ITEM 1. BUSINESS. - -----------------
DESCRIPTION OF THE COMPANY.
Sizzler International, Inc. ("Sizzler" or the "Company") is a Delaware corporation and was formed on January 18, 1991, under the name Collins Foods, Inc., as a wholly owned subsidiary of Collins Foods International, Inc. ("CFI"), for the purpose of effecting a series of transactions relating to the transfer of CFI's domestic Kentucky Fried Chicken ("KFC") restaurants and certain real estate to PepsiCo, Inc. In March 1991, CFI transferred all of its assets and liabilities other than those related to the operation of its domestic KFC restaurants and certain real estate to the Company. These assets and liabilities included CFI's 66% ownership interest in the stock of Sizzler Restaurants International, Inc. ("SRI"), CFI's International Division and a subsidiary of CFI that owns certain restaurant properties and the headquarters building. Shortly thereafter, CFI was merged with and into PepsiCo, Inc.
In addition, on March 18, 1991, the Company completed an exchange offer which resulted in the increase of its ownership interest in SRI from 66% to approximately 94%. In April 1991, SRI became a wholly owned subsidiary of the Company through the merger of SRI with and into another wholly owned subsidiary of the Company. Effective on May 7, 1991, the Company's name was changed from Collins Foods, Inc. to Sizzler International, Inc.
On June 2, 1996, in response to continued domestic operating losses, the Company enacted a comprehensive restructuring strategy designed to return the U.S. operations to profitability. This strategy included the closure of under- performing restaurants in the U.S. and filing for bankruptcy protection. The Company and four subsidiaries (SRI, Buffalo Ranch Steakhouses, Inc. ("BRSH"), Tenly Enterprises, Inc. ("Tenly"), and Collins Properties, Inc. ("CPI")) became debtors-in-possession subject to the supervision of the U.S. Bankruptcy Court. The debtor subsidiaries collectively own and operate substantially all of the Company's U.S. restaurant businesses and assets. The Company's international division businesses and assets are owned and operated by separate subsidiaries and are not subject to the U.S. Chapter 11 cases. The cases involving the Company and its debtor subsidiaries are jointly administered under Case No. 96- 16075AG.
On February 24, 1997 the U.S. Bankruptcy Court confirmed the plans of reorganization of BRSH (formerly the owner and operator of the Buffalo Ranch restaurant chain), and Tenly (the owner and operator of certain non-operating restaurant properties). The Company does not consider the assets and operations of these subsidiaries to be material. The BRSH and Tenly plans call for the repayment of creditors from the liquidation of assets.
On June 2, 1997, the U.S. Bankruptcy Court for the Central District of California approved plans of reorganization for the Company, SRI and CPI. The Company's plan provides for full payment of allowed creditor's claims, estimated as approximately $67 million, primarily from the operation of the Company's international division. SRI's plan provides for full payment of allowed creditor's claims, estimated as approximately $24 million, over a four-year period, primarily from U.S. operations. CPI's plan provides for full payment of allowed creditor claims, estimated as approximately $1.7 million. Funds for the payment of CPI's claims are to be generated through the sale of CPI's properties.
The number of restaurants in operation by the Company and its franchisees at June 2, 1997 and June 3, 1996 as well as April 30, 1997 and 1996 was as follows:
INFORMATION BY GEOGRAPHIC AREA AND INDUSTRY SEGMENT.
The Company is engaged in only one industry segment -- restaurant operations. See Note 8 of "Notes to Consolidated Financial Statements" which are included in this report for financial information relating to the Company's foreign operations.
SIZZLER RESTAURANTS.
The Company operates 108 Sizzler restaurants worldwide. Sizzler restaurants operate in the mid-scale dining market featuring a selection of grilled steak, chicken and seafood entrees, sandwiches and specialty platters, as well as a fresh fruit and salad bar in a family dining environment. Sizzler restaurants follow a semi-service system, whereby guests place their order and pay upon entering the restaurant and then are seated. This system combines the benefits of convenience with the experience of a full service restaurant.
The Company also licenses another 257 Sizzler restaurants worldwide. Single- unit franchise agreements for a Sizzler restaurant generally provide for a franchise term of 20 years, payment of an initial franchise fee and payment of royalties equal to a percentage of gross sales. Franchise agreements that relate to restaurants developed pursuant to multi-unit development agreements and restaurants owned by multi-unit operators may be subject to more favorable financial terms. Franchisees are also generally required to contribute a percentage of their gross sales to national and regional cooperative advertising funds. Usually, the company-operated and franchised restaurants operate in the same manner.
Sizzler restaurants are typically free-standing buildings with an average size of 5,000 to 6,000 square feet containing seating for 150 to 200 guests. Sizzler restaurants are open seven days a week mostly for lunch and dinner. During fiscal 1997, dinner sales accounted for approximately 61 percent of revenues, and lunch accounted for most of the remainder.
During the bankruptcy period, SRI closed nine restaurants domestically and sold nine restaurants to franchisees. Internationally, six company-operated Sizzlers in Australia and New Zealand were closed and two were opened. As the result of internal repositioning, the Sizzler franchisee in Australia closed its 39 restaurants. These closures were partially offset by ten new restaurant openings throughout Asia.
INTERNATIONAL OPERATIONS.
International operations continue to make an important contribution to consolidated results. The largest single international business is the Company's operation of 96 KFC restaurants in Queensland, Australia. For the year ended April 30, 1997, this business reported operating profits of $9.9 million.
At April 30, 1997, the Company operated 36 Sizzler restaurants in Australia and three in New Zealand. In addition, the Company franchised 55 Sizzler restaurants in Puerto Rico, Guam, Japan, Taiwan, Indonesia, Guatemala, South Korea and Thailand. The Company owns a 50% interest in a joint venture operating three Sizzler restaurants in Singapore.
The Company has entered into agreements calling for further development of Sizzler restaurants in Japan, Singapore, Thailand, Taiwan, Indonesia, South Korea, Guatemala and Puerto Rico.
SUPPLIERS.
The Company has entered into distribution arrangements with a number of suppliers of food and other products used in its restaurants. From time to time the Company makes advance purchases of selected commodity items to minimize fluctuation of costs. Although wholesale commodity prices are subject to change due to various economic conditions, the Company has in the past been able to obtain sufficient supplies to carry on its businesses and the Company believes that it will be able to do so in the future.
The Chapter 11 proceeding had no material effect on the delivery of goods and services.
TRADEMARKS AND SERVICE MARKS.
The Company owns certain registered trademarks, trade names and service marks domestically and internationally which are of material importance to the business conducted by Sizzler. These include the trademarks of SIZZLER(R), SIZZLER AMERICAN GRILL(R) and others. Sizzler licenses the right to use certain trademarks, trade names and service marks to its franchisees. The Company has licensed the right to use certain trademarks, trade names and service marks which relate to the operation of KFC(R) and The Italian Oven(R) restaurants in Australia pursuant to franchise agreements with the respective franchisors.
RESEARCH AND DEVELOPMENT.
The Company continuously evaluates its menus and restaurant concepts. New products are developed by the Company's research staff in conjunction with outside consultants and food suppliers. Before introduction, new menu items are rigorously tested and evaluated for guest acceptance, quality and profitability.
The Company intends to maintain its ongoing research programs relating to the development of new food products and evaluation of marketing activities. The costs associated with such research activities are not material to the Company.
SEASONALITY.
The Company's operations are subject to some seasonal fluctuation with the summer months being slightly stronger followed by the spring months. The fall and winter seasons are weaker due to climatic and other conditions which negatively impact guest dining patterns, although the overall effect of seasonality is moderated to a limited extent by the fact that the Australian seasons fall in reverse of the seasons in the United States.
WORKING CAPITAL REQUIREMENTS.
The working capital requirements of the Company generally do not fluctuate significantly during the year because revenues consist primarily of cash sales and there is a rapid turnover of inventory. The Company does not carry significant inventories of beef, poultry, seafood, produce or other food products. Food products are ordered and delivered two or more times per week to individual restaurants. Individual restaurants maintain supplies adequate to support their needs for two to five days.
COMPETITION.
The restaurant business is highly competitive and is affected by changes in the public's eating habits and preferences, demographic and sociocultural patterns, and local and
national economic conditions affecting consumer spending habits. The restaurants operated by the Company compete directly and indirectly with a large number of national and regional restaurant operations, as well as with locally owned restaurants and numerous other establishments that offer moderately priced steak, chicken, salads and other menu items to the public. The Company relies on innovative concept development, marketing techniques and promotions and competes in terms of perceived value, the variety and quality of menu items, service, and price. There are other companies engaged in restaurant operations and franchising programs similar to the Company's that have substantially greater financial resources and a higher volume of sales than the Company.
ENVIRONMENTAL MATTERS.
Federal and state environmental regulations have not to date had a material effect on the Company, but more stringent and varied requirements of local government bodies with respect to zoning, land use and environmental factors sometimes delay construction of new restaurants or remodels of existing restaurants.
EMPLOYEES.
The Company employed approximately 2,500 persons at April 30, 1997, in the United States and approximately 5,700 persons in Australia. Labor relations with employees have traditionally been good. As is true with most restaurant operations, the majority of the Company's employees work part time.
GOVERNMENT REGULATION.
Each of the Company's restaurants is subject to federal, state and local laws and regulations governing health, sanitation, environmental matters, safety, the sale of alcoholic beverages and regulations regarding wages, hiring and employment practices. The Company believes it has all licenses and approvals material to the operation of its business, and that its operations are in material compliance with applicable laws and regulations.
RISKS ATTENDANT TO FOREIGN OPERATIONS.
The Company operates Sizzler restaurants in Australia and New Zealand, as well as KFC restaurants in Queensland, Australia. The Company also licenses the right to operate Sizzler restaurants to others in a number of countries and U.S. territories. Possible risks attendant to such operations include fluctuations in currency exchange rates, higher rates of inflation and possible changes in tax rates and structures. The Company is not able to predict the likelihood of or degree of future changes in exchange rates, rates of inflation or tax rates and structures.
ITEM 2.
ITEM 2. PROPERTIES. - -------------------
Through its subsidiaries, the Company owns or leases the real property on which its restaurants are operated. A small number of franchised restaurants are also located on property owned or leased by the Company.
The Company owns in fee a total of 33 operating Sizzler restaurant properties in the United States, Australia and New Zealand. Sizzler restaurants typically are free-standing buildings with an average size of 5,000 to 6,000 square feet. The Company owns in fee 47 KFC properties. The KFC restaurants in Australia are typically free-standing buildings with floor areas ranging from 1,875 to 2,500 square feet.
Approximately 70 percent of the restaurant locations operated by the Company are leased. The leases generally are for primary terms of 15 to 20 years, with two or three renewal options of five years each, and expire on various dates until the year 2012. The Company has the right to extend many of these leases. The Company has the option under some of these leases to purchase the facilities at the end of the lease terms for varying amounts as specified in the respective lease agreements.
In addition the Company owns in fee a 100,000 square foot executive office building in Los Angeles and the land upon which the building is located.
The Company owns or leases a number of additional properties which it does not currently operate. The majority of these properties have been subleased to third parties with the remainder being held for sale or other disposition.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS. - --------------------------
As previously discussed, during the 1997 fiscal year, the Company and four of its subsidiaries were debtors-in-possession subject to the supervision of the U.S. Bankruptcy Court of the Central District of California under Chapter 11 of the federal Bankruptcy Code. The bankruptcy proceedings commenced on June 2, 1996 and were jointly administered under Case No. 96-16075AG. Chapter 11 plans of reorganization for two of the Company's subsidiaries (BRSH and Tenly) were confirmed on February 24, 1997. The Chapter 11 plans of reorganization for the Company and the remaining two subsidiaries (SRI and CPI) were approved on June 2, 1997.
There are additional legal proceedings pending to which the Company is a party or of which its property is the subject that involve ordinary routine litigation incidental to the business. None of these pending legal proceedings is considered material.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - -------------------------------------------------------------
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION - ----------------------------------------------------------------------------
The Company's common stock is listed on the New York Stock Exchange (the "NYSE") under the symbol "SZ". As of June 30, 1997, the approximate number of record holders of the Company's common stock was 2,983. The high and low sales prices for a share of the Company's common stock as reported on the NYSE, by quarter, for the past two fiscal years are as follows:
COMMON STOCK DIVIDENDS - ------------------------------------------------------------------------------
The Company and its predecessor CFI, have paid quarterly cash dividends without interruption up to the third quarter of fiscal 1996. Future dividends will depend on a number of factors, including earnings, financial position, capital requirements, bankruptcy plan restrictions and other relevant factors.
Cash dividends per share paid quarterly on common stock for the past two fiscal years are as follows:
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - --------------------------------
The following table sets forth consolidated financial data with respect to the Company and should be read in conjunction with the Consolidated Financial Statements, including Notes thereto, which are included elsewhere herein.
(a) Includes an after-tax charge of $12.2 million, or $.42 per share, primarily related to the closure of under-perfoming Sizzler restaurants, and a $2.8 million charge to income or $.10 per share, net of tax, related to costs associated with food contamination at two franchised restaurants in southern Oregon.
(b) Includes an after-tax charge of $98.9 million, or $3.40 per share, primarily related to the closure of under-performing Sizzler restaurants and the write-off of intangible assets.
(c) Includes an after-tax charge of $108.9 million or $3.92 per share, primarily related to the costs and asset write downs associated with restaurant closings and reorganization. In addition to the restructuring charge, the Company recorded a charge of $12.8 million or $0.46 per share related to the adoption of SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", as of the end of the fourth quarter of fiscal year 1996. See note 3.
(d) This total does not include line of credit borrowings totaling $27.0 million which, as a result of acceleration of maturity, are presented as current liabilities in the consolidated financial statements.
(e) Substantially all prepetition debt has been reclassified as "Liabilities subject to compromise under reorganization proceedings".
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - --------------------------------------------------------------------------------
CONSOLIDATED SUMMARY - --------------------
In the fourth quarter of fiscal 1996, the Company recorded a restructuring charge of $108.9 million. The restructuring costs included predominantly non- cash write offs of assets and related disposition costs associated with the closure of restaurants in the United States. Overall, the restructuring charge reflects the efforts to redeploy capital to those core markets which are expected to yield returns consistent with management's expectations and objectives, and to eliminate the Company's investment in non-performing assets.
The non-recurring items consist of the following (in thousands):
During fiscal 1997, the Company closed 130 U.S. restaurants not meeting specified financial criteria. As a result of these activities, $100.2 million of the reserves were utilized. As of April 30, 1997, the reserve balance was $8.7 million. Management continues to review all restaurants and market areas for compatibility with long term goals. Non-performing restaurants and market areas not fitting into management's long term plans will continue to be reviewed for closure.
In addition to the restructuring charge, the 1996 consolidated financial statements reflect an additional non-cash charge of $12.8 million or $0.46 per share related to the adoption of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". In fiscal 1997, impaired restaurants were among those restaurants that were closed.
The following analysis of financial condition and results of operations excludes the previously described charges and reserves, unless otherwise specified.
The Company's revenues are generated from four primary sources: Domestic company-operated restaurant sales, domestic franchise revenues (including franchise fees, royalties and rental income), international company-operated restaurant sales and international franchised restaurant revenues. The addition or closure of restaurants, both Company and franchised and the sales volume of comparable restaurants (those restaurants open more than one year) are important factors to consider in evaluating the Company's results.
Revenues totaled $299.9 million in fiscal 1997, a decrease of $136.3 million or 31.2 percent from 1996, compared with a decrease of $26.0 million or 5.6 percent in fiscal 1996 from fiscal 1995. This decline is largely attributable to a net reduction of 200 company-operated and franchised Sizzler restaurants, as well as a decline in sales of existing restaurants in the U.S. and Australia. During the same time period, four KFC restaurants were added in Australia and four Buffalo Ranch Steakhouse restaurants in the U.S. were closed. Domestic revenues declined in fiscal 1997 by $130.8 million or 51.7 percent from the prior year, primarily resulting from the closure of 130 company-operated restaurants in the U.S. The domestic franchise system experienced a net reduction of 36 restaurants. Internationally, the Company had a net decrease of five Sizzler company-operated restaurants and a net decrease of 29 franchised Sizzler restaurants. International operations also added four KFC restaurants during the fiscal year. The changes in international operations resulted in a $5.4 million or 3.0 percent decrease in international revenues.
Loss before interest and taxes was $0.9 million in fiscal 1997, an improvement of $9.6 million or 91.0 percent from a $10.5 million loss in fiscal 1996. This increase was due to a $17.2 million improvement in domestic operations, partially offset by a $7.6 million decline in international operations. Domestic operations benefited from the closure of 130 under-performing restaurants and cost reductions in the remaining restaurants and corporate headquarters. The decrease in international earnings was primarily due to lower average sales per restaurant and lower guest counts partially offset by a 5.5 percent increase in the Australian dollar exchange rate.
U.S. OPERATIONS - ---------------
Excluding franchise revenues, company-operated restaurants contributed approximately 38.8 percent of consolidated revenues. Company operated restaurant sales decreased $128.2 million to $116.5 million or 52.4 percent when compared to the prior year, due to the closure of 130 restaurants and a decline in average sales per restaurant. On a comparative restaurant basis, for those restaurants open more than one year, average sales per Sizzler restaurant fell 10.0 percent to approximately $1.3 million per year, average customers per restaurant were 7.8 percent lower and the average customer check decreased 2.4 percent over the prior year. However, sales are showing an upward trend as the fourth quarter comparable sales decline narrowed to 5.9 percent and the
average customer check increased 0.5 percent from the prior year.
Loss before interest and taxes improved by $13.4 million to $11.0 million in fiscal 1997 from a loss of $24.4 million in fiscal 1996. The improvement was primarily a result of the closure of 130 under-performing restaurants, improved labor scheduling, reductions in administrative support staff and other cost reduction measures achieved during the year in the restaurants as well as headquarters. As a percentage of revenues, occupancy and labor costs declined 2.6 percent and 0.8 percent, respectively.
In fiscal 1996, revenues from domestic operations decreased $19.4 million to $244.7 million when compared to the prior year. This decrease was attributed to a systemwide decline in average domestic restaurant sales, and the impact of severe winter storms. Losses before interest and taxes from domestic operations increased $11.0 million compared to fiscal 1995 to a loss of $24.4 million.
DOMESTIC FRANCHISE - ------------------
In 1997, domestic franchise revenues, including franchise fees, royalties and rental income accounted for 1.8 percent of consolidated revenues. Revenues declined $2.6 million or 32.2 percent versus fiscal 1996. Lower revenue is primarily the result of a net reduction of franchised restaurants, a decline of 18.9 percent in average sales per franchised restaurant and an abatement of royalties for the fourth quarter pursuant to the plan of reorganization. During fiscal 1997, nine restaurants became franchised and 45 franchised restaurants were closed for a net reduction of 36 franchised restaurants. At April 30, 1997, there were 199 domestic franchised restaurants in operation.
In 1996, domestic franchise revenues accounted for 1.9 percent of consolidated revenues. Revenues decreased $1.8 million or 18.4 percent versus fiscal 1995 and earnings before interest and taxes decreased $1.3 million or 47.1 percent when compared to the prior year. The lower revenues and earnings resulted from the net reduction of 40 franchised restaurants and a decline of 4.8 percent in average sales per domestic franchised restaurant. At April 30, 1996, the number of domestic franchised restaurants was 235.
INTERNATIONAL OPERATIONS - ------------------------
International operations generated approximately 59.3 percent of consolidated revenues in fiscal 1997. Revenues decreased by 3.0 percent or $5.4 million to $177.9 million when compared to the prior year. The net reduction of five company-operated Sizzler restaurants offset by the addition of four KFC restaurants contributed to the decline in revenues. Earnings before interest and taxes decreased $7.6 million to $4.7 million or 62.0 percent during fiscal 1997 with lower average restaurant sales impacting the decrease. At April 30, 1997, the international operation included 97 company-operated,
joint ventured, and franchised Sizzlers, 96 KFC restaurants and one The Italian Oven restaurant.
Excluding franchise revenues, results from the company-operated Sizzler restaurants reflect a 12.5 percent decrease in revenues, or $9.9 million, to $69.8 million from the prior fiscal year. This decrease reflects lower average restaurant sales and restaurant closings offset by the increase in the Australian dollar exchange rate. On a comparative restaurant basis, sales in Australian dollars, check average and customer counts decreased by 16.2 percent, 2.0 percent and 14.5 percent, respectively, from levels of the previous year. At April 30, 1997, the Company operated 39 Sizzler restaurants versus 44 a year ago.
The Company's international franchise revenues increased $521,000 or 13.7 percent to $4.3 million in 1997 versus 1996, due primarily to net new restaurant openings in the Asian/Pacific region. At April 30, 1997, there were 55 international franchised restaurants and three joint ventured restaurants in nine countries and two U.S. territories, versus 85 international franchised restaurants and two joint ventured restaurants in nine countries and two U.S. territories at April 30, 1996. During fiscal 1997, 11 franchised restaurants were opened in Japan, Thailand, South Korea, Guatemala and Indonesia and one joint venture in Singapore, while 40 were closed in Australia and one in Indonesia. The Australian closures are represented by a single multi-unit operator.
Revenues from the Company's KFC restaurants increased $5.4 million to $102.6 million or 5.5 percent when compared to the prior year. This increase reflects four additional restaurants and the increase in the Australian dollar exchange rate. On a comparative restaurant basis, in Australian dollars, average restaurant sales decreased 2.0 percent and the average customer check increased 2.8 percent, however, customer counts declined 4.7 percent, compared to fiscal 1996. At April 30, 1997, the number of KFC restaurants was 96 versus 92 last year.
In fiscal 1996, the Company's international operations accounted for approximately 42.0 percent of consolidated revenues. Revenues decreased by 2.5 percent or $4.7 million, to $183.3 million when compared to fiscal 1995. This reduction in revenues was primarily the result of closing three restaurants in Canada, as well as a 10.5 percent decline in average Sizzler restaurant sales in Australia, partially offset by the addition of four KFC restaurants and one The Italian Oven restaurant.
Excluding franchise revenues, company-operated Sizzlers recorded a 12.5 percent or $11.6 million decline in revenues to $81.5 million from fiscal 1995, primarily reflecting lower average restaurant sales. On a comparative restaurant basis, sales in Australian dollars and guest counts decreased by 10.5 percent and 14.3 percent, respectively, from levels of the previous year. The average guest check was up 4.5 percent, reflecting a menu price increase during the year. At April 30, 1996, the Company operated 44 Sizzler restaurants versus 47 at April 30, 1995.
International franchise revenues decreased $776,000 or 16.9 percent to $3.8 million in 1996 versus 1995, due primarily to lower average restaurant sales in Australia, offset by a net increase of eight restaurants in the Asian/Pacific region and Puerto Rico. At April 30, 1996, there were 85 international franchised restaurants and two joint ventured restaurants in nine countries and two U.S. territories, versus 77 restaurants in 10 countries and two U.S. territories at April 30, 1995.
Fiscal 1996 revenues of $97.2 million from the Company's KFC restaurants increased $6.9 million or 7.6 percent when compared to the prior year. On a comparative restaurant basis, average restaurant sales, in Australia dollars, decreased 1.2 percent and the average guest check decreased 10.2 percent, however, guest counts increased 0.4 percent, compared to fiscal 1995. At April 30, 1996, the number of KFC restaurants was 92 versus 88 at April 30, 1995.
Earnings before interest and taxes decreased $9.4 million to $12.4 million or 43.2 percent during fiscal 1996.
CONSOLIDATED COSTS AND EXPENSES - -------------------------------
Consolidated costs and expenses, as a percentage of revenues, were 0.5 percent lower in fiscal 1997. Payroll and related expenses, occupancy costs and depreciation and amortization expense decreased 1.8 percent, 2.4 percent and 0.6 percent, as a percentage of revenues, respectively. The lower costs reflect the closure of under-performing restaurants.
Investment income increased $0.2 million in 1997 from 1996 and declined $0.3 million in 1996 from 1995. Interest expense increased in 1997 from 1996 by $4.6 million or 198.0 percent, due to increased borrowings prior to bankruptcy filing and estimated accrued interest on prepetition liabilities. In fiscal 1996, interest expense increased $0.9 million from 1995, primarily as a result of higher borrowings during the fiscal year.
During fiscal 1996, the Company was a party to foreign exchange contracts to hedge exposure to the Australian dollar exchange rate. These contracts had no material effect on the results of operations. No contracts were in place at fiscal year end.
In fiscal 1996, consolidated costs and expenses, as a percentage of revenues, were 5.0 percent higher than the previous year, primarily due to increases in food costs, operating labor and advertising expenses. These increases primarily reflected the relatively fixed nature of certain restaurant costs such as management salaries, occupancy and other direct restaurant costs at lower sales levels.
The provision for income taxes changed from a provision of $4.9 million in fiscal 1996 to a benefit of $7.3 million in fiscal 1997. The benefit for income taxes reflects taxes on foreign operations. Under current accounting standards (Financial Accounting Standards Board
Statement No. 109 "Accounting for Income Taxes"), the Company may not record a tax benefit for U.S. source losses. (See Note 4 of Notes to Consolidated Financial Statements).
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LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
WORKING CAPITAL - ---------------
The Company's principal source of working capital is cash provided by operations which amounted to $5.9 million in fiscal 1997 and $13.4 million in fiscal 1996. The Company has historically maintained a relatively low current ratio, but because of the non payment of pre bankruptcy liabilities, the current ratio was 1.5 at fiscal year-end 1997. The current ratio was 0.4 at fiscal year-end 1996.
The Company began to experience liquidity problems in 1996, due primarily to continued sales decline in the Company's U.S. restaurants, the impact of severe winter storms, higher costs associated with the development of the Sizzler American Grill repositioning, and higher net interest expense payments. On June 2, 1996, the Company commenced Chapter 11 proceedings and became debtors-in- possession subject to the supervision of the U.S. Bankruptcy Court.
At April 30, 1997, working capital was $15.9 million compared with a deficit of $39.7 million at the end of the prior year. The increase primarily reflects the non payment of pre bankruptcy liabilities, shown on the balance sheet as "Liabilities subject to compromise under reorganization proceedings". At April 30, 1996, working capital was a deficit of $39.7 million compared to a deficit of $5.4 million at the end of the prior year. The decrease primarily reflected the $27 million outstanding line of credit balance that was presented as a current liability in the consolidated financial statements due to the Company's non-compliance with its financial covenants.
TOTAL ASSETS/CAPITAL EXPENDITURES - ---------------------------------
Total assets decreased $10.4 million or 5.9 percent in fiscal 1997. Property and equipment represented 62.4 percent of total assets at the end of fiscal 1997 and 75.7 percent at the end of fiscal 1996. In fiscal 1996, total assets decreased $76.7 million or 27.7 percent from fiscal 1995 as a result of market and restaurant closures and related provisions.
Capital expenditures were $6.4 million in fiscal 1997, which included new restaurant construction and acquisitions of $1.5 million and remodels of $4.9 million. The Company
anticipates continuing to grow international operations through additional investment in company-operated restaurants, joint ventures and the development of the franchise system. The international restaurant base has expanded, as demonstrated by the net increase of five Sizzler restaurants and four KFC restaurants during fiscal year 1997.
The Company anticipates capital expenditures in fiscal 1998 to be approximately $8.6 million, of which $5.1 million will be used to develop the Asian/Pacific region and $3.5 million on replacement upgrades and other capital items. It is anticipated that between eight and ten restaurants will be added to the international division in fiscal 1998. Domestically, no new unit growth is planned in fiscal 1998, instead, the Company will focus on the repositioning program.
In fiscal 1996, capital expenditures were $24.4 million, consisting of new restaurant construction and acquisitions of $6.9 million and remodels of $17.5 million.
DEBT - ----
As a result of the bankruptcy filing, no principal or interest payments on prepetition debt will be made prior to bankruptcy court approval.
In July 1996, the Company obtained a $15.0 million revolving credit facility. The credit facility, which bore interest at the lending institution's prime rate plus 1%, was to mature on the earlier of July 15, 1998, or the effective date of a confirmed plan of reorganization. This facility is secured by the assets of certain of the Company's subsidiaries and provides restrictions on additional borrowings and incurrence of liens. During the fiscal year there were no borrowings on this credit facility. As of July 1997, the Company canceled this credit agreement.
INFLATION - ---------
Increases in interest rates and the costs of labor, food and construction can significantly affect the Company's operations. Management believes that the current practices of maintaining adequate operating margins through a combination of menu price increases and cost controls, careful management of working capital and evaluation of property and equipment needs are its most effective tools for coping with inflation.
OTHER - -----
The Company is aware of industry concerns regarding the potential impact of further increases in the minimum wage, the increased marketing of prepared foods by grocery and convenience stores, customer resistance to increases in menu prices, the growth of home delivery of prepared foods, increased concerns over the nutritional value of foods
and compliance with existing or proposed health and safety legislation and other similar contingencies. The Company is unable to predict the possible impact of such factors on its business. In the past, the Company has been able to address similar types of changes in the business climate and been able to pass any associated higher costs along to its customers, because the changes have generally impacted all restaurant companies.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands of dollars, except per share data)
The following tables show comparative quarterly financial results during the past two fiscal years. The first, second and fourth fiscal quarters normally include twelve weeks of operations whereas the third fiscal quarter includes sixteen weeks of operations. - --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Sizzler International, Inc.:
We have audited the accompanying consolidated balance sheets of Sizzler International, Inc. (a Delaware corporation) and subsidiaries as of April 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' investment and cash flows for each of the three years in the period ended April 30, 1997. These financial statements and schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sizzler International, Inc. and subsidiaries as of April 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1997 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The accompanying consolidated statements of operations indicates that the Company has incurred recurring losses. As discussed in Note 2 to the consolidated financial statements, on June 2, 1996, the Company and certain U.S. subsidiaries filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. These matters among others raise substantial doubt about the Company's ability to continue as a going concern. In addition, on June 2, 1997, the U.S. Bankruptcy Court approved the plan of reorganization for the Company and certain U.S. subsidiaries. Management's plans in regards to these matters are also described in Note 2. Continuation of business thereafter is dependent on the Company's ability to achieve successful future operations. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in the index of financial statement schedules as Part IV, Item 14 (a) (2) are presented for purposes of complying with the Securities and Exchange Commissions rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Los Angeles, California July 23, 1997
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (In thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (In thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Investment (In thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTRODUCTION: On June 2, 1996, the Company enacted a comprehensive restructuring strategy designed to return the U.S. operations to profitability. This strategy included the closure of underperforming restaurants in the U.S. and filing for bankruptcy protection through a Chapter 11 proceeding. On June 2, 1996, the Company and four subsidiaries, Sizzler Restaurants International, Inc., Buffalo Ranch Steakhouses, Inc., Tenly Enterprises, Inc., and Collins Properties, Inc., became debtors-in-possession subject to the supervision of the U.S. Bankruptcy Court of the Central District of California under Chapter 11 of the federal bankruptcy code.
BASIS OF PRESENTATION: The consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. While the Chapter 11 cases are in process, the Company continues in possession of its properties and operates and manages its business as a debtor- in-possession pursuant to the Bankruptcy Code. The consolidated financial statements have been prepared in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," issued by the American Institute of Certified Public Accountants in November 1990 ("SOP 90-7").
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Sizzler International, Inc., and all majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated.
Certain financial statements, notes and supplementary data for the prior years have been reclassified to conform with the 1997 presentation.
ACCOUNTING PERIOD: The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Sunday nearest to April 30. For clarity of presentation, the Company has described all periods presented as if the year ended April 30.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FRANCHISE OPERATIONS: The Company recognizes initial franchise fees as income when the franchised restaurant commences operation, at which time the Company has substantially performed its obligations relating to such fees. Royalties which are based
upon a percentage of sales, are recognized as income on the accrual basis. On a limited basis, franchisees have also entered into leases of restaurant properties leased or owned by Sizzler. Royalty revenues, franchise fees and rent payments from franchisees are included in "Franchise Operations" in the Consolidated Statements of Operations.
MARKETING COSTS: Marketing costs are reported in the Other Operating Expenses and include costs of advertising, marketing and promotional programs. Promotional discounts are expensed as incurred and other marketing costs are charged to expense ratably in relation to sales over the year in which incurred.
STOCK-BASED COMPENSATION: The Company uses the intrinsic value-based method of measuring stock-based compensation cost which measures compensation cost as the excess, if any, of the quoted market price of Sizzler's capital stock at the grant date over the amount the employee must pay for the stock. The Company's policy generally is to grant stock options at fair market value at the date of grant.
COMMON STOCK AND NET INCOME OR LOSS PER SHARE: Net income or loss per common and common equivalent share is computed by dividing net income by the weighted average number of shares outstanding during each year, adjusted for the dilutive effect of stock options and contingent shares, if applicable. For the years presented, primary per share computations and fully diluted per share computations are approximately equal.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist primarily of short-term, interest-bearing time deposits and other marketable securities with original maturities of 90 days or less, which are carried at cost, which approximates fair value because of the short maturity of those instruments. At April 30, 1997 and 1996, cash and time deposits amounted to $34,085,000 and $6,377,000, respectively. Other securities were $2,839,000 at April 30, 1996.
INVENTORIES: Inventories are valued at the lower of cost (first-in, first-out method) or market, and primarily consist of food products.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost, which includes interest capitalized during construction and costs relating to the selection of sites for new restaurant locations, except for assets that have been impaired, for which the carrying amount is reduced to the estimated fair value.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization are provided over the estimated useful lives of the assets using the straight-line method. Estimated useful lives range from 10 to 30 years for buildings and 2 to 8 years for equipment. Leasehold improvements are amortized primarily over the remaining lives of the leases, generally 15 to 20 years.
PROPERTIES HELD FOR SALE OR LEASE: Properties held for sale or lease were $10,234,000 at April 30, 1997 and $15,834,000 at April 30, 1996, and are included in Other Assets. These assets represent excess land carried at estimated realizable values.
INTANGIBLE ASSETS: Intangible assets are amortized on a straight-line basis over appropriate periods ranging from 12 to 40 years. The Company continually evaluates the recoverability of these intangible assets by assessing whether the recorded value of the intangible assets will be recovered through future expected operating results. The methodology used to assess the recoverability of intangible and other long lived assets is to determine its expected net realizable value based upon the historical trend and their expected impact on future operating cash flows. During the fourth quarter of fiscal 1996, the Company wrote off approximately $9.8 million of intangibles related to repurchased Sizzler franchise rights associated with market closures (See Note 3).
RECOVERABILITY OF LONG LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or a group of assets may not be recoverable. The Company considers a history of operating losses to be its primary indicator of potential impairment. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company deems an asset to be impaired if a forecast of undiscounted future operating cash flows directly related to the asset, including disposal value, if any, is less than its carrying amount. If an asset is determined to be impaired, the loss is measured as the amount by which the carrying amount of the asset exceeds fair value. The Company generally measures fair value by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. The non-cash charge was $12.8 million for fiscal 1996.
OTHER CURRENT LIABILITIES: Other current liabilities include amounts accrued for compensation and benefits, insurance, advertising, legal fees, rent, taxes and others.
OTHER LIABILITIES: Other liabilities consist primarily of insurance reserves of $418,000 in 1997 and $7,380,000 in 1996, restructuring reserve of $8,700,000 in 1997 and $34,400,000 in 1996. In addition, other liabilities include an obligation of $12,989,000 in 1996 related to the Company's Executive Supplemental Benefit Plan.
TRANSLATION OF FOREIGN CURRENCIES: The financial statements of the Company's foreign operations are translated in accordance with the Statement of Financial Accounting Standards No. 52. As a result, translation adjustments are included in stockholders' investment. The functional currency used in the Company's foreign operations is primarily the Australian dollar. Foreign currency transaction gains and losses were not material in 1997, 1996 and 1995.
NOTE 2 - BANKRUPTCY REORGANIZATION - --------------------------------------------------------------------------------
Bankruptcy Proceedings - ----------------------
On June 2, 1996, in response to continued domestic operating losses, the Company enacted a comprehensive restructuring strategy designed to return the U.S. operations to profitability. This strategy included the closure of under- performing restaurants in the U.S. and filing for bankruptcy protection. The Company and four subsidiaries (SRI, Buffalo Ranch Steakhouses, Inc. ("BRSH"), Tenly Enterprises, Inc. ("Tenly"), and Collins Properties, Inc. ("CPI")) became debtors-in-possession subject to the supervision of the U.S. Bankruptcy Court. The debtor subsidiaries collectively own and operate substantially all of the Company's U.S. restaurant businesses and assets. The Company's international division businesses and assets are owned and operated by separate subsidiaries and are not subject to the U.S. Chapter 11 cases. The cases involving the Company and its debtor subsidiaries are jointly administered under Case No. 96- 16075AG.
On February 24, 1997 the U.S. Bankruptcy Court confirmed the plans of reorganization of BRSH (formerly the owner and operator of the Buffalo Ranch restaurant chain), and Tenly (the owner and operator of certain non-operating restaurant properties). The Company does not consider the assets and operations of these subsidiaries to be material. The BRSH and Tenly plans call for the repayment of creditors from the liquidation of assets.
On June 2, 1997, the U.S. Bankruptcy Court for the Central District of California approved plans of reorganization for the Company, SRI and CPI. The Company's plan provides for full payment of allowed creditor's claims, estimated as approximately $67 million, primarily from the operation of the Company's international division. SRI's plan provides for full payment of allowed creditor's claims, estimated as approximately $24 million, over a four-year period, primarily from U.S. operations. CPI's plan provides for full payment of allowed creditor's claims, estimated as approximately $1.7 million. Funds for the payment of CPI's claims are to be generated through the sale of CPI's properties.
Reorganization Costs - --------------------
During fiscal 1997 the Company incurred $2,606,000 of severance costs, $5,435,000 of legal and professional costs and $785,000 of temporary staffing costs relating to the bankruptcy reorganization. These reorganization costs were accrued in the prior year and charged against established reserves. Additionally, $6,000,000 of interest was charged to earnings in the fourth quarter when the reorganization plan was approved by all of the creditor committees.
Liabilities Subject to Compromise Under Reorganization Proceedings - ------------------------------------------------------------------
Liabilities subject to compromise under reorganization proceedings as of April 30, 1997 are identified below:
Approximately 10,000 claims have been filed against the Company which include duplicate claims and a significant number of claims which the Company deems to be highly inflated. The ultimate amount and settlement terms for such liabilities are not presently determinable. Therefore, no provision has been made for these differences in the accompanying consolidated financial statements.
Condensed Combined Financial Statement - --------------------------------------
The following condensed combined balance sheet as of April 30, 1997 sets forth the combined financial position of the Company and four subsidiaries (SRI, BRSH, Tenly and CPI) which are in reorganization proceedings.
Condensed Combined Balance Sheet As of April 30, 1997
NOTE 3 - NON-RECURRING ITEMS - --------------------------------------------------------------------------------
During the fourth quarter of fiscal 1996, the Company recorded a pre-tax restructuring charge of $108.9 million or $3.92 per share. The restructuring costs include predominantly non-cash write-offs of assets and related disposition costs associated with the closure of 130 restaurants in the United States.
The fiscal 1996 restructuring charge and the remaining balances of accrued restructuring liabilities as of April 30, 1997 were:
NOTE 4 - INCOME TAXES - --------------------------------------------------------------------------------
The Company files a consolidated United States income tax return which includes all domestic subsidiaries in which it owns 80 percent or more of the voting stock and 80 percent or more of the value of the outstanding stock. Foreign withholding taxes have not been provided on the unremitted earnings totaling $7,671,000 of the Company's foreign operations at April 30, 1997. It is the Company's intention to reinvest such earnings permanently.
The components of the provision (benefit) for income taxes attributable to income (loss) from operations consists of the following (in thousands):
A reconciliation of the statutory United States Federal income tax rate to the Company's consolidated effective income tax rate follows:
Pre-tax income (loss) for domestic and foreign operations is as follows (in thousands):
The tax effects of temporary differences and carryforwards which give rise to significant amounts of deferred tax assets and deferred liabilities are as follows (in thousands):
The valuation allowance required under FASB 109 ("Accounting for Income Taxes") represents deferred tax assets that do not satisfy the recognition criteria as set forth in the standard.
NOTE 5 - DEBT - --------------------------------------------------------------------------------
As a result of the bankruptcy filing (see Note 2), substantially all debt outstanding at June 2, 1996 has been classified as "Liabilities subject to compromise under reorganization proceedings". No principal or interest payments on prepetition debt will be made without bankruptcy court approval.
A summary of debt outstanding as of April 30, 1997 and 1996, is as follows (in thousands):
Payment of $70 long-term debt, excluding capital lease obligations, is due in fiscal 1998, $1 in 1999, $1 in 2000, $1 in 2001, and $562 thereafter.
In July 1996, the Company obtained a $15.0 million revolving credit facility. The credit facility which bore interest at the lending bank's prime rate plus 1% was to mature on the earlier of July 15, 1998 or the effective date of a confirmed plan of reorganization. This facility is secured by the assets of certain of the Company's subsidiaries. During the fiscal year there were no borrowings on this credit facility. As of July 1997, the Company canceled this credit agreement.
NOTE 6 - STOCK OPTIONS AND RESTRICTED STOCK - --------------------------------------------------------------------------------
The Company has an Employee Stock Incentive Plan for certain officers and key employees, a Stock Option Plan for Non-Employee Directors and a stock purchase plan for Non-Employee Directors. The maximum number of shares that may be issued under these plans is 2,000,000, 100,000 and 100,000 shares, respectively. Grants of options to employees and the periods during which such options can be exercised are at the discretion of the Board of Directors.
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation", permits stock compensation cost to be measured using either the intrinsic value-based method per APB-25 or the fair-value method per SFAS 123. The Company continues to use the intrinsic value-based method prescribed by APB-25 for financial statement purposes. Had compensation cost for these plans been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the following pro-forma amounts.
STOCK OPTIONS: - -------------- The outstanding options become exercisable in varying amounts through 2005. A summary of stock option transactions follows:
RESTRICTED STOCK PLAN: - ----------------------
Stock issued under this plan is delivered subject to various conditions relating to corporate performance. Compensation expense related to these options amounted to approximately $1,374,000 in 1997, $142,000 in 1996 and $264,000 in 1995. A summary of restricted stock transactions follows:
NOTE 7 - LEASES - -------------------------------------------------------------------------------- The Company is a party to a number of noncancelable lease agreements involving land, buildings and equipment. The leases are generally for terms of 15 to 20 years which expire on various dates through 2012. The Company has the right to extend many of these leases. Certain leases require contingent rent, determined as a percentage of sales, when annual sales exceed specified levels. The Company is also a lessor and a sublessor of land, buildings and equipment.
The Company is a co-lessee or guarantor on leases of certain franchisees which are not significant in amount.
Following is a schedule by year of future minimum lease commitments and sublease rental income under all noncancelable leases (in thousands):
(a) Capital lease obligations include only those leases which were not rejected during bankuptcy proceedings. Substantially all captial lease obligations have been reclassified as "Liabilities subject to compromise under reorganization proceedings" on the balance sheet.
Rent expense consists of (in thousands):
NOTE 8 - INFORMATION BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA - --------------------------------------------------------------------------------
The Company is engaged in only one industry segment which is restaurant operations. Operating profits exclude investment income, interest expense, income taxes, non-recurring charges, and impairment of long-lived assets. Identifiable assets are those assets used in the operations of each geographic area.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
At April 30, 1997, international commitments made for capital projects were approximately $1,039,000. There were no U.S. commitments for capital projects at fiscal year end.
The Company is a party to certain litigation arising in the ordinary course of business which, in the opinion of management, should not have a material adverse effect upon the consolidated financial position of the Company or its results of operations.
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has a contributory employee profit sharing, savings and retirement plan for all eligible employees. The annual employer contribution is determined at the discretion of the Company's Board of Directors. The Company did not make a contribution to the Employee Savings Plan in 1997 or 1996. The Company's contribution amounted to approximately $515,000 in 1995.
In addition, the Company has an Executive Supplemental Benefit Plan which provides benefits upon retirement to certain employees. The present value of the accumulated benefit obligation related to this plan at a six percent discount rate totaled $12,989,000 at April 30, 1997 and April 30, 1996.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------
The following table sets forth certain information with respect to the current directors and executive officers of the Company:
Name Age Position with Company - ----------------------------- --- ---------------------
James A. Collins 70 Chairman of Board of the Company and its predecessor CFI since 1968 (term expires in 1998). Chief Executive Officer of the Company since May 29, 1997.
Kevin W. Perkins 45 Director of the Company since 1994 (term expires in 1998). Executive Vice President of the Company since May 29, 1997. President, and Chief Executive Officer of the Company (1994-1997). President and Chief Executive Officer of International Operations.
Peter H. Dailey 67 Director of the Company since 1991 (term expires in 1998). Chairman, Enniskerry Financial, Ltd., a private investment company, and Chairman, Supervisory Board of Directors of Memorex-Telex, Inc. Director, Chicago Title and Trust Company. Pinkerton, Inc. and Jacobs Engineering Group, Inc. Former Ambassador to Ireland and Special Envoy to NATO.
Barry E. Krantz 54 Director of the Company since January 1997 (term expires in 1997). Restaurant industry consultant since 1995. Chief Operating Officer, Restaurant Enterprises Group (1993-1995), President, Family Restaurant division (1989-1995), and President and Chief Operation Officer, Family Restaurants, Inc. (1994-1995).
Name Age Position with Company - ---- --- ---------------------
Phillip D. Matthews 59 Director of the Company since May 1997 (term expired in 1996). Chairman, Panda Management Company (1995-1997). Chairman, Wolverine World Wide, Inc. (1993-1996). Director, Bell Sports, Inc., H. F. Ahmanson & Co., Home Savings of America and Wolverine World Wide, Inc.
H. Wallace Merryman 69 Director of the Company and its predecessor CFI since 1971 (term expires in 1997). Chairman of the Board and Chief Executive Officer, Avco Financial Services, Inc. (1975-1987).
Robert A. Muh 59 Director of the Company since May 1997 (term expired in 1996). Chairman of the Board of Sutter Securities, Inc. since 1992. President, Financial Services International (1987-1992).
Carol A. Scott, Ph.D. 47 Director of the Company since 1993 (term expired in 1996). Professor of Marketing, UCLA since 1989. Chairman of the Faculty, UCLA Anderson Graduate School of Management (1990-1994). Director, Athena Medical Corporation.
Charles F. Smith 64 Director of the Company since 1995 (term expires in 1998). President of Charles F. Smith & Co., Inc., an investment banking firm, since 1984. Director, FirstFed Financial Corp., Logicon, Inc., and Fremont Funding Corp.
Christopher R. Thomas 48 Executive Vice President of the Company since 1991. Chief Financial Officer of the Company and its predecessor CFI (1985-1997). President and Chief Executive Officer of Sizzler USA.
Name Age Position with Company - ----------------------------- --- ---------------------
Ryan S. Tondro 49 Vice President and Chief Financial Officer of the Company since May 1997. Vice President, Controller of the Company (1995-1997). Controller of the Company (February 1995-August 1995). Vice President, Finance and Controller of Washington Inventory Service, a division of Huffy Corporation (1993-1995). Vice President, Controller of Thrifty Drug Stores (1978-1993).
David J. Barton 41 Vice President, General Counsel of the Company since 1994 and Secretary of the Company since 1995. Assistant General Counsel of the Company (1991-1994).
Michael J. Raedeke 39 Vice President, Taxation and Internal Audit of the Company since 1995. Director of Tax/Internal Audit of the Company (1991-1995).
(1) Other Annual Compensation represents: a) automobile allowance and cost reimbursement, b) reimbursements for legal and tax assistance, c) premiums on group life insurance, and d) executive medical plan costs.
(2) Does not exceed the lesser of $50,000 or 10% of total salary and bonus.
(3) Restricted stock may be sold to eligible employees at the discretion of the Board of Directors for an amount that is not less than the par value of such shares. Dividends, when paid, are paid on all restricted stock. All restricted shares are subject to limitations on sale or other disposition thereof, which terminate upon the satisfaction of certain criteria established by the Board of Directors at the time of the sale. As of the end of fiscal 1997, the aggregate restricted stock holdings remaining, valued as of the date of the grant, are as follows: Mr. Perkins, 232,375 shares valued at $1,193,584; Mr. Thomas, 177,875 shares valued at $1,011,547; Mr. Barton, 75,000 shares valued at $281,250; Mr. Tondro, 75,000 shares valued at $281,250; Mr. Kowalski, 54,000 shares, valued at $202,500.
(4) Mr. Perkins' 1997 All Other Compensation represents loan forgiveness.
(5) Mr. Tondro joined the Company in February 1995.
(6) Mr. Kowalski joined the Company in August 1994 and left the Company in July 1997.
BOARD COMMITTEES AND DIRECTOR COMPENSATION
The Board of Directors has an Audit Committee, a Compensation and Stock Option Committee, and a Nominating Committee.
The Board of Directors of the Company met 12 times during fiscal 1997, including one meeting of an ad hoc committee of the Board formed to review the Chapter 11 proceedings. Each director attended 75% or more of the aggregate of the total number of meetings of the Board of Directors and the total number of meetings held by committees of the board on which he or she served.
Messrs. Merryman (Chairman) and Smith and Ms. Scott comprised the Audit Committee, which met four times during fiscal 1997. The Audit Committee recommends to the Board of Directors the appointment of the Company's independent auditors, reviews the fee arrangements and scope of the annual audit, reviews the activities and recommendations of the Company's internal auditors and considers the comments of the independent auditors with respect to internal accounting controls.
Mr. William S. Hansen (Chairman), Mr. Dailey and Mr. Wayne G. Kees comprised the Compensation and Stock Option Committee, which did not meet during fiscal 1997. The Compensation and Stock Option Committee approves officers' salaries, administers executive compensation plans, reviews and approves the grant of options and restricted stock and approves bonus schedules for Company employees.
Messrs. Smith (Chairman) and Kees and Ms. Scott comprised the Nominating Committee which met during fiscal 1997 on 12/20/96. The Nominating Committee has the responsibility of nominating the officers of the Company, and recommending candidates for election to the Board of Directors at the Annual Meeting of Stockholders and to fill vacancies or newly created directorships.
Following the end of fiscal 1997, Messrs. Hansen and Kees announced their retirement and resigned from the Board of Directors. The resulting vacancies on the Board were filled by the appointment of Mr. Phillip D. Matthews and Mr. Robert A. Muh.
In his capacity as the Chairman of the Board of Directors, during fiscal 1997 Mr. Collins received a salary of $53,000. Each other Director who is not an employee of the Company is paid a retainer fee of $20,000 per year and is also paid a fee of $1,000 for attending each meeting of the Board of Directors, and $1,000 for attending committee meetings not held in conjunction with a Board meeting.
Under the Company's Stock Purchase Plan for Non-Employee Directors, each Director who is not an employee of the Company may elect to have all or a portion of his or her retainer used to purchase shares of the Company's common stock. The price of the shares of common stock purchased from the Company is the closing price reported on the New York Stock Exchange on the first day of each calendar quarter for which the director's election is effective.
Under the Company's Stock Option Plan for Non-Employee Directors, each Director who is not an employee of the Company is automatically granted, on the date of any annual meeting of which the Director is elected or re-elected to the Board, an option to purchase 2,000 shares of the Company's common stock. The exercise price of each option is the fair market value of the common stock on the grant date. Options granted under the plan vest and become exercisable on the date of the Company's next annual meeting following the grant date, provided that the Director continues to serve as a Director until such date.
EXECUTIVE SUPPLEMENTAL BENEFIT PLAN
During fiscal 1997, the Company maintained an Executive Supplemental Benefit Plan. Under the Supplemental Benefit Plan, the normal retirement date is the later of the participant's sixty-fifth birthday or the date the participant achieves 10 years of service under the Supplemental Benefit Plan. Participants who retire at the normal retirement date are entitled to receive 65% of the average for their three highest years of earnings, comprised of base salary and standard bonus, but excluding any other cash bonus or form of remuneration, during the last five years of employment, reduced by 50% of the participant's primary social security benefit and by the annuitized value of the participant's account balance under the profit sharing portion of the Company's Employee Savings Plan. Such benefits are payable as a life and survivor annuity. Participants who retire between the ages of 55 and 65 and who have completed 15 years of service under the Supplemental Benefit Plan are entitled to receive reduced benefits based on age and the number of years of service completed.
EMPLOYMENT CONTRACTS
The Company has entered into employment agreements with five executive officers (Messrs. Perkins, Thomas, Barton, Raedeke, and Tondro). Each of these agreements sets forth the officer's position and responsibilities with the Company and provides for the officer's annual base salary, participation in the Management Incentive Plan or other bonus program, and other benefits generally available to executive officers of the Company.
Under these employment agreements, the Company may terminate the officer's employment for cause. "Cause" generally is defined to include the willful and continued failure by the officer to substantially perform his duties after demand by the Company, or the willful engaging by the officer in misconduct which is materially injurious to the Company. Under these agreements, the officer may terminate his employment for "good reason." "Good reason" generally is defined as a failure by the Board of Directors to re-elect the officer to the position set forth in the agreement following removal from such position, or to vest the officer with the powers and authority of the position set forth in the agreement, or other breach by the Company.
In the event an employment agreement is terminated by the Company other than for cause or by reason of the officer's disability, or by the officer for good reason, the officer is entitled under his employment agreement to receive the sum of (a) his salary through the date of termination and (b) as severance an amount equal to one year of the officer's salary at the annual rate in effect as of the date of termination.
A subsidiary of the Company is party to a consulting agreement with Barry Krantz, a director of the Company. Under the agreement, Mr. Krantz provides marketing consulting services. The agreement is terminable by the Company's subsidiary at any time and for any reason upon two weeks' notice.
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE
It is the duty of the Compensation and Stock Option Committee to administer the Company's various compensation and incentive plans, including its 1991 Employee Stock Incentive Plan, Management Incentive Plan and Executive Supplemental Benefit Plan. In addition, we review compensation levels in light of the performance of members of senior management, including the five most highly compensated executive officers. The Committee is composed entirely of independent outside directors. No member of the Committee is a former or current officer or employee of the Company or any of its subsidiaries. The Committee reviews all aspects of compensation for senior management with the Board of Directors.
The Company routinely has retained the services of outside compensation consulting firms to assist the Committee in connection with the performance of its various duties. These firms provide advice to the Committee with respect to the reasonableness of compensation paid to senior management of the Company. Typically, this advice takes into account how the Company's compensation programs
compare to those of competing companies as well as the Company's performance. Members of the Committee also review compensation surveys and analysis provided by such firms, including material prepared by the Company's human resources personnel.
The compensation policy of the Company, which is endorsed by the Committee, is that a substantial portion of the annual compensation of each officer relate to and must be contingent upon the performance of the Company or a business unit, the enhancement of shareholder value, and/or the individual contributions of each officer. As a result, much of an executive officer's potential compensation is "at risk" under an annual bonus compensation program. In addition, the Committee seeks to offer compensation opportunities comparable to those provided by other similar companies in the restaurant industry. The Committee strives to create a direct link between the long-term interests of executives and shareholders. Through the use of stock-based incentives, the Committee focuses the attention of its executives on managing the Company from the perspective of an owner with an equity stake.
In the second half of fiscal 1996, the Committee conducted a review of the Company's executive compensation program generally. The Committee found that, in light of certain events and developments, it was necessary and appropriate to revise the Company's executive compensation program to enhance its effectiveness in attracting and retaining talented key management. The events and developments included the assumption of additional functions by key executives as a result of reductions in corporate administrative overhead in December 1995, the anticipated assumption of major additional responsibilities by key executives in connection with the bankruptcy proceeding, evidence of increased employee attrition, and the need to develop simpler and more direct incentives to achieve certain specific key objectives deemed desirable by the Board of Directors.
Based on these findings, the Committee approved certain revisions to the Company's executive compensation program, which were implemented by the Company effective in May 1996. The revised program featured a new Incentive Plan, a severance policy, and a restructuring of executive equity incentives. The Committee also approved the use of employment agreements for the Company's executive officers.
Under the new Incentive Plan, participants were entitled to a one-time cash bonus on the Program Termination Date, defined as May 1, 1998 or the earlier occurrence of either of two key strategic objectives. The amount of the bonus was established as a designated percentage of annual base salary, ranging from 40% to 125% depending on the participant's responsibilities and relative position within the Company. To be eligible for the bonus, a participant was required to remain continuously employed by the Company on a full time basis until the Program Termination Date. The key strategic objectives consisted of either confirmation of a plan of reorganization in the Company's Chapter 11 bankruptcy or consummation of a merger or sale transaction in respect of the Company.
As part of the Company's severance policy, executive officers and other key managerial personnel are entitled to a severance payment upon termination of employment. The amount of the severance ranges from six to twelve months of annual base salary, depending on the employee's responsibilities and relative position within the Company. For a payment to be due, such termination must be either by the Company other than for cause or by the employee in the case of specified events.
As part of the restructuring of management equity incentives, the Committee approved the award of restricted shares to each of the senior officers of the Company, along with other members of management. Restricted shares generally are subject to restrictions on resale by the holder and to a right of repurchase by the Company until the achievement of certain objectives or the occurrence of certain events. Each of the officers received a number of restricted shares that was based on his or her responsibilities and relative position in the Company. The restricted shares were sold to employees at par value ($.01 per share), and were granted on the condition that the recipient cancel any outstanding stock options previously granted to the recipient under the 1991 Employee Stock Incentive Plan.
The Committee believes that the award of restricted shares is a cost-effective way to align management's interests with those of shareholders, motivate those who have direct ability to influence short and long-term corporate results, and maximize the likelihood that corporate objectives, goals and strategies will be attained.
The compensation of Mr. Perkins, the Company's Chief Executive Officer, for fiscal 1997 was established in a manner consistent with the Company's fiscal 1997 executive officer compensation program generally. Mr. Perkins' salary was fixed as $300,000. The percentage of salary payable to Mr. Perkins as bonus under the new Incentive Plan was established at 125%. Mr. Perkins was awarded 210,000 restricted shares on the basis described above. Mr. Perkins also was entitled to receive perquisites and other benefits on the same basis as other executive officers of the Company.
Compensation and Stock Option Committee (Fiscal Year 1997)
William S. Hansen, Chairman
Peter H. Dailey
Wayne G. Kees
July 23, 1997
STOCK PERFORMANCE GRAPH.
The following graph compares the cumulative total return for Sizzler stock with the comparable cumulative returns of (i) a broad market index: The Dow Jones Equity Market Index and (ii) a published industry or line of business index: The Dow Jones-Entertainment and Leisure (Restaurants) index. The Graph covers the time period from the end of fiscal 1992 until the end of fiscal 1997. It assumes $100 invested on April 30, 1992 in Sizzler stock and $100 invested at that time in each of the indexes. The comparison assumes that all dividends are reinvested.
(GRAPH OMITTED)
Item 12. Security Ownership of Certain Beneficial Owners and Management - -------- --------------------------------------------------------------
As of June 30, 1997, according to filings with the Securities and Exchange Commission and to the best knowledge of the Company, the following persons (as depicted in the schedule below) are the beneficial owners of more than 5% of the outstanding voting shares of the Company.
(1) Possesses sole voting and investment power for all shares of Common Stock beneficially owned unless otherwise indicated.
(2) Does not include 334,483 shares of Common Stock held by an independent trustee for the benefit of Mr. Collins' adult children as to which Mr. Collins disclaims beneficial ownership.
(3) CGCI and its affiliates possess sole investment power, but sole voting power only for 1,777,100 shares of Common Stock. CGCI and its affiliates disclaim beneficial ownership of these shares. The Company has been advised that the shares are held by one or more separate investment management companies affiliated with CGCI, each of which manages accounts on behalf of others.
(4) Possesses sole investment power and no voting power.
(5) DFAI possesses sole investment power, but sole voting power only for 1,069,834 shares of Common Stock. Persons who are officers of DFAI also serve as officers of DFA Investment Group Inc., a registered open-end investment company (the "DFAI Fund"), and the DFA Investment Trust Company, a Delaware business trust (the "DFAI Trust"). In their capacities as officers of the DFAI Fund and the DFAI Trust, these persons vote 220,800 additional shares owned by the Fund and 224,200 additional shares owned by the Trust. DFAI disclaims beneficial ownership of these shares. The Company has been advised that the shares are held in portfolios of DFAI Fund or in series of DFAI Trust investment vehicles for qualified employee benefit plans, for all of which DFAI, a registered investment advisor, serves as investment manager.
STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the equity securities of the Company beneficially owned by each director of the Company, and by all directors and officers of the Company as a group, on June 30, 1997.
*Less than one percent (1%) of class.
(1) Possesses sole voting and investment power. (2) Does not include 334,483 shares of Common Stock held by an independent trustee for the benefit of Mr. Collins' adult children as to which Mr. Collins disclaims beneficial ownership. (3) Includes shares issuable pursuant to options exercisable within 60 days of June 30, 1997 in the following amounts: Ms. Scott - 4,000, Messrs. Dailey and Merryman - 6,000 shares each, and all directors and executive officers as a group - 16,000 shares.
Item 13. Certain Relationships and Related Transactions. - -------------------------------------------------------
The Company has entered into employment agreements with certain executive officers and into a consultancy agreement with one of its directors. (See Item 11
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. - -------------------------------------------------------------------------
(a) List of documents filed as part of the report:
(1) Financial Statements:
Report of Independent Public Accountants
Consolidated Statements of Operations of Sizzler International, Inc. and Subsidiaries for each of the three years in the period ended April 30, 1997
Consolidated Balance Sheets of Sizzler International, Inc. and Subsidiaries as of April 30, 1997 and 1996
Consolidated Statements of Stockholders' Investment of Sizzler International, Inc. and Subsidiaries for each of the three years in the period ended April 30, 1997.
Consolidated Statements of Cash Flows of Sizzler International, Inc. and Subsidiaries for each of the three years in the period ended April 30, 1997.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules:
Schedules supporting Financial Statements:
II. Valuation and Qualifying Accounts
Schedules omitted:
All other schedules, other than those shown above, have been omitted because the required information is shown in the consolidated financial statements or in the notes thereto, or the amounts involved are not significant, or the required matter is not applicable.
(3) Exhibits:
(b) Reports on Form 8-K
Registrant has filed no reports on Form 8-K during the last quarter of its 1997 fiscal year.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: July 23, 1997 SIZZLER INTERNATIONAL, INC.
By: /s/ James A. Collins ------------------------ James A. Collins Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II -----------