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 3, 2002
[_] 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)
------------------------------------------------------------
(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 19, 2002
- ------------------------------ ---------------------------------------
Common Stock $0.01 Par Value 27,205,491 shares
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
WORLDWIDE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
February 3, April 30,
ASSETS 2002 2001
- ---------------------------------------------------------- ------------ ------------
(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 21,701 $ 9,997
Restricted cash 3,339 7,852
Receivables, net of reserves of $767 at
February 3, 2002 and $965 at April 30, 2001 2,338 2,464
Inventories 4,168 4,211
Current tax asset 3,680 3,324
Prepaid expenses and other current assets 2,166 2,554
- ---------------------------------------------------------- ------------ ------------
Total current assets 37,392 30,402
- ---------------------------------------------------------- ------------ ------------
Property and equipment, net 60,742 60,011
Property held for sale, net 2,483 3,996
Long-term notes receivable, net of reserves of $3
at February 3, 2002 and $17 at April 30, 2001 912 994
Deferred income taxes 1,089 2,425
Goodwill, net of accumulated amortization of
$659 at February 3, 2002 and $659 at April 30, 2001 19,663 19,491
Intangible assets, net of accumulated amortization of
$1,006 at February 3, 2002 and $893 at April 30, 2001 2,226 2,208
Other assets 2,152 3,035
- ---------------------------------------------------------- ------------ ------------
Total assets $ 126,659 $ 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)
February 3, April 30,
LIABILITIES AND STOCKHOLDERS' INVESTMENT 2002 2001
- ------------------------------------------------------------------------ ----------- ----------
(Unaudited) (Audited)
Current Liabilities:
Current portion of long-term debt $ 5,243 $ 5,597
Accounts payable 9,888 9,078
Other current liabilities 12,812 9,626
Income taxes payable 1,251 1,870
- ------------------------------------------------------------------------ ----------- ----------
Total current liabilities 29,194 26,171
- ------------------------------------------------------------------------ ----------- ----------
Long-term debt, net of current portion 24,693 24,085
Deferred gains and revenues 7,638 8,307
Pension liability 9,184 9,482
- ------------------------------------------------------------------------ ----------- ----------
Total liabilities 70,709 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 27,205,491 shares at February 3, 2002
and 27,744,799 shares at April 30, 2001 292 291
Additional paid-in capital 279,890 279,846
Accumulated deficit (214,654) (217,046)
Treasury stock, 2,000,000 shares at February 3, 2002
and 1,363,800 shares at April 30, 2001, at cost (4,135) (3,189)
Accumulated other comprehensive loss (5,443) (5,385)
- ------------------------------------------------------------------------ ----------- ----------
Total stockholders' investment 55,950 54,517
- ------------------------------------------------------------------------ ----------- ----------
Total liabilities and stockholders' investment $ 126,659 $ 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 FORTY WEEKS ENDED FEB. 3, 2002 AND FEB. 4, 2001
(In thousands, except per share data)
Feb. 3, Feb. 4,
2002 2001
- ------------------------------------------------------------ ---------------- ----------------
(Unaudited) (Unaudited)
Revenues
Restaurant sales $ 197,205 $ 179,703
Franchise revenues 6,403 6,515
- ------------------------------------------------------------ ---------------- ----------------
Total revenues 203,608 186,218
- ------------------------------------------------------------ ---------------- ----------------
Costs and Expenses
Cost of sales 67,642 63,729
Labor and related expenses 56,292 50,955
Other operating expenses 48,574 43,292
Depreciation and amortization 7,268 7,045
General and administrative expenses 18,275 16,983
- ------------------------------------------------------------ ---------------- ----------------
Total operating costs 198,051 182,004
- ------------------------------------------------------------ ---------------- ----------------
Interest expense 2,799 2,797
Investment income (639) (1,327)
Gain on sale of assets (412) (347)
- ------------------------------------------------------------ ---------------- ----------------
Total costs and expenses 199,799 183,127
- ------------------------------------------------------------ ---------------- ----------------
Income before provision for income taxes 3,809 3,091
- ------------------------------------------------------------ ---------------- ----------------
Provision for income taxes 1,417 1,292
- ------------------------------------------------------------ ---------------- ----------------
Net income $ 2,392 $ 1,799
============================================================ ================ ================
Basic and diluted earnings per share $ 0.09 $ 0.06
============================================================ ================ ================
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 SIXTEEN WEEKS ENDED FEB. 3, 2002 AND FEB. 4, 2001
(In thousands, except per share data)
Feb. 3, Feb. 4,
2002 2001
- -------------------------------------------------------------------- ---------------- ----------------
(Unaudited) (Unaudited)
Revenues
Restaurant sales $ 79,907 $ 74,937
Franchise revenues 2,486 1,986
- -------------------------------------------------------------------- ---------------- ----------------
Total revenues 82,393 76,923
- -------------------------------------------------------------------- ---------------- ----------------
Costs and Expenses
Cost of sales 27,575 26,053
Labor and related expenses 22,706 21,692
Other operating expenses 19,820 18,603
Depreciation and amortization 2,910 3,131
General and administrative expenses 7,498 7,754
- -------------------------------------------------------------------- ---------------- ----------------
Total operating costs 80,509 77,233
- -------------------------------------------------------------------- ---------------- ----------------
Interest expense 1,128 1,117
Investment income (227) (315)
Gain on sale of assets - (350)
- -------------------------------------------------------------------- ---------------- ----------------
Total costs and expenses 81,410 77,685
- -------------------------------------------------------------------- ---------------- ----------------
Income (loss) before provision for income taxes 983 (762)
- -------------------------------------------------------------------- ---------------- ----------------
Provision for income taxes 610 614
- -------------------------------------------------------------------- ---------------- ----------------
Net income (loss) $ 373 $ (1,376)
==================================================================== ================ ================
Basic and diluted earnings (loss) per share $ 0.01 $ (0.05)
==================================================================== ================ ================
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 FORTY WEEKS ENDED FEB 3, 2002 AND FEBRUARY 4, 2001
(in thousands)
Feb. 3, Feb. 4,
2002 2001
- ------------------------------------------------------------------------------ ----------------- ------------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net income $ 2,392 $ 1,799
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,268 7,045
Deferred income taxes 999 38
Provision for bad debts 40 -
Gain on sale of assets (412) (347)
Other (146)
Changes in operating assets and liabilities:
Receivables 167 2,882
Inventories 41 265
Prepaid expenses and other assets 1,151 (1,020)
Accounts payable 823 (2,510)
Accrued liabilities 2,231 541
Income taxes payable (624) (1,605)
- ------------------------------------------------------------------------------ ----------------- ------------------
Net cash provided by operating activities 13,930 7,088
- ------------------------------------------------------------------------------ ----------------- ------------------
INVESTING ACTIVITIES
Additions to property and equipment (8,024) (16,324)
Proceeds from disposal of property and equipment 2,529 4,211
Acquisition of Pat & Oscar's net of cash acquired - (16,383)
Other, net (272) (63)
- ------------------------------------------------------------------------------ ----------------- ------------------
Net cash used in investing activities (5,767) (28,559)
- ------------------------------------------------------------------------------ ----------------- ------------------
FINANCING ACTIVITIES
Issuance of long-term debt 5,000 5,000
Reduction of long-term debt (4,777) (2,950)
Repurchase of common stock (901) (946)
Other, net (58) 65
- ------------------------------------------------------------------------------ ----------------- ------------------
Net cash (used in) provided by financing activities (736) 1,169
- ------------------------------------------------------------------------------ ----------------- ------------------
Net increase (decrease) in cash, cash equivalents and restricted cash 7,427 20,302
- ------------------------------------------------------------------------------ ----------------- ------------------
Effect of foreign exchange on cash (236) (356)
- ------------------------------------------------------------------------------ ----------------- ------------------
Cash, cash equivalents and restricted cash
at beginning of period 17,849 38,789
- ------------------------------------------------------------------------------ ----------------- ------------------
Cash, cash equivalents and restricted cash
at end of period $25,040 $ 18,131
============================================================================== =====================================
Supplemental Cash Flow Disclosures
Cash paid during the year for:
Interest $ 2,200 $ 2,218
Income taxes $ 946 $ 2,627
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
1. General:
The condensed consolidated financial statements include Worldwide
Restaurant Concepts, Inc. ("WRC" or the "Company") and its wholly owned
subsidiaries. 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 KFC(R) franchises in Queensland,
Australia and the operation of Pat & Oscar's(SM) 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:
Sixteen weeks ended Forty weeks ended
-------------------------- --------------------------
February 3, February 4, February 3, February 4,
In thousands, except EPS 2002 2001 2002 2001
----------- ----------- ----------- -----------
Numerator for basic and diluted EPS
Net income (loss) $ 373 $ (1,376) $ 2,392 $ 1,799
============ =========== =========== ===========
Denominator for basic EPS - weighted average
shares of common stock outstanding 27,205 27,637 27,389 27,817
Effect of dilutive stock options 71 120 85 196
----------- ----------- ----------- -----------
Denominator for diluted EPS - adjusted
weighted average shares outstanding 27,276 27,757 27,474 28,013
----------- ----------- ----------- -----------
Basic and diluted earnings (loss) per share $ 0.01 $ (0.05) $ 0.09 $ 0.06
=========== =========== =========== ===========
Antidilutive options not included in computation
of diluted EPS 3,572 3,583 3,613 3,623
7
3. Comprehensive Income:
Comprehensive income, for the quarters ended February 3, 2002 and February
4, 2001, are as follows (in thousands):
Sixteen weeks ended Forty weeks ended
------------------------- --------------------------
February 3, February 4, February 3, February 4,
2002 2001 2002 2001
----------- ---------- ----------- -----------
Net Income (loss) $ 373 $ (1,376) $ 2,392 $ 1,799
Foreign currency translation
adjustments (no tax effect) (194) 704 61 214
Adoption of SFAS 133: Cumulative effect
of change in accounting principle, net of tax - (242) -
Change in fair value of derivative instrument, net of tax 62 - 123 -
----------- ---------- ----------- -----------
Total comprehensive income $ 241 $ (672) $ 2,334 $ 2,013
----------- ---------- ----------- -----------
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 its franchisees. The
Company's reportable segments are based on geographic area and brand
identity. Sizzler USA consists of all United States and Latin America
Sizzler(R) restaurants and franchise operations. Pat & Oscar's consists of
14 Pat & Oscar'sSM restaurants in southern California and Arizona. Sizzler
International consists of all foreign Company and franchise operated
Sizzler(R) restaurants. KFC consists of all 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.
8
Sixteen weeks ended Forty weeks ended
-------------------------- --------------------------
February 3, February 4, February 3, February 4,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues (in thousands):
------------------------
Sizzler - USA $ 30,271 $ 30,147 $ 80,208 $ 78,429
Oscar's 12,580 9,407 29,884 13,188
Sizzler - International 12,234 11,417 27,867 28,590
KFC 27,308 25,952 65,649 66,011
----------- ----------- ----------- -----------
Total revenues $ 82,393 $ 76,923 $ 203,608 $ 186,218
=========== =========== =========== ===========
Earnings (loss) before interest and taxes (in thousands):
---------------------------------------------------------
Sizzler - USA $ 1,235 $ 940 $ 5,164 $ 4,903
Oscar's 74 (1,006) 617 (1,369)
Sizzler - International 911 596 1,463 1,212
KFC 3,406 2,980 7,793 7,561
Corporate and other (3,742) (3,470) (9,068) (7,746)
----------- ----------- ----------- -----------
Total earnings before interest
and taxes $ 1,884 $ 40 $ 5,969 $ 4,561
----------- ----------- ----------- -----------
Reconciliation to pre-tax income (in thousands):
- ------------------------------------------------
Interest expense $ 1,128 $ 1,117 $ 2,799 $ 2,797
Investment income, net (227) (315) (639) (1,327)
----------- ----------- ----------- -----------
Income (loss) before income taxes $ 983 $ (762) $ 3,809 $ 3,091
=========== =========== =========== ===========
Earnings (loss) 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 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 the name Pat & Oscar'sSM (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.
9
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):
Sixteen weeks ended Forty weeks ended
---------------------------- -------------------------
February 4, February 6, February 4, February 6,
2001 2000 2001 2000
---- ---- ---- ----
Revenues 76,923 78,188 196,062 203,346
Net income (loss) (1,376) 676 1,650 4,619
Basic and diluted net income (loss) per share (0.05) 0.02 0.06 0.16
Shares used in per share calculation 27,637 28,598 28,013 28,723
The above net income amounts include goodwill amortization.
6. Goodwill and Intangible Assets:
Effective May 1, 2001, the Company adopted Financial Accounting Standards
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):
February 3, 2002 April 30, 2001
------------------ -----------------
Franchise rights $ 2,231 $ 2,174
Accumulated amortization (730) (662)
Trademarks 360 286
Accumulated amortization (82) (47)
Other intangibles: 641 641
Accumulated amortization (194) (184)
------------------ -----------------
Total intangibles 3,232 3,101
Total accumulated amortization (1,006) (893)
------------------ -----------------
Net intangibles $ 2,226 $ 2,208
------------------ -----------------
Aggregate amortization expense on intangible assets was approximately
$39,000 for the quarter ended February 3, 2002. 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.
10
The changes in the carrying amount of goodwill for the forty weeks ended
February 3, 2002, are as follows (in thousands):
Sizzler Pat &
USA Oscar's Total
--- ------- -----
Balance as of April 30, 2001 $ 1,449 $ 18,042 $ 19,491
Goodwill acquired during the year - 172 172
Impairment losses - - -
------- -------- --------
Balance as of February 3, 2002 $ 1,449 $ 18,214 $ 19,663
------- -------- --------
A reconciliation of reported net income to net income adjusted to reflect
adoption of SFAS 142 for the forty weeks ended February 3, 2002 is as
follows (in thousands):
Sixteen weeks ended Forty weeks ended
------------------------- --------------------------
February 3, February 4, February 3, February 4,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Reported net income (loss) $ 373 $ (1,376) $ 2,392 $ 1,799
Add back: goodwill amortization - 265 374
------------------------- --------------------------
Adjusted net income $ 373 $ (1,111) $ 2,392 $ 2,173
========================= ==========================
Basic and diluted earnings (loss) per share:
Adjusted basic and
diluted earnings (loss) per share $ 0.01 ($0.04) $ 0.09 $ 0.08
7. Interest Rate Swaps and Hedges:
The Company is a party to four derivative contracts. Two interest rate swap
contracts and two interest rate cap contracts were a required condition of
the loan agreement entered into 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 fair value in the financial statements. All of
the change in value of the derivatives is recorded in other comprehensive
income as no ineffectiveness exists. The fair value of the derivatives 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 which is
due in August of 2003.
11
8. Commitments and Contingencies:
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 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.
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.
10. Pat & Oscar's Put and Call Option
The Company's purchase agreement for the acquisition of Pat & Oscar's
includes set fixed price put and call option agreements for the first two
years after the acquisition under which the Company could elect to acquire
the remaining 18.0 percent ownership interest for $7.0 million or be
required to acquire up to 5.2 percent of the remaining ownership interest
for approximately $1.0 million. In years three through ten the put and call
options cover the entire remaining 18.0 percent ownership interest and are
based on a formula that includes the Company's earnings multiple and debt,
FFPE's profitability and debt and other pre-determined factors.
12
11. Related Party Transaction:
On October 15, 2001, the Company made a $200,000 loan to Kenneth Cole,
President and CEO of Sizzler USA, which constituted a material
consideration of his employment package. The proceeds of the loan were to
be used to pay in full two promissory notes executed by Mr. Cole in favor
of his former employer as payment for shares of stock of his former
employer owned by Mr. Cole. Mr. Cole will repay the Company upon the sale
of the stock, if such sale should occur. Any deficiency will be forgiven by
the Company over a five year period, provided Mr. Cole remains employed by
the Company.
12. Subsequent Event:
Subsequent to the end of the quarter, one of the Company's executives
elected early retirement and the Company committed to certain supplemental
benefits under its executive supplemental retirement plan and as a result
will record operating expense estimated to be $0.9 million in its fourth
quarter to record the liability for these benefits.
13
WORLDWIDE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
SIXTEEN WEEKS ENDED FEBRUARY 3, 2002 VERSUS FEBRUARY 4, 2001
- ------------------------------------------------------------
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 February 3, 2002
were $82.4 million compared to $76.9 million for the quarter ended February 4,
2001, an increase of $5.5 million or 7.1 percent. The increase is primarily due
to the addition of Pat & Oscar's which accounted for $12.6 million in sales this
quarter compared to $9.4 million in the prior year quarter. In addition, all
divisions had increases in same store sales due to successful menu promotions,
which more than offset the 5.3 percent decrease in the Australian dollar
exchange rate that reduced revenues by $2.2 million. Results for the quarter
were also affected by a slowing economy both in the U.S. and Australia.
The following table shows the change in Company-operated same store sales over
prior year all calculated in local currencies:
FY 2001 FY 2002
-------------------------------- ------------------------
QTR 1 QTR 2 QTR 3 QTR 4 QTR 1 QTR 2 QTR 3
----- ----- ----- ----- ----- ----- -----
SIZZLER
- -------
Sizzler USA 1.9% 0.7% 0.1% -1.6% -3.2% -0.7% 1.1%
Sizzler International 0.6% -4.1% -0.5% -1.8% -2.0% 7.9% 14.8%
KFC 6.1% 4.0% 2.6% -2.7% 1.3% 3.7% 7.0%
- ---
PAT & OSCAR'S n/a 4.9% 5.5% 2.5% -0.9% -1.8% 1.7%
- -------------
Consolidated operating expenses for the quarter ended February 3, 2002 were
$80.5 million compared to $77.2 million for the quarter ended February 4, 2001,
an increase of $3.3 million or 4.3 percent. The increase is primarily due to the
addition of four new Pat & Oscar's(SM) and three new KFC(R) restaurants. These
increases were partially offset
14
by a 5.3 percent decrease in the Australian dollar exchange rate.
Interest expense was $1.1 million in the current quarter compared to $1.1
million in the same period of the prior year. Interest expense includes interest
on the Company's debt with Westpac Banking Corporation in Australia ("Westpac")
and Heller Financial Services and to a lesser extent, the Company's executive
supplemental retirement plan. See Note 12 - Subsequent Event, to Consolidated
Financial Statements. Investment income was $0.2 million in the current quarter
compared to $0.3 million in the same period of the prior year, a decrease of
$0.1 million or 27.9 percent which was primarily due to lower interest rates,
partially offset by higher cash balances.
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
$0.6 million in the current quarter compared to $0.6 million in the same period
of the prior year. The consolidated effective income tax rate increased to 62.1
percent for the sixteen weeks ended February 3, 2002 due to higher income in our
international division which does not benefit from domestic net operating
losses.
SIZZLER USA OPERATIONS
- ----------------------
Total revenues for the quarter ended February 3, 2002 were $30.3 million
compared to $30.1 million for the quarter ended February 4, 2001, an increase of
$0.2 million or 0.4 percent. Restaurant sales for the current quarter were $28.3
million compared to $28.6 million in the same period of the prior year. The
restaurant sales decrease is primarily due to a reduction of Company-owned
stores to 66 compared to 68 last year, partially offset by an increase in same
store sales of 1.1 percent. Since the first quarter of last year, the Company
closed one store due to redevelopment, acquired four franchised restaurants,
opened one new restaurant and closed two restaurants that had expired leases.
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.
The Company's re-imaging of the Sizzler(R) brand and related promotional and
operational initiatives have resulted in positive underlying sales trends this
quarter as indicated by the improvement in same store sales. Franchise revenue
was $2.0 million in the current quarter compared to $1.5 million in the same
period of the prior year, an increase of $0.5 million or 33.3 percent. This
increase is related to recognizing franchise royalties on a 13 period basis
versus a calendar month basis to better match revenues with related expenses.
This increase was partially offset by a reduction of revenues resulting from
having 8 fewer franchise locations than last year for the same period. Franchise
revenues were produced by 181 franchised Sizzler(R) restaurants, including 13 in
Latin America, in the current quarter compared to 189 franchised Sizzler(R)
restaurants, including 13 in Latin America, in the same period of the prior
year.
Prime costs were $18.8 million in the current quarter compared to $18.8 million
in the same period of the prior year. Prime costs, which include food, paper and
labor,
15
increased to 66.5 percent of sales compared to 65.5 percent in the same period
of the prior year. This increase in the prime cost percentage is due to higher
discount levels associated with value-based promotions that ran during the
quarter and to a minimum wage increase. We continue to focus on food and labor
cost controls.
Other operating expenses amounted to $7.4 million for the current quarter
compared to $7.5 million for the same period of the prior year. This decrease is
due to having two fewer restaurants partially offset by increased utility costs.
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 at prices that are a good value. 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. The Company is also evaluating various
exterior upgrades to complement the interior remodels completed last year. In
addition, the Company will continue to focus on quality service by training its
restaurant employees with new training programs. The Company expects to complete
the re-imaging of its franchise locations before the end of calendar year 2003.
PAT & OSCAR'S OPERATIONS
- ------------------------
Pat & Oscar's generated $12.6 million in revenues for the quarter ended February
3, 2002 compared to $9.4 million in the same period of the prior year, an
increase of $3.2 million or 33.7 percent. The increase in revenues is primarily
due to an increase in the number of stores to 14 restaurants at the end of
current quarter compared to 10 in the prior year. Same store sales also
increased 1.7 percent as a result of promotions, which offset cannibalization of
sales caused by certain newly opened restaurants.
Prime costs were $7.5 million in the current quarter compared to $6.1 million in
the same period of the prior year. Prime costs, which include food, paper and
labor, decreased to 59.3 percent of sales compared to 64.5 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 controls reduced overall
labor costs. Total prime costs increased due to having four additional
restaurants.
Other operating expenses amounted to $3.3 million for the current quarter
compared to $2.5 million for the same period in the prior year primarily due to
new restaurant openings.
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
16
Company expects to open one new location during the remainder of fiscal year
2002 and five to six during fiscal year 2003. The Company will focus its
expansion in Southern California with emphasis outside of San Diego County.
Due to the adoption of SFAS 142, the Company discontinued amortizing the
goodwill that resulted from the acquisition of Pat & Oscar's. 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 February 3, 2002 were $12.2 million
compared to $11.4 million for the quarter ended February 4, 2001, an increase of
$0.8 million or 7.3 percent. This increase was primarily driven by a 14.8
percent increase in same store sales due to successful marketing promotions,
featuring a salad bar with either steak or seafood added on for a nominal price
that increased customer traffic. This revenue increase was partially offset by a
5.3 percent decline in the Australian dollar exchange rate and by having one
less restaurant in the current quarter compared to the same period in the prior
year. Restaurant sales for the current quarter were $11.7 million compared to
$10.9 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 $486,000 in the current quarter compared to $469,000
in the same period of the prior year, an increase of $17,000 or 3.6 percent.
Franchise revenues were produced by three joint ventures and 56 franchised
Sizzler(R) locations in the current quarter and 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 $7.8 million in the current quarter compared to $7.3 million in
the same period of the prior year. Prime costs, which include food, paper and
labor, decreased to 66.0 percent of sales compared to 66.3 percent in the same
period of the prior year due to tight labor cost controls that offset higher
food costs related to the promotions that ran during the quarter.
Other operating expenses amounted to $2.7 million for the current quarter
compared to $2.6 million for the same period of the prior year, primarily due to
variable costs associated with the increase in sales, partially offset by 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. The Company is
presently testing two remodel formats, one mirrors the Sizzler USA version
providing a softer, warmer steakhouse feel. The other is a scaled-back version
of this theme. The Company will continue to monitor these locations before
proceeding with the remodel program in Australia. We are also
17
planning to test a Sizzler(R) restaurant in a club, which is a popular dining
venue in Australia.
KFC OPERATIONS
- --------------
Revenues for the quarter ended February 3, 2002 were $27.3 million compared to
$26.0 million for the quarter ended February 4, 2001, an increase of $1.3
million or 5.2 percent. This increase is due to a 7.0 percent increase in same
store sales and to having three more units in operation compared to the same
period in the prior year. These same store sales increases were driven by
various family value offerings and kids meal premiums, partially offset by a 5.3
percent decrease in the Australian dollar exchange rate. 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 $16.3 million in the current quarter compared to $15.5 million
in the same period of the prior year. Prime costs, which include food, paper and
labor, decreased to 59.5 percent of sales compared to 59.9 percent for the same
period of the prior year due to labor cost improvements, partially offset by
higher food costs associated with recent promotions.
Other operating expenses amounted to $6.6 million for the current quarter
compared to $6.3 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 partially offset by a 5.3
percent decline in the Australian dollar exchange rate.
Management is continuing its facilities upgrade program and based on positive
results of "face-to-face" drive-thru operations, plans to add two more upgrades
during the next two quarters.
RESULTS OF OPERATIONS
- ---------------------
FORTY WEEKS ENDED FEBRUARY 3, 2002 VERSUS FEBRUARY 4, 2001
- ----------------------------------------------------------
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 forty weeks ended February 3,
2002 were $203.6 million compared to $186.2 million for the forty weeks ended
February 4, 2001, an increase of $17.4 million or 9.3 percent. The increase is
primarily due to Pat & Oscar's which has four additional restaurants compared to
last year and accounted for $29.9 million in sales this period compared to $13.2
million in the prior year period which included only 23 weeks of
post-acquisition operations. In addition, both the international Sizzler(R) and
KFC(R) restaurants had strong increases in same store sales due to successful
menu promotions. These revenue increases were slightly offset by a decline in
same store sales from the Company's U.S. restaurants due to a softness in
18
the domestic economy. Further offsetting these revenue increases was an 8.2
percent decrease in the Australian dollar exchange rate that reduced revenues by
$8.4 million.
Consolidated operating expenses for the forty weeks ended February 3, 2002 were
$198.1 million compared to $182.0 million in the prior year, an increase of
$16.1 million or 8.8 percent. The increase is primarily due to the addition of
four new Pat & Oscar'sSM. Utility rate increases in the U.S. also contributed to
the increase in operating expenses. These increases are partially offset by a
8.2 percent decline in the Australian dollar exchange rate.
Interest expense was $2.8 million for the forty weeks ended February 3, 2002
compared to $2.8 million in the same period of the prior year. Interest expense
relates 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. See Note 12 - Subsequent Event to Consolidated
Financial Statements. Investment income was $0.6 million compared to $1.3
million in the same period of the prior year, a decrease of $0.7 million, or
51.8 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 $1.4 million in the first forty weeks of fiscal year 2002
compared to $1.3 million in the same period of the prior year, an increase of
$0.1 million or 9.7 percent. The effective income tax rate was 37.2 percent for
the forty weeks ended February 3, 2002 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 forty weeks ended February 3, 2002 were $80.2 million
compared to $78.4 million for the forty weeks ended February 4, 2001, an
increase of $1.8 million or 2.3 percent. Restaurant sales were $75.0 million
compared to $73.2 million in the same period of the prior year. The increase is
primarily due to an increase in Company-owned stores to 66 this year compared to
60 for most of the period last year. Since the first quarter of last year, the
Company closed one store due to redevelopment, acquired four franchised
restaurants, opened one new restaurant and closed two restaurants that had
expired leases. 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. The sales increases were
partially offset by negative same store sales during part of the period driven
by a slowing domestic economy. In addition, the California economy has been
particularly affected by previously instituted utility rate increases. Franchise
revenue was $5.2 million for the first forty weeks of this year compared to $5.2
million in the same period of the prior year. Franchise revenues were
19
produced by 181 franchised Sizzlers, including 13 in Latin America, in the
current period compared to 189 franchised Sizzlers, including 13 in Latin
America, in the same period of the prior year. An increase in revenues
associated with recognizing franchise royalties on a period basis versus a
calendar basis was offset by having eight less restaurants compared to last
year.
Prime costs were $49.0 million for the forty weeks ended February 3, 2002
compared to $48.1 million in the same period of the prior year. Prime costs,
which include food, paper and labor, decreased to 65.3 percent of sales compared
to 65.7 percent in the same period of the prior year. The decrease in the
percent is due to reductions in food costs associated with tighter controls and
purchasing effectiveness partially offset by increased labor costs which have
resulted from higher workers compensation rates and to additional managers added
to promote sales growth and guest service. The increase in total prime costs is
due to having more restaurants, compared to the prior year.
Other operating expenses amounted to $19.2 million for the current year compared
to $18.3 million for the same period of the prior year. This increase is
primarily due to increases in utilities and to having more restaurants, compared
to 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 at prices that are a good value. 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 initiatives. The Company is also evaluating
various exterior upgrades to complement the interior remodels completed last
year. In addition, the Company will continue to focus on quality service by
training its restaurant employees with new training programs. The Company
expects to complete the re-imaging of its franchise locations before the end of
calendar year 2003.
PAT & OSCAR'S OPERATIONS
- ------------------------
Total revenues for the forty weeks ended February 3, 2002 were $29.9 million
compared to $13.2 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 40 weeks of operations in the current year compared to 23 in the
prior year. In addition, there were 14 restaurants at the end of the current
quarter compared to 10 in the prior year. These increases were partially offset
by negative same store sales trends during the earlier part of the period,
driven by a slowing economy and cannibalization from certain new restaurant
openings. However, by the end of the period, same store sales had begun to turn
positive. This improvement is attributed to recent marketing promotions.
Prime costs, which include food and labor, were $17.5 million compared to $8.5
million in the same period of the prior year. Prime costs represent 58.7 percent
of sales, compared to 64.5 percent in the same period of the prior year. This
improvement is due
20
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 new restaurants.
Other operating expenses amounted to $7.5 million in the current period compared
to $3.4 million in the same period of the prior year primarily due to new
restaurant openings and 17 additional weeks of operations.
Pat & Oscar's continued to show positive earnings before interest and taxes
("EBIT") for the current forty week period and is expected to be accretive to
earnings for fiscal year 2002. The Company expects to open one new location
during the remainder of fiscal year 2002 and five to six during fiscal year
2003. The Company will focus its expansion in Southern California with emphasis
outside of San Diego County.
Due to the adoption of SFAS 142, the Company discontinued amortizing the
goodwill that resulted from the acquisition of Pat & Oscar's 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 forty weeks ended February 3, 2002 were $27.8 million
compared to $28.6 million for the forty weeks ended February 4, 2001, a decrease
of $0.7 million or 2.5 percent. The revenue decrease was primarily caused by an
8.2 percent decrease in the Australian dollar exchange rate, and having one less
restaurant in the current period compared to the same period in the prior year.
These decreases were partially offset by same store sales increases, driven by
successful marketing promotions. Restaurant sales for the forty weeks ended
February 3, 2002 were $26.6 million compared to $27.3 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 $1.2 million in the current year compared to $1.3 million in the
same period of the prior year, a decrease of $0.1 million or 7.7 percent. This
decrease is primarily due to the 8.2 percent decrease in the Australian dollar
exchange rate. Three joint venture restaurants and 56 international franchised
restaurants produced current franchise revenues in both the current and prior
years. Current international franchise restaurants are located in Japan, Taiwan,
Thailand, South Korea, Singapore and Indonesia.
Prime costs were $18.0 million for the forty weeks ended February 3, 2002
compared to $18.4 million in the same period of the prior year. Prime costs,
which include food, paper and labor, were 67.4 percent of sales in the current
year compared to 67.5 percent of sales in the same period of the prior year.
This decrease is due to a decrease in labor costs resulting from tighter labor
controls.
21
Other operating expenses amounted to $6.4 million for the current fiscal year
compared to $6.6 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. The Company completed
the remodel of two locations during the quarter and 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 forty weeks ended February 3, 2002 were $65.6 million compared
to $66.0 million for the forty weeks ended February 4, 2001, a decrease of $0.4
million or 0.6 percent. This decrease is due to an 8.2 percent decrease in the
Australian dollar exchange rate, that more than offset 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 $39.4 million in the current year compared to $39.7 million in
the same period of the prior year. Prime costs, which include food, paper and
labor, remained flat at 60.1 percent of sales.
Other operating expenses amounted to $15.9 million for the current year compared
to $15.9 million for the same period of the prior year. Operating expenses
increased due to additional restaurants, but the increases were offset by
declining foreign exchange rates.
Management is continuing its facilities upgrade program and based on positive
results of "face-to-face" drive-thru operations, plans to add two more upgrades
during the next two quarters.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working Capital
- ---------------
The Company's principal source of liquidity is cash flows from operations, which
was $13.9 million for the first forty weeks of fiscal year 2002 compared to $7.1
million for the same period of the prior year. This increase of 96.5 percent is
due to fluctuations in the Company's operating account balances and a $0.6
million increase in net income.
22
The Company's working capital at February 3, 2002 was $8.2 million including
cash and cash equivalents of $25.0 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 1.3 at February 3, 2002 and 1.2 at
April 30, 2001.
Total Assets / Capital Expenditures
- -----------------------------------
At February 3, 2002 total assets were $126.7 million, an increase of $4.1
million or 3.3 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 48.0 percent of total assets at February 3, 2002 and
49.0 percent at April 30, 2001.
Capital expenditures were $7.3 million for the forty weeks ended February 3,
2002 and $16.3 million for the same period last year. The current year's capital
expenditures were primarily used for development of four new Pat & Oscar's
restaurants and refurbishment of existing restaurants.
The Company plans to expand its international operations through additional
investment in Company-operated restaurants, joint ventures and the development
of the franchise system. The Company expects to remodel two to three Australian
Sizzler(R) restaurants at a cost of approximately $50,000 each and two to four
KFC(R) restaurants, including "face-to-face" drive-thru operations, at a cost of
approximately $100,000 each. The Company's domestic operations will primarily be
expanded by growing the Pat & Oscar's division through new restaurants.
Presently, the Company contemplates adding five to six more Pat & Oscar's(SM)
locations by the end of fiscal 2003 at a cost of approximately $1.2 million per
location, before landlord contributions. The Company is presently testing an
exterior remodel package for its domestic Sizzler(R) operations and cost
estimates range between $50,000 and $75,000.
Debt
- ----
The Company's debt includes a credit facility with 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 (6.6 percent at February 3, 2002) 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 $15.7 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
9.4 percent. Under the terms of the agreement, the Company has borrowed the
maximum amount permissible. A portion of the Company's real estate and personal
property in the U.S.
23
are collateral for the loan. The loan 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 was
approximately $9.8 million.
In connection with the acquisition of Pat & Oscar's, the Company assumed
revolving credit facilities with the Southwest Community Bank that mature in
fiscal year 2004 and 2005. The agreement is subject to certain financial
covenants and restrictions which management believes are customary for loans of
this type. The loans carry variable interest rates that ranged from 5.5 percent
to 10.0 percent over the past 12 months. At the end of the quarter, the
Company's unpaid principal balance was approximately $1.9 million.
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 forty weeks ended February 3, 2002, the Company repurchased 636,200
shares of its common stock for a total of $901,000. 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 Westpac, with an outstanding principal balance at February 3, 2002 of $15.7
million or $31.3 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 (6.6 percent at February 3, 2002),
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 on this loan, 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 September 30, 2002 and August 31, 2003, respectively.
In addition, the Company has entered into two interest rate swap contracts to
convert part of its variable interest exposure to a fixed rate of a weighted
average of approximately 7.60 percent. The interest rate swap contracts 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 5.5 to
10.0 percent during the last 12 months. As of February 3, 2002, the Company had
a $1.9 million balance comprised of unpaid principal.
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 February 3, 2002, the Company's net
investment in its Australian subsidiaries was $13.8 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, as amended. 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
and menu programs and an exterior remodeling program (c) the continued focus on
quality service by training its 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 calendar year 2003, (e) the accretion to earnings of
the Pat & Oscar's division for fiscal year 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 including a test restaurant
in a club, (g) the opening of one new Pat & Oscar's location in the fourth
quarter of fiscal year 2002 and five to six new locations in fiscal year 2003.
(h) the KFC(R) facilities upgrade program, (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 Company's ability 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,
menu and restaurant employee training programs to be a cost-effective means of
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 year 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(R) restaurant testing programs in Australia, (g) the Company's ability
to complete the near-term opening of additional Pat & Oscar's(SM) restaurants on
schedule, (h) the Company's ability to avoid any material liability arising out
of the E.coli incident in Milwaukee in July 2000, including the liquidation of
its insurance carrier, Reliance Insurance Company. (i) the Company's ability to
manage its costs and expenses and meet of its debt service requirements and
working capital needs, and (j) 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
WORLDWIDE RESTAURANT CONCEPTS, 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 11 of 15 lawsuits
arising out of the E. coli incident at two franchised locations in Milwaukee,
Wisconsin in July 2000. The Company's former meat supplier, Excel Corporation
and the Company's former 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 or settled. 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.
ITEM 5: OTHER RELATED PARTY TRANSACTIONS
On October 15, 2001, the Company made a $0.2 million loan to Kenneth Cole,
President
27
and CEO of Sizzler USA, which constituted a material consideration of his
employment package. The proceeds of the loan were to be used to pay in full two
promissory notes executed by Mr. Cole in favor of his former employer as payment
for shares of stock of his former employer, owned by Mr. Cole. Mr. Cole will
repay the Company upon the sale of the stock, if sale should occur. Any
deficiency will be forgiven bv the Company over a five year period provided Mr.
Cole remains employed by the Company.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Number Description
------ -----------
3.1 Amended bylaws of the Registrant, effective through January
17, 2002.
b. Reports on Form 8-K
The Company filed a report on Form 8-K dated January 4, 2002 reporting:
On September 20, 2001, the Company issued a press release announcing the
opening of the twelfth Pat & Oscar's(SM) restaurant.
On November 19, 2001, the Company issued a press release announcing the
opening of the thirteenth Pat & Oscar's(SM) restaurant.
On November 20, 2001, the Company issued a press release announcing the
second quarter fiscal year 2002 results.
On December 19, 2001, the Company issued a press release announcing the
opening of the fourteenth Pat & Oscar's(SM) restaurant.
28
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: March 19, 2002 /s/ Charles L. Boppell
----------------------
Charles L. Boppell
President, Chief Executive Officer and
Director
Date: March 19, 2002 /s/ A. Keith Wall
-----------------
A. Keith Wall
Vice President and Chief Financial
Officer (principal financial and
Accounting officer)
Date: March 19, 2002 /s/Mary E. Arnold
-----------------
Mary E. Arnold
Vice President and Controller
29