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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JULY 23, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER 1-10711
SIZZLER INTERNATIONAL, INC.
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(Exact Name of Registrant as specified in its Charter)
DELAWARE 95-4307254
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6101 WEST CENTINELA AVENUE, SUITE 200, CULVER CITY, CALIFORNIA 90230
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(Address of Principal Executive Offices, including zip code)
(310) 568-0135
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 5, 2000
- ---------------------------- --------------------------------
COMMON STOCK $0.01 PAR VALUE 27,664,286 SHARES
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
July 23, April 30,
ASSETS 2000 2000
-------- --------
(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 36,905 $ 38,789
Receivables, net of reserves of $786 at
July 23, 2000 and $847 at April 30, 2000 4,811 4,173
Inventories 4,124 4,333
Current tax asset 2,544 2,544
Prepaid expenses and other current assets 888 1,132
-------- --------
Total current assets 49,272 50,971
-------- --------
Property and equipment, net 52,177 46,316
Property held for sale, net 6,781 8,931
Long-term notes receivable, net of reserves of $133
at July 23, 2000 and $73 at April 30, 2000 1,830 1,224
Deferred income taxes 3,490 3,405
Intangible assets, net of accumulated amortization of
$922 at July 23, 2000 and $889 at April 30, 2000 1,869 1,876
Other assets 3,644 3,157
-------- --------
Total assets $119,063 $115,880
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
July 23, April 30,
LIABILITIES AND STOCKHOLDERS' INVESTMENT 2000 2000
--------- ---------
(Unaudited) (Audited)
Current Liabilities:
Current portion of long-term debt $ 5,147 $ 5,206
Accounts payable 9,746 8,196
Other current liabilities 10,471 10,209
Income taxes payable 2,820 2,530
--------- ---------
Total current liabilities 28,184 26,141
--------- ---------
Long-term debt, net of current portion 20,126 21,198
Deferred gain on sale and lease back 8,074 8,269
Pension liability 9,563 9,637
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 27,919,886 shares at July 23, 2000
and 28,797,828 shares at April 30, 2000 288 288
Additional paid-in capital 278,421 278,408
Accumulated deficit (216,904) (219,769)
Treasury stock, 846,700 shares at cost at July 23, 2000
and 706,700 shares at April 30, 2000 (2,303) (1,948)
Accumulated other comprehensive income (6,386) (6,344)
--------- ---------
Total stockholders' investment 53,116 50,635
--------- ---------
Total liabilities and stockholders' investment $ 119,063 $ 115,880
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TWELVE WEEKS ENDED JULY 23, 2000 AND JULY 25, 1999
(In thousands, except share data)
July 23, July 25,
2000 1999
-------- --------
(Unaudited) (Unaudited)
REVENUES
Restaurants $ 52,312 $ 54,841
Franchise operations 2,346 2,164
-------- --------
Total revenues 54,658 57,005
-------- --------
COSTS AND EXPENSES
Cost of sales 18,943 20,207
Labor and related expenses 14,234 14,845
Other operating expenses 11,930 11,551
Depreciation and amortization 1,805 2,078
General and administrative expenses 4,312 4,658
-------- --------
Total operating costs 51,224 53,339
-------- --------
Interest expense 747 872
Investment income (559) (182)
-------- --------
Total costs and expenses 51,412 54,029
-------- --------
INCOME BEFORE INCOME TAXES 3,246 2,976
-------- --------
Provision for income taxes 381 470
-------- --------
NET INCOME $ 2,865 $ 2,506
======== ========
Basic and diluted earnings per share $ 0.10 $ 0.09
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWELVE WEEKS ENDED JULY 23, 2000 AND JULY 25, 1999
(in thousands)
July 23, July 25,
2000 1999
-------- --------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net income $ 2,865 $ 2,506
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,805 2,078
Deferred income taxes (80) 70
Provision for bad debts - 112
Other 49 157
-------- --------
4,639 4,923
Changes in operating assets and liabilities:
Receivables (1,238) (18)
Inventories 217 245
Prepaid expenses and other current assets 248 413
Accounts payable 1,528 2,421
Accrued liabilities (8) (1,803)
Income taxes payable 280 358
-------- --------
Net cash provided by operating activities 5,666 6,539
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INVESTING ACTIVITIES
Additions to property and equipment (7,716) (559)
Disposal of property and equipment 2,163 60
Other, net (644) 148
-------- --------
Net cash used in investing activities (6,197) (351)
-------- --------
FINANCING ACTIVITIES
Reduction of long-term debt (1,219) (1,382)
Payment of allowed claims pursuant to
the reorganization plan - (1,000)
Repurchase of common stock (355) -
Other, net 221 21
-------- --------
Net cash used in financing activities (1,353) (2,361)
-------- --------
Net increase in cash and cash equivalents (1,884) 3,827
-------- --------
Cash and cash equivalents at beginning of period 38,789 14,691
-------- --------
Cash and cash equivalents at end of period $ 36,905 $ 18,518
======== ========
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SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JULY 23, 2000
1. GENERAL:
The condensed consolidated financial statements include Sizzler
International, Inc. and its wholly owned subsidiaries ("Sizzler" or the
"Company"). The financial statements include the Company's worldwide
operation of the Sizzler family steak house concept, including
company-owned outlets, activity related to the development and operation
of Sizzler(R) franchises, and the operation of Kentucky Fried Chicken(R)
("KFC(R)") franchises in Queensland, Australia. References to the
Company throughout these notes to Financial Statements may be made using
the first person notations of "we" or "us."
The condensed consolidated financial statements have been prepared
without audit in accordance with generally accepted accounting
principles. Pursuant to the rules and regulations of the Securities and
Exchange Commission, certain information and footnote disclosures
normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been
omitted or condensed. In our opinion, the condensed interim consolidated
financial statements include all adjustments necessary for a fair
presentation of financial position and results of operations for the
periods presented. The results of operations for the periods presented
should not necessarily be considered indicative of operations for the
full year. Certain reclassifications have been made to prior period
financial statements in order to conform to the current period
presentation. It is recommended that these condensed consolidated
financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's 2000 annual
report on Form 10-K.
2. THE 1996 RESTRUCTURING:
As a result of continued domestic operating losses in the early 1990's,
the Company's management enacted a restructuring strategy designed to
return its U.S. operations to profitability. In June 1996, the Company
and four subsidiaries filed for protection from creditors under Chapter
11 of the federal Bankruptcy Code. The plans of reorganization were
confirmed by the Bankruptcy Court and all became effective by September
23, 1997. All unsecured claims, except for 4 claims totaling
approximately $879,000, have been paid in full, and a trust established
for the benefit of creditors maintains sufficient cash to pay these
remaining 4 claims. Accordingly, on July 11, 2000 the Bankruptcy Court
entered an order directing the creditor trust to release the liens on
the stock of the Company's U.S. subsidiaries and their operating assets.
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3. EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted EPS:
Twelve weeks ended
--------------------
July 23, July 25,
In thousands, except EPS 2000 1999
------- -------
Numerator for both basic and diluted EPS - Net income $ 2,865 $ 2,506
------- -------
Denominator:
Denominator for basic EPS - weighted average
shares of common stock outstanding 27,986 28,795
Effect of dilutive stock options 385 150
------- -------
Denominator for diluted EPS - adjusted
weighted average shares outstanding 28,371 28,945
------- -------
Basic and diluted earnings per share $ 0.10 $ 0.09
======= =======
4. COMPREHENSIVE INCOME:
In fiscal year 1999, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income". Other comprehensive income may include foreign currency
translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on investments in equity securities.
Comprehensive income for the quarters ended July 23, 2000 and July 25,
1999 are as follows (in thousands):
Twelve weeks ended
---------------------
July 23, July 25,
2000 1999
------- -------
Net Income $ 2,865 $ 2,506
Foreign currency translation adjustments (no tax effect) (42) (494)
------- -------
Total comprehensive income $ 2,823 $ 2,012
======= =======
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5. SEGMENT INFORMATION:
Substantially all of the Company's revenues result from the sale of menu
items at restaurants operated by the Company or by franchisees. The
Company's reportable segments are based on geographic area and product
type. Sizzler Domestic consists of all USA and Latin America Sizzler(R)
restaurant and franchise operations. Sizzler International consists of
all foreign Sizzler(R) company and franchise operated restaurants. KFC
consists of KFC(R) franchise restaurants in Australia. Corporate and
other includes any items not included in the reportable segments listed
above. The effect of all intercompany transactions are eliminated when
computing revenues, earnings before interest, taxes, and corporate
overhead, and identifiable assets.
Earnings before interest and taxes include segment operating results
before investment income, interest expense, income taxes, non-recurring
charges, and allocated corporate overhead. The corporate and other
component of earnings before interest, taxes, and corporate overhead
represents corporate selling, and general and administrative expenses
prior to being allocated to the operating segments.
TWELVE WEEKS ENDED
-----------------------
July 23, July 25,
2000 1999
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REVENUES (IN THOUSANDS):
Sizzler - USA $ 25,466 $ 25,829
Sizzler - International 8,808 9,755
KFC 20,384 21,421
-------- --------
Total revenues $ 54,658 $ 57,005
======== ========
EARNINGS BEFORE INTEREST AND TAXES (IN THOUSANDS):
Sizzler - USA $ 2,605 $ 2,719
Sizzler - International 354 483
KFC 2,083 2,172
Corporate and other (1,608) (1,708)
-------- --------
Total earnings before interest and taxes $ 3,434 $ 3,666
======== ========
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6. SUBSEQUENT EVENTS:
E.COLI OUTBREAK
On July 26, 2000, the Company was informed of an outbreak of E.coli at
one of its franchised Sizzler(R) restaurant locations in Milwaukee,
Wisconsin. Since that time the Company has been working closely with
Milwaukee health officials in the investigation of the origin and cause
of the E.coli outbreak.
Several years ago, the Company adopted a very stringent set of
procedures to protect and assure the quality of the food all the way
from suppliers to serving the guests. In light of the recent incident,
the Company has implemented a process of reaffirming and retraining
restaurant staff at both company and franchise locations to ensure
strict compliance with its existing procedures.
To date, there have been nine lawsuits filed (See Item 1: Legal
Proceedings), seven of which name one or more subsidiaries of the
Company as a defendant. The franchisee and the Company both have
insurance policies to cover this type of event. The Company believes it
has adequate insurance coverage to address any liability or business
interruption costs that the Company is likely to experience. At present,
the Company does not expect either a material or prolonged impact on its
businesses as a result of the outbreak.
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 connection with the operations of
restaurants doing business under the name "Oscar's" in the San Diego
County, Orange County and Phoenix, Arizona areas. The terms of the
acquisition include the Company's payment of approximately $16 million
in cash and issuance of warrants to purchase up to 1,250,000 shares of
Sizzler common stock at $4.00 per share. Also, the Company has agreed to
pay an earn-out amount in two and one-half years which may amount to as
much as $3.1 million or more if certain targets are achieved. The
Company advanced $1.1 million to Oscar's for restaurant expansion on May
23, 2000 and an additional $2 million upon the closing.
The Company will account for the acquisition under the purchase method
and estimates goodwill will be approximately $17.1 million to be
amortized over 20 years.
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WESTPAC
On August 21, 2000, the Company successfully concluded an internal
reorganization of its Australian division and a refinancing of its
existing credit facility with Westpac Banking Corporation. In connection
with the refinancing, the Company increased its existing Westpac credit
facility by AUD$8 million to AUD$46 million. The credit facility is to
be collateralized by the Company's Australian division assets and
certain intellectual property. The loan provides for a three-year term
at an interest rate equal to the Australian interbank borrowing rate,
plus a 2.25 percent margin. The credit facility is subject to a
mandatory principal reduction payment of AUD$10 million by December 15,
2000 in certain events, as well as to other financial and other
covenants and restrictions of a kind that management believes is
customary for a loan of this type. The Company originally entered into
its existing credit facility in 1997 in connection with its emergence
from Chapter 11 proceedings.
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SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
TWELVE WEEKS ENDED JULY 23, 2000 VERSUS JULY 25, 1999
CONSOLIDATED OPERATIONS
Company-operated restaurant sales and franchised restaurant revenues (including
franchise fees, royalties and rental income) represent the Company's primary
sources of revenue. Consolidated revenues for the quarter ended July 23, 2000
were $54,658,000 compared to $57,005,000 for the quarter ended July 25, 1999, a
decrease of $2,347,000 or 4.1%. The decrease is primarily due to a 10.9 percent
decrease in the Australian dollar exchange rate and to a lesser extent, a
reduction of six Sizzler(R) USA company operated stores, four of which were
converted to franchise locations since last year. These decreases were partially
offset by same store sales increases from KFC and both Sizzler USA and
Australia.
The following table shows the increase in Company-operated same store sales over
the prior year.
FY 2000 FY 2001
------------------------------------------------ -------
QTR 1 QTR 2 QTR 3 QTR 4 QTR 1
------ ------ ------ ------ -------
SIZZLER
U.S.A 7.2% 7.4% 6.5% 3.3% 1.9%
AUSTRALIA
(Based on A$) (5.3)% (0.3)% 2.2% 0.8% 0.6%
KFC
(Based on A$) 1.3% (0.8)% (1.2)% 10.5% 6.1%
Consolidated operating expenses for the quarter ended July 23, 2000 were
$51,224,000 compared to $53,339,000 for the quarter ended July 25, 1999, a
decrease of $2,115,000 or 4.0 percent. Approximately $2,074,000 of the decrease,
or 98.1 percent, is due to a 10.9 percent decrease in the Australian dollar
exchange rate. The remaining decrease is due to lower food cost associated with
lower commodity prices. We also experienced an increase in rent expense of
approximately $726,000 due to the
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sale and lease back of certain properties in Australia. The increase is offset
by a $347,000 reduction in depreciation expense and amortization of the deferred
gain related to the sale and leaseback of $201,000. There was also a $346,000
decrease in general and administrative expense primarily due to an insurance
refund and general and administrative expense is expected to be higher in the
second quarter.
Interest expense was $747,000 in the current quarter compared to $872,000 in the
same period of the prior year, a decrease of $125,000, or 14.3 percent. This
decrease is primarily due to a lower outstanding balance on the Company's debt
with Westpac. Under the terms of a new agreement with Westpac (See note 6 -
Subsequent Events, to Consolidated Financial Statements), the Company will be
increasing its borrowings by approximately $5.0 million which will also increase
interest expense in the future. Interest expense is primarily related to the
Company's debt with Westpac and to a lesser extent, the Company's executive
supplemental plan covering ten former and one active employee. Investment income
was $559,000 in the current quarter compared to $182,000 in the same period of
the prior year, an increase of $376,000 or 206.6 percent which was primarily due
to higher cash balances primarily associated with the sale and leaseback
transaction.
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
$381,000 in the current quarter compared to $470,000 in the same period of the
prior year, a decrease of $89,000 or 18.9 percent. This decrease is partially
due to a decrease in the Australian income tax rate to 34 percent from 36
percent on July 1, 2000. In addition, the current year provision includes a
decrease of $177,000 related to Australia's prior year provision.
U.S. SIZZLER(R) OPERATIONS
Total revenues for the quarter ended July 23, 2000 were $25,466,000 compared to
$25,829,000 for the quarter ended July 25, 1999, a decrease of 1.4 percent.
Restaurant sales for the current quarter were $23,544,000 compared to
$23,960,000. The sales decrease is primarily due to a reduction in Company-owned
stores to 60 compared to 66 last year. Since the first quarter of last year, the
Company closed one store due to city redevelopment and one due to a lease that
expired and the Company did not pursue renewal. Also, the Company sold four
Sizzler(R) stores to franchisees. 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. In addition,
there were 18 Sizzler(R) stores under remodel construction during the current
quarter which caused a decrease in sales due to guest reaction to the
inconvenience and to certain menu changes such as the paring back of hot food
items on the food bar. It has been the Company's experience that the month
following the initial transition, new customers who prefer grilled entries and a
fresher salad bar will patronize the restaurants. Franchise revenue was
$1,922,000 in the current quarter compared to $1,869,000 in the same period of
the prior year, an increase of $53,000 or 2.8 percent. Franchise revenues were
produced by 203 franchised Sizzlers(R), including
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13 in Latin America, in the current quarter compared to 200 franchised
Sizzlers(R), including 13 in Latin America, in the same period of the prior
year. The increase is due to royalties from new franchise stores and to higher
franchise sales.
Prime costs were $15,217,000 in the current quarter compared to $15,390,000 in
the same period of the prior year. Prime costs, which include food, paper and
labor, Increased to 64.6 percent of sales compared to 64.2 percent in the same
period of the prior year. The increase is due to higher labor associated with
training restaurant employees in remodeled locations and higher manager wages
partially offset by lower food cost associated with lower commodity prices and
improvements in food cost controls. These reductions in food cost are partially
offset by higher product costs associated with upgrades to certain products such
as steaks.
Other operating expenses amounted to $5,385,000 for the current quarter compared
to $5,204,000 for the same period of the prior year. This increase is due to
direct mail expenses incurred to introduce guests to remodeled Sizzlers(R)
offset by a vendor rebate that is not expected to continue.
Management is continuing its plan to re-image the Sizzler(R) concept to a
mid-scale family steakhouse by upgrading the quality of the food and improving
cooking methods and equipment and by recertifying all restaurant employees with
updated training programs. The quality of the Sizzler(R) customer experience is
also being improved by remodeling existing restaurants with a new design that is
currently being rolled-out and supporting these initiatives with appropriate
marketing programs. As of July 23, 2000, 24 stores had been remodeled and
re-introduced with special marketing programs and had sales increases averaging
12 percent.
INTERNATIONAL SIZZLER(R) OPERATIONS
Total revenues for the quarter ended July 23, 2000 were $8,808,000 compared to
$9,755,000 for the quarter ended July 25, 1999, a decrease of 9.7 percent
primarily due to a 10.9 percent decrease in the Australian dollar exchange rate.
This decrease is offset by same store sales increases driven by higher check
averages. Effective July 1, 2000, the Australian government implemented a
national goods and services tax that added 8 to 10 percent to the price of
meals. During the quarter, the Company's Sizzler(R) restaurants experienced a
minimal negative impact as a result of the tax; however, the Company expects a
slightly more significant impact in the second quarter. Restaurant sales for the
current quarter were $8,384,000 compared to $9,460,000 in the same period of the
prior year and were produced by 31 restaurants operating during the current
quarter and the same period of the prior year. Franchise revenue was $424,000 in
the current quarter compared to $295,000 in the same period of the prior year,
an increase of $129,000 or 43.7 percent. This increase is primarily due to an
increase in franchise fees and royalties from four new locations during the
quarter compared to last year. Franchise revenues were produced by three joint
venture restaurants in 6 countries and 51 international franchised restaurants
in the current quarter compared to three joint venture restaurants and 47
international franchised
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restaurants in the same period of the prior year. Current international
franchise restaurants are located in Japan, Thailand, Taiwan, South Korea,
Singapore and Indonesia.
Prime costs were $5,742,000 in the current quarter compared to $6,434,000 in the
same period of the prior year. Prime costs, which include food, paper and labor,
increased to 68.5 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 that may or may not continue.
Other operating expenses amounted to $2,012,000 for the current quarter compared
to $2,086,000 for the same period of the prior year due to lower exchange rates.
Due primarily to the sale and leaseback, rent expense for the quarter was
approximately $887,000 higher than last year and was partially offset by a
$139,000 reduction in depreciation expense and $81,000 in recognition of
deferred gains from the sale and leaseback.
Management is continuing its plan to reposition the Sizzler(R) concept in
Australia by implementing the upgraded food quality and cooking methods that are
contributing to positive sales growth in the Company's domestic operations.
Additionally, more emphasis will be placed on providing customers with better
service by increasing the number of restaurant personnel. Four units have been
repositioned and the Company plans to complete another four this fiscal year.
There are currently two units being tested with plans for adding one more
remodel to the test. If the results are consistent with the domestic sales, the
Company plans to proceed with the remodel program in Australia later this fiscal
year.
KFC(R) OPERATIONS
Revenues for the quarter ended July 23, 2000 were $20,384,000 compared to
$21,421,000 for the quarter ended July 25, 1999, a decrease of 4.8 percent. A
10.9 percent decrease in the Australian dollar exchange rate reduced sales by
$1,540,000; however, this was partially offset by same store sales increases.
Sales for the current quarter reflect 102 restaurants operating during the
current quarter compared to 101 restaurants in the same period of the prior
year. In addition, during the current quarter KFC(R) had a 6.1 percent increase
in average sales per restaurant, driven primarily by higher customer traffic and
to a lesser extent, an increase in the average guest check. Effective July 1,
2000, the Australian government implemented a national goods and services tax
that added 8 to 10 percent to the price of meals. During the quarter, the
Company's KFC(R) restaurants experienced a minimal negative impact as a result
of the tax; however, the Company expects a slightly more significant impact in
the second quarter. The Company expects to open 3 to 5 new KFC(R) restaurants in
fiscal year 2001.
Prime costs were $12,218,000 in the current quarter compared to $13,063,000 in
the same period of the prior year. Prime costs, which include food, paper and
labor,
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decreased to 59.9 percent of sales compared to 61.0 percent in the same period
of the prior year primarily due to promotions of higher margin products and to
lower commodity prices that may or may not continue.
Other operating expenses amounted to $4,886,000 for the current quarter compared
to $5,142,000 for the same period of the prior year primarily due to a decrease
in the Australian dollar exchange rate. Due to the sale and leaseback, rent
expense for the quarter was higher than last year by $482,000 and was partially
offset by a $208,000 reduction in depreciation expense and $121,000 in
recognition of deferred gains from the sale and leaseback.
The Company reached an agreement with Tricon Global Restaurants, Inc. to test
co-branding KFC(R) locations with Pizza Hut and the Company is currently
establishing the test locations. The Company also expects to open 2 to 4
additional KFC(R) locations during fiscal year 2002.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
The Company's principal source of liquidity is cash flows from operations which
was $5,666,000 for the first twelve weeks of fiscal 2001 compared to $6,539,000
for the same period of the prior year. This decrease is due to fluctuations in
the Company's operating account balances and to lease payments associated with
the sale and leaseback.
The Company's working capital at July 23, 2000 was $21,088,000 including cash
and cash equivalents of $36,905,000. At April 30, 2000 the Company had a working
capital surplus of $24,830,000. This decrease is primarily due to funds utilized
to remodel the Sizzler USA restaurants. The current ratio was 1.7 at July 23,
2000 and 1.9 at April 30, 2000.
At July 23, 2000, the Company had restricted cash balances of $19.9 million. As
of August 23, 2000, the restriction was removed and the funds were used
primarily to complete the Oscar's acquisition (See note 6 - Subsequent Events to
the Consolidated Financial Statements).
TOTAL ASSETS / CAPITAL EXPENDITURES
At July 23, 2000, total assets were $119,063,000, an increase of $3,183,000 or
2.8 percent from April 30, 2000. Property and equipment, excluding property held
for sale, represented approximately 43.8 percent of total assets at July 23,
2000 and 40.0 percent at April 30, 2000.
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Capital expenditures were $7,716,000 for the quarter ended July 23, 2000 and
$559,000 for the same period last year. The current year's capital expenditures
were primarily used for remodels, one new KFC(R) restaurant and maintenance of
existing restaurants. The Company anticipates continuing to grow international
operations through additional investment in Company-operated restaurants, joint
ventures and the development of the franchise system.
In addition, 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 connection with the operations of
restaurants doing business under the name "Oscar's" in the San Diego County,
Orange County and Phoenix, Arizona areas. The Company agreed to pay an earn-out
of up to $3.1 million or more if certain targets are achieved over a two and a
half-year period. The Company has also made commitments to provide up to an
additional $9.5 million in loans to Oscar's for expansion purposes over the next
two years. The Company advanced $1.1 million to Oscar's for restaurant expansion
on May 23, 2000 and an additional $2 million upon the closing. The Company
expects to finance these requirements with existing cash, proceeds from the sale
and leaseback of the remaining Australia properties and/or an additional outside
loan facility.
DEBT
On August 21, 2000, the Company successfully concluded a refinancing of its
existing credit facility with Westpac Banking Corporation. In connection with
the refinancing, the Company increased its existing Westpac credit facility by
AUD$8 million to AUD$46 million. The credit facility is to be collateralized by
the Company's Australian division assets and certain intellectual property. The
loan provides for a three-year term at an interest rate equal to the Australian
interbank borrowing rate, plus a 2.25 percent margin. The credit facility is
subject to a mandatory principal reduction payment of AUD$10 million by December
15, 2000 in certain events, as well as to financial and other covenants and
restrictions of a kind that management believes is customary for a loan of this
type. The Company originally entered into its existing credit facility in 1997
in connection with its emergence from Chapter 11 proceedings.
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.
SHARE REPURCHASE
During the quarter, the Company repurchased 140,000 shares of Sizzler common
stock for a total of $355,000. This brings the total number of shares
repurchased to 846,700 out of 1.5 million authorized. The Company plans to
purchase additional shares in the second quarter subject to SEC and NYSE rules.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary financial instrument subject to market risk is a bank loan
with an outstanding principal balance of $22,272,000 at July 23, 2000. The loan
is payable in Australian dollars and is collateralized by the principal
operating assets of the Company's international division. The line-of-credit
bears variable interest at a rate equal to the Australian interbank borrowing
rate, plus a margin of 2.25 percent. The primary exposures relating to this
financial instrument result from both changes in the interest rates and
fluctuation in foreign exchange rates.
To limit the Company's exposure to interest rate increases, the Company entered
into an interest rate cap contract which prevents the Company's interest rate
from exceeding 7.67 percent, in which case the subsidiary would receive the
difference between the contract rate and the actual interest rate. The interest
rate cap is in place and covers approximately 31 percent of the loan principal
outstanding and expires September 30, 2002.
In addition, the Company has entered into an interest rate swap contract to
convert part of its variable interest exposure to a fixed rate of 7.67 percent.
The interest rate swap contract in place as of the end of the fiscal year
covered approximately 31 percent of the loan principal outstanding and expires
September 30, 2002.
The Company's foreign exchange exposure related to its bank debt is hedged since
payments are made from operating cash flows generated from the operations of the
Company's Australian subsidiaries (See note 6 - Subsequent Events to the
Consolidated Financial Statements).
FORWARD-LOOKING STATEMENTS
With the exception of any historical information contained in this report, the
matters described herein contain forward looking statements that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Act of 1995. These statements may include but are not limited to, statements
regarding: (1) the expected continuation of the Company's growth in revenues and
earnings; (2) the anticipated continuation of the remodeling of U.S.
company-owned and franchised Sizzler(R) locations; (3) the Company's plans
continuing its re-positioning of its Australian Sizzler(R) restaurants through
remodeling, menu changes and better service; (4) the addition of new KFC(R) and
co-branded units in fiscal 2001 and 2002; (5) the financial impact of the E.coli
outbreak and adequacy of the Company's insurance; (6) the goodwill anticipated
from the Oscar's acquisition; (7) any increase in the Company's borrowing; (8)
the adequacy of cash flow from operations to meet debt service, capital
expenditure and working capital needs.
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Sizzler cautions that these statements are qualified by important factors that
could cause actual results to differ materially from those reflected in the
forward looking statements contained herein. Such factors include, but are not
limited to: (1) the Company's ability to continue achieving growth in revenues
and earnings; (2) the Company's ability to complete the remodeling of all U.S.
company and franchise restaurants in a timely manner; (3) the Company's ability
to complete the remodeling of its existing Australian Sizzler(R) and KFC(R)
locations; (4) whether the repositioning of the U.S. and international
Sizzler(R) concepts will attract new customers and prove effective in retaining
existing customers; (5) the Company's ability to open additional KFC(R)
locations and commence its co-branding test at certain locations; (6) the
duration and magnitude of sales lost due to the E.coli outbreak; (7) the
valuation of net assets acquired from Oscar's; (8) the Company's future cash
requirements; (9) the Company's ability to control cash flow margins; (10) other
risks as detailed from time to time in Sizzler's SEC reports, including
Quarterly Reports on Form 10Q, Current Reports on Form 8-K, and Annual Reports
on Form 10-K.
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SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Subsidiaries of the Company were named as defendants in seven of nine
lawsuits filed by individuals who were affected by the E.coli outbreak
at its two franchised locations in the Milwaukee area, Wisconsin on July
26, 2000. Out of nine lawsuits, two were filed as class action.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. On August 30, 2000 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 2003 26,011,018 562,294
Kevin W. Perkins 2003 26,025,683 547,629
The following directors' terms of office continued after the meeting
Term
Expires
-------
James A. Collins 2001
Charles F. Smith 2001
Charles L. Boppell 2002
Phillip D. Matthews 2002
Robert A. Muh 2002
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
The Company filed a report on Form 8-K dated June 22, 2000 reporting
that on June 20, 2000 Sizzler International, Inc. issued a press release
announcing earnings for the fourth quarter and fiscal year.
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: September 6, 2000 /s/Charles L. Boppell
-------------------------------------------
Charles L. Boppell
President, Chief Executive Officer
and Director
Date: September 6, 2000 /s/Steven R. Selcer
-------------------------------------------
Steven R. Selcer
Vice President and Chief Financial
Officer (principal financial and
accounting officer)
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