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 October 14, 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
WORLDWIDE RESTAURANT CONCEPTS, 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.)
15301 Ventura Blvd., Suite 300, Building B, Sherman Oaks, California 91403
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices, including zip code)
(818) 662-9800
------------------------------------------------------------------------
(Registrant's telephone number, including area code)
SIZZLER INTERNATIONAL, INC.
6101 West Centinela Avenue, Suite 200, Culver City, California 90230
------------------------------------------------------------------------
(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 November 23, 2001
- ---------------------------- --------------------------------
Common Stock $0.01 Par Value 27,205,005 shares
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
WORLDWIDE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
October 14, April 30,
ASSETS 2001 2001
- ---------------------------------------------------------- ----------- -----------
(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 18,399 $ 9,997
Restricted cash 3,339 7,852
Receivables, net of reserves of $739 at
October 14, 2001 and $965 at April 30, 2001 2,911 2,464
Inventories 4,116 4,211
Current tax asset 3,680 3,324
Prepaid expenses and other current assets 2,417 2,554
- ---------------------------------------------------------- ----------- -----------
Total current assets 34,862 30,402
- ---------------------------------------------------------- ----------- -----------
Property and equipment, net 60,023 60,011
Property held for sale, net 3,864 3,996
Long-term notes receivable, net of reserves of $3
at October 14, 2001 and $17 at April 30, 2001 833 994
Deferred income taxes 2,397 2,425
Goodwill, net of accumulated amortization of
$659 at October 14, 2001 and $659 at April 30, 2001 19,562 19,491
Intangible assets, net of accumulated amortization of
$967 at October 14, 2001 and $893 at April 30, 2001 2,220 2,208
Other assets 2,669 3,035
- ---------------------------------------------------------- ----------- -----------
Total assets $126,430 $122,562
========================================================== =========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
WORLDWIDE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
October 14, April 30,
LIABILITIES AND STOCKHOLDERS' INVESTMENT 2001 2001
- ------------------------------------------------------------ ----------- -----------
(Unaudited) (Audited)
Current Liabilities:
Current portion of long-term debt $ 4,627 $ 5,597
Accounts payable 10,045 9,078
Other current liabilities 11,934 9,626
Income taxes payable 1,544 1,870
- ------------------------------------------------------------ ----------- -----------
Total current liabilities 28,150 26,171
- ------------------------------------------------------------ ----------- -----------
Long-term debt, net of current portion 25,217 24,085
Deferred gains and revenues 8,074 8,307
Pension liability 9,289 9,482
- ------------------------------------------------------------ ----------- -----------
Total liabilities 70,730 68,045
- ------------------------------------------------------------ ----------- -----------
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 27,205,005 shares at October 14, 2001
and 27,744,799 shares at April 30, 2001 293 291
Additional paid-in capital 279,880 279,846
Accumulated deficit (215,027) (217,046)
Treasury stock, 2,000,000 shares at October 14, 2001
and 1,363,800 shares at April 30, 2001, at cost (4,135) (3,189)
Accumulated other comprehensive loss (5,311) (5,385)
- ------------------------------------------------------------ ----------- -----------
Total stockholders' investment 55,700 54,517
- ------------------------------------------------------------ ----------- -----------
Total liabilities and stockholders' investment $ 126,430 $ 122,562
============================================================ =========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
WORLDWIDE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TWENTY-FOUR WEEKS ENDED OCT. 14, 2001 AND OCT. 15, 2000
(In thousands, except per share data)
Oct. 14, Oct. 15,
2001 2000
- ----------------------------------------------------- ----------- ---------
(Unaudited) (Unaudited)
Revenues
Restaurant sales $ 117,298 $ 104,766
Franchise revenues 3,917 4,529
- ----------------------------------------------------- ----------- ---------
Total revenues 121,215 109,295
- ----------------------------------------------------- ----------- ---------
Costs and Expenses
Cost of sales 40,067 37,676
Labor and related expenses 33,586 29,263
Other operating expenses 28,754 24,692
Depreciation and amortization 4,358 3,914
General and administrative expenses 10,777 9,229
- ----------------------------------------------------- ----------- ---------
Total operating costs 117,542 104,774
- ----------------------------------------------------- ----------- ---------
Interest expense 2,171 1,680
Investment income (912) (1,012)
Gain on sale of assets (412) -
- ----------------------------------------------------- ----------- ---------
Total costs and expenses 118,389 105,442
- ----------------------------------------------------- ----------- ---------
Income before provision for income taxes 2,826 3,853
- ----------------------------------------------------- ----------- ---------
Provision for income taxes 807 678
- ----------------------------------------------------- ----------- ---------
Net income $ 2,019 $ 3,175
===================================================== =========== =========
Basic and diluted earnings per share $ 0.07 $ 0.11
===================================================== =========== =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
WORLDWIDE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TWELVE WEEKS ENDED OCT. 14, 2001 AND OCT. 15, 2000
(In thousands, except per share data)
Oct. 14, Oct. 15,
2001 2000
- ----------------------------------------------------- ----------- ----------
(Unaudited) (Unaudited)
Revenues
Restaurant sales $ 58,025 $ 52,454
Franchise revenues 1,918 2,183
- ----------------------------------------------------- ----------- ----------
Total revenues 59,943 54,637
- ----------------------------------------------------- ----------- ----------
Costs and Expenses
Cost of sales 19,866 18,733
Labor and related expenses 16,687 15,029
Other operating expenses 14,480 12,761
Depreciation and amortization 2,198 2,109
General and administrative expenses 5,300 4,917
- ----------------------------------------------------- ----------- ----------
Total operating costs 58,531 53,549
- ----------------------------------------------------- ----------- ----------
Interest expense 1,052 933
Investment income (440) (452)
- ----------------------------------------------------- ----------- ----------
Total costs and expenses 59,143 54,030
- ----------------------------------------------------- ----------- ----------
Income before provision for income taxes 800 607
- ----------------------------------------------------- ----------- ----------
Provision for income taxes 445 297
- ----------------------------------------------------- ----------- ----------
Net income $ 355 $ 310
===================================================== =========== ==========
Basic and diluted earnings per share $ 0.01 $ 0.01
===================================================== =========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
WORLDWIDE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-FOUR WEEKS ENDED OCT. 14, 2001 AND OCT. 15, 2000
(in thousands)
Oct. 14, Oct. 15,
2001 2000
- ---------------------------------------------------------------------------- ----------- ------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net income $ 2,019 $ 3,175
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,358 3,914
Net gain on sale of assets (412) -
Deferred income taxes (329) (19)
Other (347) 0
Changes in operating assets and liabilities:
Receivables (292) 702
Inventories 87 457
Prepaid expenses and other current assets 537 (128)
Accounts payable 997 (961)
Accrued liabilities 2,354 555
Income taxes payable (320) (1,565)
- ---------------------------------------------------------------------------- ----------- ------------
Net cash provided by operating activities 8,652 6,130
- ---------------------------------------------------------------------------- ----------- ------------
INVESTING ACTIVITIES
Additions to property and equipment (5,146) (11,503)
Disposal of property and equipment 1,047 5,975
Acquisition of Pat & Oscar's net of cash acquired - (16,383)
Payments in escrow, Pat & Oscar's acquisition - (1,151)
Other, net 216 145
- ---------------------------------------------------------------------------- ----------- ------------
Net cash used in investing activities (3,883) (22,917)
- ---------------------------------------------------------------------------- ----------- ------------
FINANCING ACTIVITIES
Issuance of long-term debt 3,000 -
Reduction of long-term debt (2,785) (1,826)
Repurchase of common stock (946) (946)
Other, net (13) (72)
- ---------------------------------------------------------------------------- ----------- ------------
Net cash used in financing activities (744) (2,844)
- ---------------------------------------------------------------------------- ----------- ------------
Net increase (decrease) in cash, cash equivalents and restricted cash 4,025 (19,631)
- ---------------------------------------------------------------------------- ----------- ------------
Effect of foreign exchange on cash (136) (1,470)
- ---------------------------------------------------------------------------- ----------- ------------
Cash, cash equivalents and restricted cash
at beginning of period 17,849 38,789
- ---------------------------------------------------------------------------- ----------- ------------
Cash, cash equivalents and restricted cash
at end of period $ 21,738 $ 17,688
============================================================================ =========== ============
Supplemental Cash Flow Disclosures
Cash paid during the year for:
Interest $ 2,101 $ 1,524
Income taxes $ 946 $ 2,035
6
WORLDWIDE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
AS OF OCTOBER 14, 2001
1. General:
The condensed consolidated financial statements include Worldwide
Restaurant Concepts, Inc. and its wholly owned subsidiaries ("WRC" 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 Company-owned outlets 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:
7
Twelve weeks ended Twenty-four weeks ended
-------------------------- --------------------------
October 14, October 15, October 14, October 15,
In thousands, except EPS 2001 2000 2001 2000
-------------------------- --------------------------
Numerator for basic and diluted EPS
Net income $ 355 $ 310 $ 2,019 $ 3,175
=========== =========== =========== ===========
Denominator for basic EPS - weighted average
shares of common stock outstanding 27,218 27,776 27,256 27,907
Effect of dilutive stock options 14 121 67 234
----------- ----------- ----------- -----------
Denominator for diluted EPS - adjusted
weighted average shares outstanding 27,232 27,897 27,323 28,141
=========== =========== =========== ===========
Antidilutive options not included in computation
of diluted EPS 4,217 3,793 4,164 3,680
Basic and diluted earnings per share $ 0.01 $ 0.01 $ 0.07 $ 0.11
=========== =========== =========== ===========
3. Comprehensive Income:
Comprehensive income, for the quarters ended October 14, 2001 and
October 15, 2000, are as follows (in thousands):
Twelve weeks ended Twenty-four weeks ended
------------------------- --------------------------
October 14, October 15, October 14, October 15,
2001 2000 2001 2000
------------------------- --------------------------
Net Income $ 355 $ 310 $ 2,019 $ 3,175
Foreign currency translation
adjustments (no tax effect) 252 960 255 918
Adoption of SFAS 133: Cumulative effect
of change in accounting principle, net of tax - - (242) -
Gain (loss) on derivative instrument, net of tax (13) - 61 -
-----------------------------------------------------
Total comprehensive income $ 594 $ 1,270 $ 2,093 $ 4,093
=====================================================
4. Segment Information:
Substantially all of the Company's revenue results 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 United States and Latin America
Sizzler(R) restaurants and franchise operations. Pat & Oscar's consists
of twelve Pat & Oscar's(SM)
8
restaurants in southern California and Arizona. Sizzler International
consists of all foreign Company and franchise operated Sizzler(R)
restaurants. KFC consists of KFC(R) franchise restaurants in Australia.
Corporate and other includes any items not included in the reportable
segments listed above. Intercompany transactions are eliminated when
computing revenues, earnings before interest, taxes, and corporate
overhead.
Twelve weeks ended Twenty-four weeks ended
----------------------------- ----------------------------------
October 14, October 15, October 14, October 15,
2001 2000 2001 2000
------------ ----------- ----------- -----------
Revenues (in thousands):
------------------------
Sizzler - USA $ 24,095 $ 22,816 $ 49,937 $ 48,282
Oscar's 8,513 3,781 17,304 3,781
Sizzler - International 8,049 8,365 15,633 17,173
KFC 19,286 19,675 38,341 40,059
------------ ----------- ----------- -----------
Total revenues $ 59,943 $ 54,637 $ 121,215 $ 109,295
============ =========== =========== ===========
Earnings before interest and taxes
-----------------------------------
(in thousands):
---------------
Sizzler - USA $ 1,492 $ 1,359 $ 3,929 $ 3,964
Oscar's 30 (363) 543 (363)
Sizzler - International 384 270 552 616
KFC 2,214 2,171 4,387 4,580
Corporate and other (2,708) (2,349) (5,326) (4,276)
------------ ----------- ----------- -----------
Total earnings before interest
and taxes $ 1,412 $ 1,088 $ 4,085 $ 4,521
============ =========== =========== ===========
Reconciliation to pre-tax income:
---------------------------------
Interest expense $ 1,052 $ 933 $ 2,171 $ 1,680
Investment income, net (440) (452) (912) (1,012)
------------ ----------- ----------- -----------
Income before income taxes $ 800 $ 607 $ 2,826 $ 3,853
============ =========== =========== ===========
Earnings before interest and taxes includes operating results before
investment income, interest expense, income taxes and non-recurring
charges. The corporate and other component of earnings before interest and
taxes represents corporate selling, and general and administrative
expenses.
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 doing business
under
9
the name Pat & Oscar's(SM) (formerly operated 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 May 1, 2000 and 1999 (in thousands, except per
share amounts):
Twelve weeks ended Twenty-four weeks ended
------------------------- ---------------------------
October 15, October 17, October 15, October 17,
2000 1999 2000 1999
------------------------- ---------------------------
Revenues $ 57,615 $ 61,736 $ 119,622 $ 125,158
Net Income 100 1,455 2,931 3,943
Basic and diluted net income per share 0.00 0.05 0.10 0.14
Shares used in per share calculation 27,897 29,047 28,141 28,996
The above net income amounts include goodwill amortization
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 and all recognized assets, liabilities and
goodwill have been assigned to these reporting units. The Company completed
the first step of the transitional goodwill impairment test during the
second quarter and no impairment was recorded. The following sets forth the
intangible assets by major asset class (in thousands):
10
October 14, 2001 April 30, 2001
---------------- --------------
Amortized intangibles:
Franchise rights $ 2,229 $ 2,174
Accumulated amortization (711) (662)
Unamortized intangible assets:
Trademarks 317 286
Accumulated amortization (67) (47)
Other intangibles: 641 641
Accumulated amortization (189) (184)
---------------- --------------
Total intangibles 3,187 3,101
Total accumulated amortization (967) (893)
---------------- --------------
Net intangibles $ 2,220 $ 2,208
================ ==============
Aggregate amortization expense on intangible assets was approximately
$30,000 for the quarter ended October 14, 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.
The changes in the carrying amount of goodwill for the quarter ended
October 14, 2001, are as follows (in thousands):
Sizzler
WRC USA Pat & Oscar's Total
--- --- ------------- -----
Balance as of April 30, 2001 $ - $ 1,449 $ 18,042 $ 19,491
Goodwill acquired during the year 71 - - 71
Impairment losses - - - -
----------- ----------- ------------- ------------
Balance as of October 14, 2001 $ 71 $ 1,449 $ 18,042 $ 19,562
=========== =========== ============= ============
A reconciliation of reported net income to net income adjusted to reflect
adoption of SFAS 142 in the quarter ended October 14, 2001 is as follows
(in thousands):
Twelve weeks ended Twenty-four weeks ended
------------------------- ----------------------------
October 14, October 15, October 14, October 15,
2001 2000 2001 2000
------------------------- ----------------------------
Reported net income $ 355 $ 310 $ 2,019 $ 3,175
Add back: goodwill amortization - 109 - 109
------------------------- ----------------------------
Adjusted net income $ 355 $ 419 $ 2,019 $ 3,284
========================= ============================
Basic and diluted earnings per share:
Adjusted and reported basic and
diluted earnings per share $ 0.01 $ 0.02 $ 0.07 $ 0.12
11
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 percent 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 correspond with the repayment of the loan by the
Company's International Division expected in August of 2003.
8. Commitments and Contingencies:
On July 9, 2001 the Company entered into a ten-year lease agreement
with Galleria Park Partners, LLC commencing October 29, 2001. The
agreement commits the Company to pay $0.6 million in annual fixed
rent. The location will be used for the Company's corporate office.
On October 3, 2001, upon the petition of the Insurance Commissioner of
the Commonwealth of Pennsylvania, Reliance Insurance Company
("Reliance") was declared insolvent and became subject to Pennsylvania
state law liquidation proceedings. Reliance was the Company's primary
general liability and workers' compensation carrier during the period
May 1, 1997 through May 1, 1999 and was the Company's first level
excess general liability carrier with respect to for claims against
the Company arising out of the July 2000 E. coli incident in
Milwaukee.
As a result of the legal proceedings affecting Reliance, the Company's
ability to recover funds under its liability policies with this
carrier, whether relating to the Milwaukee incident or otherwise, may
be substantially limited. However, based on the amount of its primary
general liability coverage under policies with other carriers, as well
as anticipated results of the pending litigation in Milwaukee and
other claims, the Company does not believe that Reliance's liquidation
proceedings are likely to have any material adverse impact upon the
Company.
12
9. Authoritative pronouncement:
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS No. 144"). SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS
No. 144 supercedes SFAS No. 121 and the accounting and reporting
provisions of APB Opinion No. 30 for the disposal of a segment of a
business. SFAS No. 144 also amends ARB No. 51 to eliminate the
exception to consolidation for a subsidiary for which control is
likely to be temporary. SFAS No. 144 is not expected to have a
material impact on the Company's consolidated results of operations,
financial position or cash flow. The Company will adopt SFAS No. 144
beginning in the first quarter of fiscal 2003.
13
WORLDWIDE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
TWELVE WEEKS ENDED OCTOBER 14, 2001 VERSUS OCTOBER 15, 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 October 14, 2001
were $59.9 million compared to $54.6 million for the quarter ended October 15,
2000, an increase of $5.3 million or 9.7 percent. The increase is primarily due
to the addition of Pat & Oscar's which accounted for $8.5 million in sales this
quarter compared to $3.8 million in the prior year quarter, which included only
seven weeks of post acquisition operations. In addition, there were four more
domestic Sizzler locations than in the same period in the prior year. Both the
international Sizzler(R) and KFC(R) restaurants had increases in same store
sales due to successful menu promotions. These revenue increases were partially
offset by a decline in same store sales from the Company's U.S. restaurants due
to a slowing domestic economy that further deteriorated as a result of the
September 11, 2001 incidents. Further offsetting the revenue increase was a 9.1
percent decrease in the Australian dollar exchange rate that reduced revenues by
$2.7 million.
The following table shows the change in Company-operated same store sales over
prior year.
FY 2001 FY 2002
------------------------------------- ---------------
QTR 1 QTR 2 QTR 3 QTR 4 QTR 1 QTR 2
----- ----- ----- ----- ----- -----
SIZZLER
- -------
Sizzler USA 1.9% 0.7% 0.1% -1.6% -3.2% -0.7%
Sizzler International
(Based on A$) 0.6% -4.1% -0.5% -1.8% -2.0% 7.9%
KFC
- ---
(Based on A$) 6.1% 4.0% 2.6% -2.7% 1.3% 3.7%
PAT & OSCAR'S
- -------------
USA n/a 4.9% 5.5% 2.5% -0.9% -1.8%
14
Consolidated operating expenses for the quarter ended October 14, 2001 were
$58.5 million compared to $53.5 million for the quarter ended October 15, 2000,
an increase of $5.0 million or 9.3 percent. The increase is primarily due to
having five more weeks of Pat & Oscar's operations, the addition of new Pat &
Oscar's(SM) and KFC(R) restaurants and the addition of four Sizzler(R) U.S.
restaurants that were previously franchised. Utility rate increases in the U.S.
contributed to the increase in operating expenses. These increases were
partially offset by a 9.1 percent decrease in the Australian dollar exchange
rate.
Interest expense was $1.1 million in the current quarter compared to $0.9
million in the same period of the prior year, an increase of $119,000, or 12.8
percent. The increase in interest expense is primarily due to higher debt
assumed with the Company's acquisition of Pat & Oscar's and to the Company's
additional borrowings under the Heller Financial Services loan. 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 $0.4 million in the current
quarter compared to $0.5 million in the same period of the prior year, a
decrease of $12,000 or 2.7 percent which was primarily due to lower interest
rates.
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 $0.3 million in the same period
of the prior year. The effective income tax rate increased from 18.0 percent for
the twelve weeks ended October 15, 2000 to 29.0 percent for the twelve weeks
ended October 14, 2001 due to higher income in our international division which
does not benefit from domestic net operating loss deductions.
SIZZLER USA OPERATIONS
- ----------------------
Total revenues for the quarter ended October 14, 2001 were $24.1 million
compared to $22.8 million for the quarter ended October 15, 2000, an increase of
5.6 percent. Restaurant sales for the current quarter were $22.6 million
compared to $21.1 million in the same period of the prior year. The sales
increase is primarily due to an increase in Company-owned stores to 67 compared
to 63 last year and 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 four franchised restaurants and opened one new
restaurant. 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 decreased 0.7 percent
from the same period last year due to a slowing U.S. economy that has further
deteriorated as a result of the September 11, 2001 incidents. In addition, the
California economy has been particularly affected by previously instituted
utility rate increases. However, the Company's re-imaging of the Sizzler(R)
brand and related promotional and operational initiatives have resulted in
positive underlying sales trends as indicated by the improvement in same store
sales compared to the first quarter of Fiscal Year 2002.
15
Management believes that sales will recover from the September 11 attacks in the
near term and is focusing its efforts on driving sales through marketing
promotions and operational improvements. Franchise revenue was $1.5 million in
the current quarter compared to $1.7 million in the same period of the prior
year, a decrease of $0.2 million or 13.3 percent. Franchise revenues were
produced by 185 franchised Sizzler(R) restaurants, including 13 in Latin
America, in the current quarter compared to 194 franchised Sizzler(R)
restaurants, including 13 in Latin America, in the same period of the prior
year. The revenue decrease is due to having 9 fewer franchise locations coupled
with lower sales volumes.
Prime costs were $14.6 million in the current quarter compared to $14.0 million
in the same period of the prior year. Prime costs, which include food, paper and
labor, decreased to 64.6 percent of sales compared to 66.4 percent in the same
period of the prior year. The decrease is due to reductions in food costs
associated with tighter controls and purchasing effectiveness and to labor cost
controls. The increase in total prime costs is due to having four more
restaurants than in the prior year.
Other operating expenses amounted to $5.8 million for the current quarter
compared to $5.4 million for the same period of the prior year. This increase is
primarily due to the additional restaurants and utility rate increases.
Management is continuing its plan to re-image the Sizzler(R) concept as an
affordable, mid-scale family grill concept 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. As part of the re-imaging, the Company has launched a menu
redevelopment initiative that includes testing new grilled entrees and
side-dishes and re-designed menu boards. New marketing programs will accompany
these programs. In addition, the Company will continue to focus on quality
service by training its restaurant employees with new training programs. The
Company has completed its interior remodels with its Company-operated locations
and expects to complete the re-imaging of its franchise locations before the end
of fiscal year 2003.
PAT & OSCAR'S OPERATIONS
- ------------------------
Pat & Oscar's generated $8.5 million in revenues for the quarter ended October
14, 2001 compared to $3.8 million in the same period of the prior year. The
increase in revenues is primarily due to an increase in the number of stores.
There were 12 restaurants at the end of current quarter compared to 9 in the
prior year. In addition, the prior year quarter included only seven weeks of
post acquisition operations. Same store sales decreased 1.8 percent for the
quarter due to the effects of a slowing U.S. economy and the September 11, 2001
incidents and cannibalization of sales caused by certain newly opened
restaurants.
Prime costs, which include food and labor, were $5.1 million or 59.5 percent of
sales in the current quarter compared to $2.4 million or 64.7 percent in the
same period of the
16
prior year. This improvement is due to 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, flour and cheese.
In addition, tighter labor controls reduced overall labor costs. Total prime
costs increased due to additional weeks of operations and to new restaurants.
Other operating expenses amounted to $2.2 million for the current quarter
compared to $0.9 million for the same period in the prior year primarily due to
new restaurant openings and five additional weeks of operations.
Pat & Oscar's continued to show positive earnings before interest and taxes
"EBIT" for the current quarter and is expected to be accretive to earnings for
fiscal year 2002. The Company is on track to open three to four new locations
during the remainder of 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 & Oscar's restaurants. The
Company will test the resulting goodwill for impairment, at least annually. See
Note 6 - Goodwill and Intangible Assets, to Consolidated Financial Statements.
SIZZLER INTERNATIONAL OPERATIONS
- --------------------------------
Total revenues for the quarter ended October 14, 2001 were $8.0 compared to $8.4
million for the quarter ended October 15, 2000, a decrease of $0.4 million or
3.8 percent. The revenue decrease was primarily caused by a 9.1 percent decrease
in the Australian dollar exchange rate and to having one less restaurant in the
current quarter compared to the same period in the prior year. These decreases
were partially offset by a 7.9% increase in same store sales driven by
successful marketing promotions that increased customer traffic. Restaurant
sales for the current quarter were $7.6 million compared to $7.9 million in the
same period of the prior year, produced by 30 restaurants operating during the
current quarter and 31 during the same period of the prior year. Franchise
revenue was $402,000 in the current quarter compared to $435,000 in the same
period of the prior year, a decrease of $33,000 or 7.6 percent. This decrease is
due to the 9.1 percent decrease in the Australian dollar exchange rate partially
offset by royalties from additional franchise locations. Franchise revenues were
produced by three joint ventures and 56 franchised Sizzler(R) locations in the
current quarter compared to three joint ventures and 54 franchised Sizzler(R)
locations 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 $5.2 million in the current quarter compared to $5.4 million in
the same period of the prior year. Prime costs, which include food, paper and
labor, increased to 68.2 percent of sales compared to 68.0 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.
17
Other operating expenses amounted to $1.9 million for the current quarter
compared to $2.0 million for the same period of the prior year, primarily 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 three units being tested and the Company will continue to monitor
these locations before proceeding with the remodel program in Australia. We are
also planning to test a Sizzler(R) restaurant in a club, which is a popular
dining venue in Australia.
KFC(R) OPERATIONS
- -----------------
Revenues for the quarter ended October 14, 2001 were $19.3 million compared to
$19.7 million for the quarter ended October 15, 2000, a decrease of $0.4 million
or 2.0 percent. This decrease is due to a 9.1 percent decrease in the Australian
dollar exchange rate, partially offset by a 3.7% increase in same store sales
and increased sales from having three more units in operation compared to the
same period in the prior year. Sales for the current quarter reflect 107
restaurants operating during the current quarter compared to 104 restaurants in
the same period of the prior year.
Prime costs were $11.7 million in the current quarter compared to $11.9 million
in the same period of the prior year. Prime costs, which include food, paper and
labor, remained flat at 60.6 percent of sales compared to the same period of the
prior year due to slightly higher food costs associated with recent promotions
offset by labor cost improvements.
Other operating expenses amounted to $4.7 million for the current quarter
compared to $4.7 million for the same period of the prior year. Operating
expenses increased due to three additional restaurants operated in the current
quarter than in the prior year quarter and were offset by a 9.1 percent decline
in the Australian dollar exchange rate.
Management is continuing its facilities upgrade and is testing the introduction
of three-window "face-to-face" drive thru operations in four of our new store
locations.
RESULTS OF OPERATIONS
- ---------------------
TWENTY-FOUR WEEKS ENDED OCTOBER 14, 2001 VERSUS OCTOBER 15, 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 twenty-four weeks ended
October 14, 2001 were $121.2 million compared to $109.3 million for the
twenty-four weeks ended
18
October 15, 2000, an increase of $11.9 million or 10.9 percent. The increase is
primarily due to the addition of Pat & Oscar's which accounted for $17.3 million
in sales this period compared to $3.8 million in the prior year period, which
included only seven weeks of post acquisition operations. In addition, there
were eight more U.S. Sizzler(R) locations. Both the international Sizzler(R) and
KFC(R) restaurants had increases in same store sales due to successful menu
promotions. These revenue increases were partially offset by a decline in same
store sales from the Company's U.S. restaurants due to a slowing domestic
economy that further deteriorated as a result of the September 11, 2001
incidents. Further offsetting these revenue increases was a 10.5 percent
decrease in the Australian dollar exchange rate that reduced revenues by $6.3
million.
Consolidated operating expenses for the twenty-four weeks were $117.5 million
compared to $104.8 million in the prior year, an increase of $12.7 million or
12.2 percent. The increase is primarily due to having 17 more weeks of Pat &
Oscar's operations, and the addition of new Pat & Oscar's(SM) and KFC(R)
restaurants and the addition of seven Sizzler(R) U.S. restaurants that were
previously franchised. Utility rate increases in the U.S. also contributed to
the increase in operating expenses. These increases are partially offset by a
10.5 percent decline in the Australian dollar exchange rate.
Interest expense was $2.2 million for the twenty-four weeks ended October 14,
2001 compared to $1.7 million in the same period of the prior year, an increase
of $0.5 million or 29.2 percent. This increase is primarily due to debt assumed
with the acquisition of Pat & Oscar's and 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 $0.9 million compared to $1.0 million in the same period of the prior year,
a decrease of $0.1 million, or 9.9 percent primarily due to lower interest
rates.
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. The
provision amounted to $0.8 million in the first twenty-four weeks of fiscal year
2002 compared to $0.7 million in the same period of the prior year, an increase
of $0.1 million or 19.0 percent. The effective income tax rate increased from
49.0 percent for the twenty-four weeks ended October 15, 2000 to 56.0 percent
for the twenty-four weeks ended October 14, 2001 due to higher income in our
international division which does not benefit from domestic net operating loss
deductions.
SIZZLER USA OPERATIONS
- ----------------------
Total revenues for the twenty-four weeks ended October 14, 2001 were $49.9
million compared to $48.3 million for the twenty-four weeks ended October 15,
2000, an increase of $1.7 million or 3.4 percent. Restaurant sales were $46.8
million compared to $44.6 million in the same period of the prior year. The
increase is primarily due to an
19
increase in Company-owned stores to 67 this year compared to 60 last year. Since
the first quarter of last year, the Company closed one store due to
redevelopment, acquired seven franchised restaurants and opened one new store.
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 due to an
already slowing economy, which further deteriorated as a result of the September
11, 2001 incidents. In addition, the California economy has been particularly
affected by previously instituted utility rate increases. Franchise revenue was
$3.1 million for the first twenty-four weeks of this year compared to $3.7
million in the same period of the prior year, a decrease of $0.6 million or 13.7
percent. Franchise revenues were produced by 185 franchised Sizzlers, including
13 in Latin America, in the current period compared to 194 franchised Sizzlers,
including 13 in Latin America, in the same period of the prior year. The revenue
decrease is due to having 9 fewer franchise locations coupled with lower sales
volumes.
Prime costs were $30.2 million for the twenty-four weeks ended October 14, 2001
compared to $29.2 million in the same period of the prior year. Prime costs,
which include food, paper and labor, decreased to 64.6 percent of sales compared
to 65.5 percent in the same period of the prior year. The decrease is due to
reductions in food costs associated with tighter controls and purchasing
effectiveness partially 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 increase in total prime costs is due to
having more restaurants than in the prior year.
Other operating expenses amounted to $11.9 million for the current year compared
to $10.7 million for the same period of the prior year. This increase is
primarily due to increases in utilities and to having more restaurants than in
the prior year.
Management is continuing its plan to re-image the Sizzler(R) concept as an
affordable, mid-scale family grill concept 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. As part of the re-imaging initiative, the Company has
launched a menu redevelopment initiative that includes testing new grilled
entrees and side-dishes and re-designed menu boards. New marketing programs will
accompany these programs. In addition, the Company will continue to focus on
quality service by training its restaurant employees with new training programs.
The Company has completed its interior remodels with its Company-operated
locations and expects to complete the re-imaging of its franchise locations
before the end of fiscal year 2003.
PAT & OSCAR'S OPERATIONS
- ------------------------
Total revenues for the quarter ended October 14, 2001 were $17.3 million
compared to $3.8 million in the same period of the prior year. The acquisition
of Pat & Oscar's occurred during the second quarter of the prior year therefore
there were 24 weeks of
20
operations in the current year compared to seven in the prior year. In addition,
there were 12 restaurants at the end of the current quarter compared to 9 in the
prior year.
Prime costs, which include food and labor, were $10.1 million compared to $2.4
million in the same period of the prior year. Prime costs represent 58.2 percent
of sales, compared to 64.7 percent in the same period of the prior year. This
improvement is due to 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, flour and cheese. In
addition, tighter labor cost controls reduced overall labor costs. Total prime
costs increased due to additional weeks of operations and to new restaurants.
Other operating expenses amounted to $4.2 million in the current period compared
to $0.9 million in the same period of the prior year primarily due to new
restaurant openings and seventeen additional weeks of operations.
Pat & Oscar's contributed positive EBIT for the current period and is expected
to be accretive for the fiscal year. The Company is on track to open three to
four new locations in fiscal year 2002.
Due to the adoption of SFAS 142, the Company discontinued amortizing the
goodwill that resulted from the acquisition of Pat & Oscar's(SM) restaurants and
the Company will test the resulting goodwill for impairment, at least annually.
See Note 6 - Goodwill and Intangible Assets, to Consolidated Financial
Statements.
SIZZLER INTERNATIONAL OPERATIONS
- --------------------------------
Total revenues for the twenty-four weeks ended October 14, 2001 were $15.6
compared to $17.2 million for the twenty-four weeks ended October 15, 2000, a
decrease of $1.6 million or 9.0 percent. The revenue decrease was primarily
caused by a 10.5 percent decrease in the Australian dollar exchange rate, and
having one less unit in the current period compared to the same period in the
prior year. These decreases were partially offset by an increase in same store
sales driven by successful marketing promotions. Restaurant sales for the
twenty-four weeks ended October 14, 2001 were $14.9 million compared to $16.3
million in the same period of the prior year, produced by 30 restaurants
operating during the current year and 31 restaurants operating in the same
period of the prior year. Franchise revenue was $0.7 million in the current year
compared to $0.9 million in the same period of the prior year, a decrease of
$0.2 million or 12.9 percent. This decrease is primarily due to the 10.5 percent
decrease in the Australian dollar exchange rate. Three joint venture restaurants
and 56 international franchised restaurants produced current franchise revenues.
In the same period of the prior year, the Company operated three joint venture
restaurants and 54 international franchised restaurants. Current international
franchise restaurants are located in Japan, Taiwan, Thailand, South Korea,
Singapore and Indonesia.
Prime costs were $10.2 million for the twenty-four weeks ended October 14, 2001
21
compared to $11.1 million in the same period of the prior year. Prime costs,
which include food, paper and labor, were 68.6 percent of sales in the current
year compared to 68.2 percent of sales in the same period of the prior year.
This increase is 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 $3.7 million for the current fiscal year
compared to $4.0 million for the same period of the prior year primarily 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
three units being tested and the Company will continue to monitor these
locations before proceeding with the remodel program in Australia. 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 twenty-four weeks ended October 14, 2001 were $38.3 million
compared to $40.1 million for the twenty-four weeks ended October 15, 2000, a
decrease of $1.7 million or 4.3 percent. This decrease is due to a 10.5 percent
decrease in the Australian dollar exchange rate, partially offset by an increase
in same store sales and sales from three more units in operation compared to the
same period in the prior year. Sales for the current quarter reflect 107
restaurants operating during the current quarter compared to 104 restaurants in
the same period of the prior year.
Prime costs were $23.2 million in the current year compared to $24.1 million in
the same period of the prior year. Prime costs, which include food, paper and
labor, increased slightly to 60.4 percent of sales compared to 60.3 percent in
the same period of the prior year due to labor rate increases.
Other operating expenses amounted to $9.2 million for the current year compared
to $9.6 million for the same period of the prior year primarily due to a
decrease in the Australian dollar exchange rate.
Management is continuing its facilities upgrade and is testing the introduction
of three-window "face-to-face" drive thru operations in four of our new store
locations.
22
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working Capital
- ---------------
The Company's principal source of liquidity is cash flows from operations, which
was $8.7 million for the first twenty-four weeks of fiscal year 2002 compared to
$6.1 million for the same period of the prior year. The increase is due to
fluctuations in the Company's operating account balances partially offset by a
$1.2 million decrease in net income.
The Company's working capital at October 14, 2001 was $6.7 million including
cash and cash equivalents of $18.4 million. At April 30, 2001 the Company had a
working capital surplus of $4.2 million. This increase is primarily due to net
cash provided by operating activities and additional borrowings, partially
offset by expansion of Pat & Oscar's and funds expended for international
remodeling initiatives. The current ratio was 1.2 at October 14, 2001 and 1.2 at
April 30, 2001.
Total Assets / Capital Expenditures
- -----------------------------------
At October 14, 2001, total assets were $126.4 million, an increase of $3.9
million or 3.2 percent from April 30, 2001 primarily due to the increase in cash
and cash equivalents. Property and equipment, excluding property held for sale,
represented approximately 47.5 percent of total assets at October 14, 2001 and
49.0 percent at April 30, 2001.
Capital expenditures were $5.1 million for the twenty-four weeks ended October
14, 2001 and $11.5 million for the same period last year. The current year's
capital expenditures were primarily used for development of two new Pat &
Oscar's(SM) restaurants and refurbishment of existing restaurants. The Company
anticipates increased international operations through additional investment in
Company-operated restaurants, joint ventures and the development of the
franchise system.
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 $17.5 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
9.58 percent. Under the terms of the agreement, the Company has borrowed $8.0
million to date and had the right to borrow the remaining balance under certain
conditions, on or before
23
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 the Southwest Community Bank that matures in
fiscal year 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 covenants and restrictions.
Share Repurchase
- ----------------
During the twenty-four weeks ended October 14, 2001, the Company repurchased
636,200 shares of its common stock for a total of $946,000. This brings the
total number of shares repurchased to 2.0 million out of 2.0 million authorized.
New Accounting Standards
- ------------------------
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supercedes SFAS No. 121 and the accounting and
reporting provisions of APB Opinion No. 30 for the disposal of a segment of a
business. SFAS No. 144 also amends ARB No. 51 to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
No. 144 is not expected to have a material impact on the Company's consolidated
results of operations, financial position or cash flow. The Company will adopt
SFAS No. 144 beginning in the first quarter of fiscal 2003.
QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK DISCLOSURES
- ----------------------------------------------------------------------
The Company is exposed to the following market risks: interest rate risk,
foreign currency rate risk, and commodity price risk.
24
Interest rate risk
- ------------------
The Company's primary financial instrument subject to market risk is a bank loan
with an outstanding principal balance at October 14, 2001 of $17.5 million or
$34.5 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 (6.85 percent at October 14, 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 that prevent the Company's interest rate
from exceeding 7.60 percent, in which case the subsidiary would receive the
difference between the contract rate and the actual interest rate. The interest
rate cap covers approximately 33 percent of the loan principal outstanding and
expires August 31, 2003.
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 covered
approximately one third 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. As of October 14, 2001, the Company had
a $2.2 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 October 14, 2001, the Company's net
investment in its Australian subsidiaries was $11.5 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.
25
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 Reform Act of 1995. These statements may include, but are
not limited to, statements regarding (a) repayment of the Westpac loan in August
of 2003, (b) the initiation of new Sizzler USA marketing programs, (c) the
continued focus by the Company on quality service by training its Sizzler USA
restaurant employees with new training programs, (d) the completion of the
re-imaging of the Company's Sizzler USA franchise locations before the end of
fiscal year 2003, (e) the accretion to earnings of the Pat & Oscar's division
for fiscal 2002, (f) the continued repositioning of the Sizzler(R) concept in
Australia by implementation of upgraded food quality and cooking methods and
provision of better service, (f) the testing of various Sizzler(R) restaurant
programs in Australia, (g) the opening of three or four new Pat & Oscar's
locations in fiscal year 2002 (two of which in the third quarter), (h) the
increase in international operations, (i) the sufficiency of cash flow from
operations will be sufficient to meet debt service and working capital
requirements, and (j) the impact of SFAS 144 on the Company's consolidated
results of operations, financial position and cash flow.
The Company cautions that these statements are qualified by important factors
that could cause results to differ materially from those reflected in the
forward-looking statements contained herein. Such factors include but are not
limited to: (a) the extent to which the Company continues to pay principal and
interest under the Westpac loan without extension or deferral of the maturity of
such loan, (b) the extent to which the Company continues to consider new Sizzler
USA marketing and restaurant employee training programs to be a cost-effective
means of in increasing sales and improving customer service, (c) acceptance by
franchisees of the proposed Sizzler USA re-imaging program and such franchisees'
access to capital resources, (d) the Company's successful generation of earnings
in the Pat & Oscar's division for the remainder of fiscal 2002, (e) the
Company's ability to continue its Sizzler(R) concept repositioning efforts in
Australia, and the success of such efforts, (f) the costs and perceived benefits
of Sizzler restaurant testing programs in Australia, (g) the Company's ability
to complete the near-term opening of additional Pat & Oscar's restaurants on
schedule, (h) the extent to which the Company's ability to increase its
international operations may be adversely affected by uncertain political,
economic and social conditions abroad, including conditions associated with the
United States' war on terrorism, (i) the Company's ability to overcome any
residual adverse publicity arising out of the E.coli incident in Milwaukee last
year, (j) the Company's ability to manage its costs and expenses and meet of its
debt service requirements and working capital needs, and (k) other risks and
factors 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.
26
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.
Approximately 140 claims were submitted and a substantial number of those claims
have been resolved. No trial date has been set.
On October 3, 2001, upon the petition of the Insurance Commissioner of the
Commonwealth of Pennsylvania, Reliance Insurance Company ("Reliance") was
declared insolvent and became subject to Pennsylvania state law liquidation
proceedings. Reliance was the Company's primary general liability and workers'
compensation carrier during the period May 1, 1997 through May 1, 1999 and was
the Company's first level excess general liability carrier with respect to for
claims against the Company arising out of the July 2000 E. coli incident in
Milwaukee.
As a result of the legal proceedings affecting Reliance, the Company's ability
to recover funds under its liability policies with this carrier, whether
relating to the Milwaukee incident or otherwise, may be substantially limited.
However, based on the amount of its primary general liability coverage under
policies with other carriers, as well as anticipated results of the pending
litigation in Milwaukee and other claims, the Company does not believe that
Reliance's liquidation proceedings are likely to have any material adverse
impact upon the Company.
As of 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
flow.
27
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Number Description
------ -----------
3.1 Certificate of Incorporation of Registrant, incorporated herein by
reference to Exhibit 3.1 to Amendment No. 1 to Registrant's Form S-4
Registration Statement No. 33-38412.
3.2 Certificate of Ownership and Merger, incorporated herein by reference
to Exhibit 4.2 to Post Effective Amendment No. 2 to Registrant's Form
S-8 Registration Statement filed November 14, 2001.
3.3 Bylaws of the Registrant, effective through September 4, 2001,
incorporated herein by reference to Exhibit 4.3 to Post Effective
Amendment No. 2 to Registrant's Form S-8 Registration Statement filed
November 14, 2001.
4.0 Rights Agreement dated January 22, 2001 between the Registrant and The
Bank of New York, as Rights Agent, incorporated herein by reference to
Exhibit 4 to the Registrant's Form 8-K Report filed January 22, 2001.
10.1 Headquarters Lease Agreement dated July 9, 2001 between the Registrant
and Galleria Park Partner, LLC, incorporated herein by reference to
Exhibit 10.1 to the Registrant's Form 8-K Report filed September 7,
2001.
b. Reports on Form 8-K
The Company filed a report on Form 8-K dated September 7, 2001 reporting:
July 9, 2001, the headquarters lease agreement with Galleria Park
Partner, LLC.
August 15, 2001 A press release announcing the first quarter
conference call.
August 22, 2001 A press release announcing the first quarter of fiscal
year 2002 results.
August 30, 2001 A press release announcing the corporate name change
to Worldwide Restaurant Concepts, Inc.
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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.
Worldwide Restaurant Concepts, Inc.
Registrant
Date: November 27, 2001 /s/ Charles L. Boppell
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Charles L. Boppell
President, Chief Executive Officer
and Director
Date: November 27, 2001 /s/ A. Keith Wall
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A. Keith Wall
Vice President and Chief Financial
Officer (principal financial and
Accounting officer)
Date: November 27, 2001 /s/ Mary E. Arnold
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Mary E. Arnold
Vice President and Controller
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