar's generated $8.8 million in revenues through its 11 restaurants for
the quarter ended July 22, 2001. The acquisition of Pat and Oscar's occurred in
the second quarter of fiscal year 2001, therefore no revenue were recorded in
the prior year quarter.
Prime costs, which include food and labor, were $5.0 million or 56.8% of sales.
We continue to experience significant food cost savings related to new vendor
contracts where the benefits of the Company's purchasing leverage has resulted
in lower prices for items such as poultry, pork ribs and flour.
Other operating expenses amounted to $2.0 million for the current quarter.
In line with projections, Pat and Oscar's showed a profit during the current
quarter and is expected to be accretive for the year. The Company expects to
open four to five new locations during fiscal year 2002 with two openings
projected for next quarter.
Due to the adoption of SFAS 142, the Company discontinued amortizing the
goodwill that resulted from the acquisition of Pat and Oscar's restaurants. The
Company will test the resulting goodwill for impairment, at least annually.
14
SIZZLER INTERNATIONAL OPERATIONS
- --------------------------------
Total revenues for the quarter ended July 22, 2001 were $7.6 million compared to
$8.8 million for the quarter ended July 23, 2000, a decrease of $1.2 million or
13.6 percent including $1.0 million due to an 11.9 percent decrease in the
Australian dollar exchange rate. The remaining decrease in sales is the result
of one less unit in the current quarter compared to the same period in the prior
year and a 2.0% decline in same store sales. Franchise revenue was $0.3 million
in the current quarter compared to $0.4 million in the same period of the prior
year, a decrease of $0.1 or 25.0 percent. This decrease is primarily due to an
11.9 percent decrease in the Australian dollar exchange rate. Franchise revenues
were produced by three joint venture restaurants and 55 international franchised
restaurants compared to three joint venture restaurants and 51 international
franchised restaurants in the same period of the prior year. Current
international franchise restaurants are located in Japan, Thailand, Taiwan,
South Korea, Singapore and Indonesia.
Prime costs were $5.0 million in the current quarter compared to $5.7 million in
the same period of the prior year. Prime costs, which include food, paper and
labor, increased to 69.0 percent of sales compared to 68.5 percent in the same
period of the prior year due to higher labor costs associated with higher hourly
wages partially offset by lower commodity prices that may or may not continue.
Other operating expenses amounted to $1.8 million for the current quarter
compared to $2.0 million for the same period of the prior year due to lower
exchange rates.
Management is continuing its plan to reposition the Sizzler(R) concept in
Australia by implementing the upgraded food quality and cooking methods
consistent with those implemented 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 and if the results are positive, the Company plans to
proceed with the remodel program in Australia later this fiscal year. We are
also planning to test a Sizzler(R) restaurant in a club, which is a popular
dining venue in Australia.
KFC OPERATIONS
- --------------
Revenues for the quarter ended July 22, 2001 were $19.1 million compared to
$20.3 million for the quarter ended July 23, 2000, a decrease of $1.2 million or
5.9 percent. An 11.9 percent decrease in the Australian dollar exchange rate
reduced sales by $2.6 million. Therefore, excluding the impact of foreign
exchange, sales increased by approximately $1.3 million due to three more units
in operation compared to the same period in the prior year and a 1.3 percent
increase in same store sales. Sales for the current quarter reflect 105
restaurants operating during the current quarter compared to 102 restaurants in
the same period of the prior year.
15
Prime costs were $11.5 million in the current quarter compared to $12.2 million
in the same period of the prior year. Prime costs, which include food, paper and
labor, increased to 60.2 percent of sales compared to 59.9 percent in the same
period of the prior year primarily due to higher labor costs.
Other operating expenses amounted to $4.6 million for the current quarter
compared to $4.9 million for the same period of the prior year primarily due to
a decrease in the Australian dollar exchange rate.
Management has continued to have discussions with Tricon Global Restaurants,
Inc. regarding the possibility of co-branding certain KFC(R) locations with
Pizza Hut(R) and Taco Bell(R) and is presently awaiting the evaluation of the
results from Tricon.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working Capital
- ---------------
The Company's principal source of liquidity is cash flows from operations which
was $4.8 million for the first twelve weeks of fiscal 2002 compared to $5.6
million for the same period of the prior year. This decrease is due to lower
operating income.
The Company's working capital at July 22, 2001 was $5.4 million including cash,
cash equivalents and restricted cash of $20.2 million. At April 30, 2001 the
Company had a working capital surplus of $4.2 million. This increase is
primarily due to funds generated by operations. The current ratio was 1.2 at
July 22, 2001 and 1.2 at April 30, 2001.
At July 22, 2001, the Company had restricted cash balances of $1.7 million.
Total Assets / Capital Expenditures
- -----------------------------------
At July 23, 2000, total assets were $123.5 million, an increase of $0.9 million
or 0.7 percent from April 30, 2001. Property and equipment, excluding property
held for sale, represented approximately 47.7 percent of total assets at July
22, 2001 and 49.0 percent at April 30, 2001.
Capital expenditures were $1.8 million for the quarter ended July 22, 2001 and
$7.7 million for the same period last year. The current year's capital
expenditures were primarily used for development of two new Pat & Oscar'sSM
restaurants scheduled to open next quarter and maintenance of existing
restaurants. The Company anticipates continuing to grow international operations
through additional investment in Company-operated restaurants, joint ventures
and the development of the franchise system.
16
Debt
- ----
The Company's debt includes a credit facility with Westpac Banking Corporation
in Australia ("Westpac"). The credit facility is collateralized by the
Australian division's assets and intellectual property. The loan provides for a
three-year term at an interest rate equal to the Australian inter-bank borrowing
rate, plus a 2.25 percent margin. The agreement is subject to certain financial
covenants and restrictions which management believes are customary for a loan of
this type. At the end of the quarter, the Company's unpaid principal balance on
the Westpac facility was approximately $18.5 million.
In addition, the Company has a $10.0 million, seven year term loan with Heller
Financial Services that is amortized based on 15 years, with an interest rate of
9.65 percent. Under the terms of the agreement, the Company has borrowed $8.0
million to date and has the right to borrow the remaining balance under certain
conditions, on or before November 15, 2001. A portion of the Company's real
estate and personal property in the U.S are collateral for the loan. The
agreement is subject to certain financial covenants and restrictions which
management believes are customary for a loan of this type.
In connection with the acquisition of Pat & Oscar's the Company assumed a
revolving credit facility with Southwest Community Bank that matures in fiscal
years 2004 and 2005. The agreement is subject to certain financial covenants and
restrictions which management believes are customary for a loan of this type.
The loans carry variable interest rates that ranged from 7.5 percent to 10.0
percent over the past 12 months.
Based on current operations and anticipated sales growth, management believes
that cash flow from operations will be sufficient to meet all of its debt
service requirements and working capital needs.
The Company is in compliance with all debt covenant and restrictions.
Share Repurchase
- ----------------
During the quarter, the Company repurchased 143,300 shares of Sizzler common
stock for a total of $215,000. This brings the total number of shares
repurchased to 1,507,100 out of 2.0 million authorized. The Company plans to
purchase additional shares in the second quarter subject to SEC and NYSE rules.
New Accounting Standards
- ------------------------
In June 2001, the Financial Accounting Standard Boards ("FASB") issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires all business combinations initiated after June
30, 2001, to be accounted for using the purchase method. The Company will adopt
SFAS No.
17
141 beginning in the first quarter of fiscal 2003.
With the adoption of SFAS No. 142, goodwill is no longer subject to amortization
over its estimated useful life and will be subject to at least an annual
assessment for impairment by applying a fair-value based test. Effective May 1,
2001, the Company adopted Financial Accounting Standard Board ("FASB") No. 142
"Goodwill and Other Intangible Assets." On adoption, the Company established its
reporting units based on its current reporting structure and all recognized
assets were assigned to those reporting units. In addition, all of the Company's
goodwill has been assigned to these reporting units. The Company will complete
the first step of the transitional goodwill impairment test during the Company's
second quarter.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This statement established
accounting and reporting standards for derivative financial instruments and for
hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The accounting for changes in fair value of the derivative (i.e.,
gains and losses) depends on the intended use of the derivative and the
resulting designation. The Company adopted SFAS 133 during the first quarter of
fiscal year 2002. Adoption of this standard resulted in the four derivative
contracts being valued at their fair market value and the cumulative effect of
the change in the accounting principle being recorded in other comprehensive
income as the derivatives were entered for hedging purposes.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
The Company is exposed to the following market risks: interest rate risk,
foreign currency rate risk, and commodity price risk.
Interest Rate Risk
- ------------------
The Company's primary financial instrument subject to market risk is a bank loan
with an outstanding principal balance at July 22, 2001 of $18.5 million or $36.5
million Australian dollars. The loan is payable in Australian dollars and is
collateralized by the principal operating assets of the Company's International
Division. The loan bears variable interest at a rate equal to the Australian
inter-bank borrowing rate (7.7 percent at July 22, 2001), including a margin of
2.25 percent. The primary exposures relating to this financial instrument result
from changes in the interest rates.
To hedge the Company's exposure to interest rate increases, the Company entered
into two interest rate cap contracts, which prevent the Company's interest rate
from exceeding a weighted average of approximately 7.60 percent, in which case
the Company would receive the difference between the contract rate and the
actual interest rate. The interest rate caps in place cover approximately one
third of the loan principal outstanding and the contracts are set to expire
September 30, 2002 and August 31,
18
2003, respectively.
In addition, the Company has entered into two interest rate swap contracts to
convert part of its variable interest exposure to a fixed rate of a weighted
average of approximately 7.60 percent. The interest rate swap contracts in place
as of the end of the fiscal year covered approximately one third percent of the
loan principal outstanding and expire September 30, 2002 and August 31, 2003,
respectively.
The Company also has a revolving credit facility with variable interest as a
result of the acquisition of Pat & Oscar's. The interest rate ranged from 7.5 to
10.0 percent during the last 12 months. The Company had a $2.0 million balance
comprised of unpaid principal and interest.
Foreign Currency Exchange Rate Risk
- -----------------------------------
The Company's foreign currency exchange risk primarily relates to its investment
in its Australian operations whereby changes in the exchange rate impact the
Company's net investment. The Company has mitigated the risk with a bank loan
payable in Australian dollars, which reduced the Company's exposure by
decreasing its net investment. As of July 22, 2001, the Company's net investment
in its Australia subsidiaries was $10.3 million. The Company does not enter into
contracts designed to hedge the residual foreign currency exchange risk.
Commodity Price Risk
- --------------------
The Company's commodity price risk is attributable to fluctuation in the price
of selected food products (i.e. meat) used in the normal course of business. The
Company contracts for certain amounts of these food products in the future at a
predetermined or fixed price in order to hedge the risk of changes in the market
price. The Company does not purchase future contracts for trading purposes.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements contained in this document may contain forward-looking
statements that are made pursuant to the safe harbor provisions of the Private
Securities Litigation Act of 1995. These statements may include but are not
limited to, statements regarding continuing growth in revenues and earnings.
The Company cautions that these statements are qualified by important factors
that could cause actual results to differ materially from those reflected in the
forward looking statements contained herein. Such factors include, but are not
limited to: (1) the Company's ability to implement its strategic plan; 2) the
Company's ability to continue to overcome any residual adverse publicity arising
out of the E. coli incident last August; 3) whether the remodel of the Company's
Australian Sizzler(R) restaurants will prove successful; 4) the Company's
ability to manage its costs and expenses and meet all of its debt service
requirements and working capital needs; and 5) other risks and factors
19
as detailed from time to time in the Company's SEC reports, including Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and Annual Reports on Form 10-
K.
20
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is subject to various lawsuits, claims and other legal matters in
the ordinary course of conducting its business.
Two subsidiaries of the Company are named defendants in eleven of fifteen
lawsuits arising out of the E. coli incident at two franchised locations in
Milwaukee, Wisconsin in July 2000. The Company's meat supplier, Excel
Corporation and the Company's franchisee, E&B Management Company and its
principals are named defendants in some or all of the cases. The plaintiffs seek
monetary damages in amounts to be determined for death, sickness or injuries
arising out of the consumption of food allegedly contaminated with E. coli.
As of the date of this report, and with exception of the items noted above,
management believes that there are no legal proceedings pending, the adverse
resolution of which may be expected to have a material adverse impact on either
the Company's consolidated financial position, results of operations or cash
flows.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. On August 29, 2001 Sizzler International, Inc. held its annual meeting of
stockholders.
b. The following directors were elected as members of the Board at the
Meeting:
Term
Expires For Withheld
------- --- --------
James A. Collins 2004 23,575,186 2,516,867
Charles F. Smith 2004 23,454,295 2,637,758
The following directors' terms of office continued after the meeting
Term
Expires
-------
Charles L. Boppell 2002
Phillip D. Matthews 2002
Robert A. Muh 2002
Barry E. Krantz 2003
Kevin W. Perkins 2003
21
c. Proposal to amend the Company's 1997 Employee Stock Incentive Plan to
increase the number of shares of Common Stock for which options may be
granted or which may be sold as Restricted Stock under the Plan:
For Against Witheld
--- ------- -------
17,607,009 7,891,378 593,666
Proposal to amend the Company's 1997 Non-Employee Directors' Stock
Incentive Plan to increase the number of shares of Common Stock for which
options may be granted under the Plan:
For Against Witheld
--- ------- -------
17,933,983 7,995,522 162,548
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Reports on Form 8-K
The Company filed a report on Form 8-K dated July 5, 2001 reporting:
May 7, 2001 Sizzler issued a press release announcing the
appointment of Kenneth Cole as President and Chief Executive Officer
of Sizzler USA.
May 10, 2001 Sizzler issued a press release announcing the Board
authorization of an 500,000 additional shares of common stock under
the Company's share repurchase program.
June 19, 2001 Sizzler International, Inc. issued a press release
announcing earnings for the fourth quarter and fiscal year.
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: August 31, 2001 /s/ Charles L. Boppell
----------------------------------
Charles L. Boppell
President, Chief Executive Officer
and Director
Date: August 31, 2001 /s/ A. Keith Wall
----------------------------------
A. Keith Wall
Vice President and Chief Financial
Officer (principal financial and
accounting officer)
Date: August 31, 2001 /s/ Mary E. Arnold
----------------------------------
Mary E. Arnold
Vice President and Controller
23