SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended FEBRUARY 1, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER 1-10711
SIZZLER INTERNATIONAL, INC.
________________________________________________________________________________
(Exact Name of Registrant as specified in its Charter)
DELAWARE 95-4307254
________________________________________________________________________________
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6101 WEST CENTINELA AVENUE, SUITE 200, CULVER CITY, CALIFORNIA 90230
________________________________________________________________________________
(Address of Principal Executive Offices, including zip code)
(310) 568-0135
____________________________________________________________
(Registrant's telephone number, including area code)
12655 West Jefferson Boulevard, Los Angeles, California 90066
_____________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 13, 1998
- ---------------------------- -------------------------------------
COMMON STOCK $0.01 PAR VALUE 28,850,908 SHARES
PART I. FINANCIAL INFORMATION
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
February 1, April 30,
ITEM 1. FINANCIAL STATEMENTS 1998 1997
- ---------------------------- ---------------- ----------------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 26,952 $ 34,085
Receivables, net of reserves of $1,683 at
February 1, 1998 and $3,547 at April 30, 1997 3,979 4,398
Inventories 4,671 5,464
Prepaid expenses and other current assets 996 2,323
------- -------
Total current assets 36,598 46,270
Property and equipment, net 83,696 104,875
Long-term notes receivable, net of reserves of $334
at February 1, 1998 and $424 at April 30, 1997 1,459 1,619
Deferred income taxes 2,895 4,004
Intangible assets, net of accumulated amortization of $5,735
at February 1, 1998 and $698 at April 30, 1997 2,268 1,430
Other assets, net of accumulated amortization and reserves
of $6 at April 30, 1997 4,606 9,912
-------- --------
Total assets $131,522 $168,110
======== ========
The accompanying notes are an integral part of these consolidated condensed financial statements.
2
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
February 1, April 30,
1998 1997
---------------- ---------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term debt $ 5,686 $ 94
Accounts payable 9,566 13,634
Other current liabilities 13,148 14,240
Income taxes payable 2,543 2,401
------- -------
Total current liabilities 30,943 30,369
Long-term Liabilities:
Long-term debt, net of current portion 39,945 329
Other liabilities 18,601 9,111
Liabilities subject to compromise under
reorganization proceedings - 83,900
------- -------
Total long-term liabilities 58,546 93,340
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 28,850,908 shares at February 1, 1998
and 28,898,003 shares at April 30, 1997 289 289
Additional paid-in capital 277,054 276,200
Accumulated deficit (231,943) (234,961)
Cumulative foreign currency translation adjustments (3,367) 2,873
------- --------
Total stockholders' investment 42,033 44,401
Total liabilities and stockholders' investment $131,522 $168,110
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIXTEEN WEEKS ENDED
--------------------------------------
FEBRUARY 1, FEBRUARY 2,
1998 1997
- ----------------------------------------------------------------------------------------------------
(Unaudited)
REVENUES
Restaurants $68,311 $84,930
Franchise operations 1,762 3,129
- ----------------------------------------------------------------------------------------------------
Total revenues 70,073 88,059
- ----------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 25,917 32,912
Labor and related expenses 18,898 24,344
Other operating expenses 14,808 19,629
Depreciation and amortization 3,430 4,372
General and administrative expenses 4,310 7,577
- ----------------------------------------------------------------------------------------------------
Total operating costs 67,363 88,834
- ----------------------------------------------------------------------------------------------------
Interest expense 1,593 295
Investment income (270) (338)
- -----------------------------------------------------------------------------------------------------
Total costs and expenses 68,686 88,791
- ----------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 1,387 (732)
Provision for income taxes 632 549
- ----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 755 $(1,281)
====================================================================================================
Basic and diluted earnings (loss) per share $ 0.03 $ (0.04)
====================================================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FORTY WEEKS ENDED
---------------------------------------
FEBRUARY 1, FEBRUARY 2,
1998 1997
- ----------------------------------------------------------------------------------------------------
(Unaudited)
REVENUES
Restaurants $181,351 $231,526
Franchise operations 4,815 9,002
- ----------------------------------------------------------------------------------------------------
Total revenues 186,166 240,528
- ----------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 68,205 89,018
Labor and related expenses 49,696 67,801
Other operating expenses 38,490 51,526
Depreciation and amortization 9,180 11,182
General and administrative expenses 12,518 20,517
- ----------------------------------------------------------------------------------------------------
Total operating costs 178,089 240,044
- ----------------------------------------------------------------------------------------------------
Interest expense 4,078 779
Investment income (997) (852)
- -----------------------------------------------------------------------------------------------------
Total costs and expenses 181,170 239,971
- ----------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,996 557
Provision for income taxes 1,978 1,966
- ----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 3,018 $ (1,409)
====================================================================================================
Basic and diluted earnings (loss) per share $ 0.11 $ (0.05)
====================================================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FORTY WEEKS ENDED
------------------------------------------
FEBRUARY 1, FEBRUARY 2,
1998 1997
------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ 3,018 $(1,409)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 9,180 11,182
Deferred income taxes - 143
Provision for bad debts 501 387
Other (346) 658
- ----------------------------------------------------------------------------------------------------------
12,353 10,961
Changes in operating assets and liabilities:
Receivables 376 30
Inventories 793 1,054
Prepaid expenses and other current assets 1,235 (2,699)
Accounts payable (4,068) 15,849
Accrued liabilities (6,990) (27,931)
Income taxes payable 1,272 (2,458)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 4,971 (5,194)
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to property and equipment (5,767) (4,584)
Disposal of property and equipment 24,292 19,503
Other, net (1,919) (225)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 16,606 14,694
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of long-term debt 46,895 11,310
Reduction of long-term debt (2,992) (184)
Payment of allowed claims pursuant
to the reorganization plan (72,613) -
Other, net - (60)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (28,710) 11,066
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (7,133) 20,566
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 34,085 9,216
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $26,952 $29,782
=========================================================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
AS OF FEBRUARY 1, 1998
1. The condensed consolidated financial statements have been prepared by
Sizzler International, Inc. (the "Company"), 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 the opinion of management,
the condensed interim consolidated financial statements include all
adjustments necessary for a fair presentation of financial position and
results of operations for the periods presented. The results of operations
for the periods presented should not necessarily be considered indicative
of operations for the full year. Certain reclassifications have been made
to prior period financial statements in order to conform to the current
period presentation. It is recommended that these condensed consolidated
financial statements be read in conjunction with the financial statements
and the notes thereto included in the Company's 1997 annual report on Form
10-K.
2. During the fiscal quarter ended February 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings
Per Share (EPS), which replaced the previously reported primary and fully-
diluted EPS. Basic EPS is computed as net income (loss) divided by the
weighted average number of common shares outstanding for the period.
Diluted EPS is similar to the previously reported fully-diluted EPS. All
EPS amounts for the periods presented have been restated to conform to the
requirements of SFAS 128.
The following table sets forth the computation of basic and diluted EPS:
Sixteen Weeks Ended Forty Weeks Ended
February 1, February 2, February 1, February 2,
Dollars in thousands, except EPS 1998 1997 1998 1997
- -------------------------------- ----------- ----------- ----------- ----------
Numerator for both basic and
diluted EPS - Net income (loss) $755 $(1,281) $3,018 $(1,409)
========== ========== ========== ==========
Denominator:
Denominator for basic EPS - weighted
average shares of common stock
outstanding 28,850,908 29,047,613 28,869,065 28,985,570
Effect of dilutive stock options 9,005 - 4,048 -
---------- ---------- ---------- ----------
Denominator for diluted EPS -
adjusted weighted average shares
outstanding 28,859,913 29,047,613 28,873,113 28,985,570
========== ========== ========== ==========
Basic and diluted earnings per share $0.03 $(0.04) $0.11 $(0.05)
========================= ===========================
7
3. On June 2, 1996, the Company enacted a comprehensive restructuring strategy
designed to return the U.S. operations to profitability. This strategy
included the closure of under-performing restaurants in the U.S. and filing
for bankruptcy protection through a Chapter 11 proceeding. On June 2, 1996,
the Company and four subsidiaries, Sizzler Restaurants International, Inc.
("SRI"), Buffalo Ranch Steakhouses, Inc. ("BRSH"), Tenly Enterprises, Inc.
("Tenly"), and Collins Properties, Inc. ("CPI"), became debtors-in-
possession subject to the supervision of the U.S. Bankruptcy Court of the
Central District of California (the "Bankruptcy Court") under Chapter 11 of
the federal bankruptcy code.
On June 2, 1997, the Bankruptcy Court entered an order confirming the
Chapter 11 plans of reorganization of the Company, SRI and CPI. The plans
of reorganization for Tenly and BRSH were confirmed on February 24, 1997.
On September 23, 1997, the reorganization plans became effective and the
Company and its subsidiaries emerged from the bankruptcy proceedings.
The Company's plan of reorganization provided for full payment of allowed
creditors' claims, including interest, over five years, from the operations
of its international division. In September 1997, the Company obtained
sufficient financing from Westpac Banking Corporation to pay its creditors'
allowed claims in full including interest. All allowed claims for CPI,
Tenly and BRSH have also been paid in full. SRI's plan provided for full
payment of allowed unsecured creditors' claims (estimated at approximately
$20 million) through the formation of a creditor trust. SRI's installment
payments to the trust will be evidenced by a four-year note. The note will
bear interest at the floating annual rate of prime plus one percent through
the first year, prime plus two percent for the next two years, and prime
plus three percent for the fourth year. SRI will secure the note with a
pledge of the stock of its subsidiaries and with substantially all of the
domestic division's operating assets.
The Company and its subsidiaries have paid approximately $73 million in
pre-petition claims and interest and reinstated the remaining pre-petition
liabilities. Remaining bankruptcy liabilities were reclassified from
"Liabilities subject to compromise under reorganization proceedings" to the
appropriate liability captions of the consolidated balance sheet.
8
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CHAPTER 11 BANKRUPTCY REORGANIZATION
- ------------------------------------
On June 2, 1997, the Bankruptcy Court entered an order confirming the Chapter 11
plans of reorganization of the Company, SRI and CPI. The plans of reorganization
for Tenly and BRSH were confirmed on February 24, 1997, On September 23, 1997,
the reorganization plans became effective and the Company and its subsidiaries
emerged from the bankruptcy proceedings.
The Company's plan of reorganization provided for full payment of allowed
creditors' claims, including interest, over five years, from the operations of
its international division. In September 1997, the Company obtained sufficient
financing from Westpac Banking Corporation to pay its creditors' allowed claims
in full including interest. All allowed claims for CPI, Tenly and BRSH have also
been paid in full. SRI's plan provided for full payment of allowed unsecured
creditors' claims (estimated at approximately $20 million) through the formation
of a creditor trust. SRI's installment payments to the trust will be evidenced
by a four-year note. The note will bear interest at the floating annual rate of
prime plus one percent through the first year, prime plus two percent for the
next two years, and prime plus three percent for the fourth year. SRI will
secure the note with a pledge of the stock of its subsidiaries and with
substantially all of the domestic division's operating assets.
The Company and its subsidiaries have paid approximately $73 million in pre-
petition claims and interest and reinstated the remaining pre-petition
liabilities. Remaining bankruptcy liabilities were reclassified from
"Liabilities subject to compromise under reorganization proceedings" to the
appropriate liability captions of the consolidated balance sheet.
MATERIAL CHANGES IN RESULTS OF OPERATIONS - SIXTEEN WEEKS
- ---------------------------------------------------------
ENDED FEBRUARY 1, 1998 VERSUS FEBRUARY 2, 1997
- ----------------------------------------------
Domestic Company-operated restaurant sales and franchised restaurant revenues
(including franchise fees, royalties and rental income) and international
Company-operated restaurant sales and franchised restaurant revenues represent
the Company's primary sources of revenue. The addition or closure of
restaurants, both Company-operated and franchised, and the sales volume of
comparable restaurants (those restaurants open more than one year) are important
factors to consider in evaluating the Company's results.
Total revenues were $70.1 million for the third quarter of fiscal 1998, which
represents a decrease of $18.0 million, or 20.4 percent, compared to the third
quarter of the prior fiscal year. This decrease is primarily due to the closure
of 12 Company-operated restaurants, the sale of four Company-operated
restaurants to franchisees and a net decrease of 44 franchised Sizzler
restaurants. During the same period, the Company added four KFC restaurants in
Australia. Revenues declined domestically by $5.1 million or 15.9 percent.
International revenues decreased by $12.9 million or 23.0 percent compared to
the third quarter of the prior year.
Earnings before interest and taxes were $2.7 million for the third quarter of
fiscal 1998, an increase of $3.5 million compared to the prior year. In the
international operations, earnings before interest and taxes increased $0.6
million. Domestically, earnings
9
before interest and taxes improved from a loss of $2.0 million in the prior
year, to income of $0.5 million in the current fiscal quarter, primarily due to
the impact of closing under-performing units. Pretax income for the third
quarter of fiscal 1998 increased $2.1 million to $1.4 million or 2.0 percent of
revenues. The third quarter of fiscal 1997 showed a pretax loss of $732,000 or
0.8 percent of revenues.
INTERNATIONAL OPERATIONS
- ------------------------
International revenues accounted for 61.5 percent of consolidated revenues.
Sales from Company-operated restaurants of $42.6 million were $12.0 million or
21.9 percent lower than the prior year primarily due to lower foreign currency
exchange rates, comparable restaurant sales declines and the closure of under-
performing Sizzlers, partially offset by the addition of four KFC restaurants.
On a comparative restaurant basis, sales in Australian dollars for Company-
operated Sizzler restaurants and customer counts decreased 9.3 percent and 13.3
percent, respectively, due to the increasingly competitive casual dining market.
The average guest check increased 4.6 percent. The KFC restaurants decreased 0.4
percent in average restaurant sales and 6.6 percent in the average number of
customers per restaurant, primarily due to the discontinuance of breakfast
service. The average customer check has increased 6.7 percent, reflecting price
increases since the third quarter of the prior year.
Earnings before interest and taxes increased $0.6 million or 26.5 percent
compared to the same quarter in the prior year. In Australian dollars, earnings
before interest and taxes increased $2.2 million or 133.9 percent. Labor and
related expense decreased 1.0 percent, other controllable expense decreased 0.6
percent, general and administrative expense decreased 0.5 percent and other
costs decreased 0.8 percent, as a percentage of revenues.
DOMESTIC OPERATIONS
- -------------------
Domestic restaurant operations accounted for 36.7 percent of the Company's
consolidated revenues. Sales from Company-operated restaurants reflect a
decrease of $4.7 million or 15.3 percent to $25.7 million when compared to the
prior year. This decline is due to the closure of one Company-operated
restaurant and the transfer of four restaurants to franchisees since the third
quarter of last year.
On a comparative restaurant basis, average sales per restaurant increased 0.3
percent, average customers per restaurant declined 6.6 percent and the average
customer check increased 7.3 percent.
Domestic franchise revenues, including franchise fees, royalties and rental
income, accounted for 1.8 percent of consolidated revenues. Compared to the
prior year, revenues decreased $0.5 million or 26.5 percent. The revenue decline
reflects the impact of a temporary royalty abatement program, of which the first
phase expired October 31, 1997, and a net reduction of 11 franchised
restaurants. Management expects that strategies being tested and implemented by
the Company will also improve sales and profits for domestic franchisees.
10
Domestically, earnings before interest and taxes improved $2.6 million to $0.5
million, from a loss of $2.0 million in the same period last year. This increase
primarily reflects a reduction in general and administrative expense of 6.4
percent, as a percentage of revenue, along with the closing of under-performing
units, offset by the impact of the royalty abatement program estimated at
$350,000 for the current quarter.
CONSOLIDATED COSTS AND EXPENSES
- -------------------------------
Consolidated costs and expenses, as a percentage of revenues, decreased 2.8
percentage points from the prior year. This decrease is primarily the result of
lower payroll and related expenses, reflecting the closure of unprofitable
restaurants, and lower general and administrative expense, and food costs.
Interest expense was $1.6 million in fiscal 1998 and $295,000 in 1997.
The effective income tax rate decreased primarily due to the utilization of loss
carryforwards to offset domestic earnings.
MATERIAL CHANGES IN RESULTS OF OPERATIONS FORTY WEEKS ENDED FEBRUARY 1, 1998
- ----------------------------------------------------------------------------
VERSUS FEBRUARY 2, 1997
- -----------------------
Total revenues were $186.2 million for the first forty weeks of fiscal 1998,
which represents a decrease of $54.4 million, or 22.6 percent, compared to the
first forty weeks of the prior fiscal year. This decrease is primarily due to
the closure of 12 Company-operated restaurants, the sale of four Company-
operated restaurants to franchisees and a net decrease of 44 franchised Sizzler
restaurants. Also impacting the decrease is the royalty abatement program which
decreased franchise revenues by an estimated $1.5 million. During the same
period, the Company added four KFC restaurants in Australia. Revenues declined
domestically by $27.2 million or 27.3 percent. International revenues decreased
by $27.2 million or 19.3 percent compared to the first forty weeks of the prior
year.
Earnings before interest and taxes were $8.1 million for the first forty weeks
of fiscal 1998, an increase of $7.6 million compared to the prior year. In the
international operations, earnings before interest and taxes were unchanged at
$5.6 million, net of a 9.0 percent decrease in the Australian dollar exchange
rate from last year. Domestically, earnings before interest and taxes improved
from a loss of $4.8 million in the prior year, to income of $3.3 million in the
current fiscal year, primarily due to lower general and administrative expense
and reduced labor and related costs, along with the impact of closing under-
performing units. Pretax income for the first forty weeks of
11
fiscal 1998 increased $4.4 million to $5.0 million or 2.7 percent of revenues.
During the first forty weeks of fiscal 1997, pretax income was $557,000.
INTERNATIONAL OPERATIONS
- ------------------------
International restaurant sales accounted for 60.2 percent of consolidated
revenues for the first forty weeks of fiscal 1998. Sales from Company-operated
restaurants of $112.1 million were $25.3 million or 18.4 percent lower than the
prior year primarily due to lower foreign currency exchange rates, comparable
restaurant sales declines and the closure of under-performing Sizzlers,
partially offset by the addition of four KFC units. Since the third quarter of
fiscal 1997, international operations had a net reduction of 11 Company-operated
and 33 franchised Sizzler restaurants. Eight franchised restaurants were opened
in Thailand, Indonesia and Japan while a total of 41 franchised restaurants were
closed, 39 in Australia, one in South Korea and one in Indonesia. As of February
1, 1998, the international operation included 32 Company-operated, three joint
ventured, and 50 franchised Sizzler restaurants, 98 KFC restaurants and one The
Italian Oven restaurant.
On a comparative restaurant basis, sales in Australian dollars for Company-
operated Sizzler restaurants and customer counts decreased 14.5 percent and 17.6
percent, respectively, due to the increasingly competitive casual dining market.
The average guest check increased 3.7 percent. The KFC restaurants decreased 1.9
percent in average restaurant sales and 7.4 percent in the average number of
customers per restaurant primarily due to the discontinuance of breakfast
service. The average customer check has increased 5.9 percent, reflecting price
increases since the third quarter of the prior year.
International franchise revenues accounted for 1.0 percent of consolidated
revenues. The Company's international franchise revenues decreased $1.9 million
or 51.3 percent due to the restaurant closures mentioned above. At February 1,
1998, there were 53 international franchised and joint-ventured Sizzler
restaurants in Japan, Taiwan, Thailand, South Korea, Singapore and Indonesia,
versus 86 restaurants in eight countries at February 2, 1997.
In Australian dollars, earnings before interest and taxes increased $2.0 million
or 34.7 percent. Labor and related expense decreased 0.92 percent, as a
percentage of revenues, due to the implementation of cost cutting programs.
DOMESTIC OPERATIONS
- -------------------
Domestic restaurant operations accounted for 37.2 percent of the Company's
consolidated revenues. Sales reflect a decrease of $24.9 million or 26.4 percent
to $69.2 million when compared to the prior year. This decline is due to the
closure of one Company-operated restaurant and the transfer of four restaurants
to franchisees since the third quarter of last year. At February 1, 1998, the
number of domestic Company-operated restaurants was 66 versus 71 restaurants at
February 2, 1997.
12
On a comparative restaurant basis, average sales per restaurant decreased 1.1
percent, average customers per restaurant declined 5.4 percent while the average
customer check increased 4.5 percent. However, sales trends are continuing to
show improvement as the sales decrease was 11.1 percent in the prior year.
Management is aggressively implementing a plan to sustain its operations' return
to profitability. The key components of the plan include: 1) the recent
introduction of a new steak line which includes USDA Choice steaks; 2) continue
to upgrade the menu, focusing on redefining Sizzler as a popularly priced grill-
based restaurant with a great salad bar; 3) improve restaurant operations; 4)
implementing a new marketing strategy focused on new menu introductions and 5)
refresh restaurant facilities including new signage.
Domestic franchise revenues, including franchise fees, royalties and rental
income, accounted for 1.6 percent of consolidated revenues. Compared to the
prior year, revenues decreased $2.3 million or 43.2 percent. The revenue decline
reflects a net reduction of 11 franchised restaurants and the impact of a
temporary royalty abatement program, of which the first phase expired October
31, 1997. Management expects that strategies being tested and implemented by the
Company will also improve sales and profits for domestic franchisees. As of
February 1, 1998, the number of domestic franchised restaurants was 199,
including 11 Latin American restaurants, versus 210 restaurants at February 2,
1997.
Domestically, earnings before interest and taxes improved $8.1 million to $3.3
million, from a loss of $4.8 million in the same period last year. This increase
primarily reflects reductions in general and administrative expense and labor
and related expense of 5.3 percent and 1.7 percent, respectively, as a
percentage of revenue. Offsetting these decreases in expense was a decrease in
franchise revenue of an estimated $1.5 million due to the royalty abatement
program. The closing of under-performing units also impacted the increase in
earnings before interest and taxes.
CONSOLIDATED COSTS AND EXPENSES
- -------------------------------
Consolidated costs and expenses, as a percentage of revenues, decreased 2.5
percentage points from the prior year. This decrease is primarily the result of
lower payroll and related expenses, general and administrative expense and food
costs, offset by higher interest expense. Interest expense was $4.1 million in
fiscal 1998 and $0.8 million in fiscal 1997, reflecting interest on new
borrowings and general unsecured bankruptcy claims.
The effective income tax rate decreased primarily due to the utilization of loss
carryforwards to offset domestic earnings.
13
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
WORKING CAPITAL
- ---------------
The Company's principal source of working capital is cash provided by operations
which amounted to $12.4 million for the first forty weeks of fiscal 1998 versus
$11.0 million for the same period of the prior year.
The Company's working capital at February 1, 1998 was $5.7 million including
cash and cash equivalents of $27.0 million. At April 30, 1997, working capital
was $15.9 million.
TOTAL ASSETS / CAPITAL EXPENDITURES
- -----------------------------------
At February 1, 1998, total assets were $131.5 million, a decrease of $36.6
million or 21.8 percent from April 30, 1997. During the first forty weeks of
fiscal year 1998, $6.4 million of domestic excess properties were sold.
Properties held for sale were $3.9 million at February 1, 1998 and $10.2 million
at April 30, 1997. Property and equipment represented approximately 63.6 percent
of total assets at February 1, 1998 and 62.4 percent at April 30, 1997.
Capital expenditures were $5.8 million for the first forty weeks of fiscal 1998,
including new restaurant construction of $1.2 million and replacements of $4.6
million. The Company anticipates continuing to build its international
operations through additional investment in Company-operated restaurants and the
development of the franchise system. Domestically, no new unit growth is planned
in fiscal 1998. Instead, the Company will focus on the previously mentioned
revitalization program. The Company has entered into certain commitments for
capital expenditures necessary to efficiently operate and to improve the
profitability of existing businesses.
DEBT
- ----
On September 23, 1997, the Company obtained a $63.5 million AUD (approximately
$46.9 million US) bank facility from Westpac Banking Corporation in order to
refinance the claims of the Company's unsecured creditors. The Westpac loan
provides for a five-year term at an interest rate equal to the Australian
interbank borrowing rate, plus a margin. The margin will be based on a formula
tied to the Company's international operations ratio of debt to earnings before
interest and taxes, and will vary between 1.25% and 2.25%. The Westpac loan
involved the collateralization of the Company's principal operating assets of
its international division. The Westpac loan is subject to a number of financial
covenants and other restrictions.
Based on current levels of operations and anticipated sales growth, management
believes that cash flow from operations will be sufficient to meet all of its
debt service requirements when due and to fund its capital expenditure and
working capital requirements.
14
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. On November 18, 1997 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
-------- --- --------
Barry E. Krantz 2000 26,692,291 237,567
Phillip D. Matthews 1999 26,715,467 214,391
H. Wallace Merryman 2000 26,675,840 254,018
Robert A. Muh 1999 26,392,682 537,176
Kevin W. Perkins 2000 26,646,111 283,747
Carol A. Scott 1999 26,705,464 224,394
The following directors' terms of office continued after the meeting:
Term
Expires
-------
James A. Collins 1998
Peter H. Dailey 1998
Charles F. Smith 1998
c. The Company's 1997 Employee Stock Incentive Plan was approved by the
stockholders. 22,177,875 votes were cast in favor of the plan, 4,578,996
votes were cast against with 172,987 abstentions.
The Company's 1997 Non-Employee Director Stock Incentive Plan was approved
by the stockholders. 22,276,507 votes were cast in favor of the plan,
4,368,955 votes were cast against with 284,396 abstentions.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 10.26 - Form of Franchise Agreement between Sizzler USA Franchise,
Inc. and Franchisee.
Exhibit 27 - Financial Data Schedule
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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.
SIZZLER INTERNATIONAL, INC.
Registrant
Date: March 16, 1998 /s/James A. Collins
---------------------------------------
James A. Collins
Chief Executive Officer
Date: March 16, 1998 /s/Ryan S. Tondro
--------------------------------------
Ryan S. Tondro
Vice President
(Principal Financial Officer)
16