-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GZx00xYrikAz0a/99a8NmZ29kYg2T6lBQHRDaxEcMGLj7CfhPApXjupIMot8oHnV EvbSaYTZlEh49YBuSc265g== 0000898430-98-002571.txt : 19980720 0000898430-98-002571.hdr.sgml : 19980720 ACCESSION NUMBER: 0000898430-98-002571 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980714 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIZZLER INTERNATIONAL INC CENTRAL INDEX KEY: 0000870760 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 954307254 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10711 FILM NUMBER: 98665732 BUSINESS ADDRESS: STREET 1: 12655 W JEFFERSON BLVD CITY: LOS ANGELES STATE: CA ZIP: 90066 BUSINESS PHONE: 3108272300 FORMER COMPANY: FORMER CONFORMED NAME: COLLINS FOODS INC DATE OF NAME CHANGE: 19600201 10-K405 1 ANNUAL REPORT ON FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) (X) Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) for the fiscal year ended April 30, 1998 or ( ) Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 No Fee Required) for the transition period from ______ to ______ Commission file number 1-10711 ------- SIZZLER INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 95-4307254 - ------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 6101 West Centinela Avenue, Culver City, California 90230 --------------------------------------------------------- (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (310) 568-0135 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED -------------------- ---------------- Common Stock, $.01 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE ---------------- (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports 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. [X]YES[_]NO The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 1998, computed by reference to the closing sale price of such shares on such date was $67,190,827. The number of shares outstanding of common stock, $0.01 par value, as of June 30, 1998, was 28,823,249. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [X] PART I ITEM 1. BUSINESS. - ----------------- DESCRIPTION OF THE COMPANY. Sizzler International, Inc. ("Sizzler" or the "Company") was incorporated on January 18, 1991 in connection with a reorganization of its parent company Collins Foods International, Inc. ("CFI") undertaken in contemplation of CFI's merger with PepsiCo, Inc. As part of the reorganization, the Company's common stock was distributed to stockholders of CFI. In addition, as part of the transaction, the Company acquired the remaining outstanding shares of common stock of its 66%-owned subsidiary Sizzler Restaurants International, Inc. ("SRI"), which became the Company's wholly-owned subsidiary. On June 2, 1996, the Company and four subsidiaries filed for protection from creditors under Chapter 11 of the federal Bankruptcy Code. The cases involving the Company and its debtor subsidiaries were jointly administered under Case No. 96-16075AG before the U.S. Bankruptcy Court for the Central District of California. The debtor subsidiaries consisted of SRI, which owned and operated the Company's Sizzler restaurants in the U.S., Buffalo Ranch Steakhouses, Inc. which owned and operated the Company's Buffalo Ranch Steakhouse restaurants, and Tenly Enterprises, Inc. and Collins Properties, Inc., each of which held certain U.S. operating and non-operating real properties. The Company's international division businesses and assets, which were owned and operated by non-debtor subsidiaries, were not subject to the U.S. Chapter 11 cases. By September 23, 1997, the Company and its debtor subsidiaries had confirmed and commenced the effective date of their respective plans of reorganization. The interests of the stockholders of the Company were not impaired under these plans of reorganization. In accordance with the plan of reorganization, SRI was reorganized into the Sizzler USA group of companies, consisting of Sizzler USA, Inc. ("Sizzler USA") and its subsidiaries. The number of restaurants in operation by the Company and its franchisees at April 30, 1998, 1997 and 1996 was as follows:
April 30, ---------------------------- 1998 1997 1996 ---- ---- ---- Domestic Sizzler Restaurants Company-operated 66 69 199 Franchised (including Latin America) 199 208 243 International Restaurants Company-operated Sizzlers 31 39 44 Franchised Sizzlers 52 49 79 Company-operated KFCs 98 96 92 The Italian Oven 0 1 1 Buffalo Ranch Steakhouses 0 0 4
2 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 97 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 251 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 1998, dinner sales accounted for approximately 65 percent of revenues, and lunch accounted for most of the remainder. During fiscal year 1998, Sizzler USA closed one restaurant domestically and sold two restaurants to franchisees. Internationally, eight Company-operated Sizzlers in Australia and New Zealand were closed. KENTUCKY FRIED CHICKEN ("KFC"). The Company operates 98 KFC restaurants in Queensland, Australia under franchise agreements with its franchisor. The term of these agreements vary from 8 to 23 years and require payment of royalties based on a percentage of sales. KFC restaurants operate in the quick service segment of the market and offer unique tasting chicken products, sandwiches and various side orders. During 1998 dinner business accounted for approximately 64% of revenue and lunch accounted for the remainder. The KFC restaurants are typically free-standing buildings with floor areas ranging from 1,875 to 2,500 square feet containing seating for 20 to 66 guests. Sixty-seven percent of the restaurants offer a drive-through option while 14 percent of the restaurants are located in the food courts of large shopping malls. 3 The KFC restaurants are required to contribute a percentage of revenue to a National Australian cooperative advertising fund administered by the franchisor and are also required to contribute to local advertising initiatives. 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. 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) 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) restaurants in Australia pursuant to the franchise agreements with the franchisor. 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 4 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 2,400 persons at April 30, 1998, in the United States and approximately 4,600 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, as well as Australian 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, possible changes in tax rates and structures, and possible foreign political and economic conditions. The Company is not able to predict the likelihood of or degree of 5 future changes in exchange rates, rates of inflation, tax rates and structures, or other conditions. 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 30 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 48 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 60 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. ITEM 3. LEGAL PROCEEDINGS. - -------------------------- There are various 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, other than certain bankruptcy claims, which are adequately reserved. None of these pending legal proceedings is considered material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------- Not Applicable. 6 EXECUTIVE OFFICERS OF THE REGISTRANT AS OF JUNE 30, 1998 - -------------------------------------------------------- James A. Collins 71 Chief Executive Officer of the Company since May 29, 1997. Chairman of the Board of the Company and its predecessor CFI since 1968. Chief Executive Officer of CFI (1968-1987). Chairman of the Board, SRI (1982-1991). Kevin W. Perkins 46 Executive Vice President of the Company and President and Chief Executive Officer of International Operations since May 29, 1997. Director of the Company (1994 to present). President and Chief Executive Officer of the Company (1994-1997). President of the Company's Sizzler Asia/Pacific Division (1988-1994). Christopher R. Thomas 49 Executive Vice President of the Company since 1991. President and Chief Executive Officer of Sizzler USA since 1997. Chief Financial Officer of the Company and its predecessor CFI (1985-1997). Ryan S. Tondro 50 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). Michael J. Raedeke 40 Vice President, Taxation and Internal Audit of the Company since 1995. Director of Tax/Internal Audit of the Company (1991-1995). Ted Robinson 46 Vice President, Strategic and Financial Planning of the Company since May 1997. Director of Financial Planning of the Company (1987-1997). 7 PART II 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 July 2, 1998, the approximate number of record holders of the Company's common stock was 2,849. 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:
1998 1997 -------------------- -------------------- High Low High Low ---- --- ---- --- First Quarter $ 3.125 $ 2.250 $ 3.875 $ 2.625 Second Quarter 4.750 3.000 3.375 2.000 Third Quarter 4.000 2.250 3.625 2.500 Fourth Quarter 4.000 2.250 2.875 2.250
COMMON STOCK DIVIDENDS - -------------------------------------------------------------------------------- The Company has not paid dividends since the third quarter of fiscal 1996. The Company has no current plans to recommence payment of cash dividends. Future dividends will depend on a number of factors, including earnings, financial position, capital requirements and other relevant factors. 8 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.
FOR THE YEARS ENDED APRIL 30, (In millions, except per share data) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Systemwide sales $ 557.9 $ 677.9 $ 875.7 $ 937.7 $ 990.6 Revenues 242.3 299.9 436.2 462.2 487.5 Net income (loss) 5.4 0.6 (138.5)(b) 6.7 (94.9)(a) Basic and diluted earnings (loss) per share 0.19 0.02 (4.99)(b) 0.24 (3.26)(a) Total assets 119.5 168.1 178.5 276.7 277.5 Long-term debt 35.5 0.3 (d) 7.0 (c) 17.1 20.9 Liabilities subject to compromise -- 83.9 (d) -- -- -- Total stockholders' investment 43.8 44.4 43.5 177.1 179.9 Dividends paid per share -- -- 0.08 0.16 0.16 - ----------------------------------------------------------------------------------------------------------------
(a) 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. (b) 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, during fiscal year 1996. (c) 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. (d) Substantially all prepetition debt has been reclassified as "Liabilities subject to compromise under reorganization proceedings." 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- CONSOLIDATED SUMMARY - -------------------- On June 2, 1997, the Bankruptcy Court entered an order confirming the Chapter 11 plans of reorganization of the Company, SRI and Collins Properties, Inc. ("CPI"). The plans of reorganization for Tenly Enterprises, Inc. ("Tenly") and Buffalo Ranch Steakhouses, Inc. ("BRSH") were confirmed on February 24, 1997. On September 23, 1997, the reorganization plans became effective and the Company and its subsidiaries emerged from the bankruptcy proceedings. The Company's plan of reorganization provided for full payment of allowed creditors' claims, including interest, over five years, from the operations of its international division. In September 1997, the Company obtained sufficient financing from Westpac Banking Corporation to pay its creditors' allowed claims in full including interest. All allowed claims for CPI, Tenly and BRSH have also been paid in full. SRI's plan provided for full payment of allowed unsecured creditors' claims (estimated at approximately $17 million) through the formation of a creditor trust. SRI's installment payments to the trust will be evidenced by a four-year note. The note will bear interest at the floating annual rate of prime plus one percent through the first year, prime plus two percent for the next two years, and prime plus three percent for the fourth year. SRI will secure the note with a pledge of the stock of its subsidiaries and with substantially all of the domestic division's operating assets. The Company and its subsidiaries have paid approximately $75 million in pre-petition claims and interest and reinstated the remaining pre-petition liabilities. Remaining bankruptcy liabilities were reclassified from "Liabilities subject to compromise under reorganization proceedings" to the appropriate liability captions of the consolidated balance sheet. 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 130 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. During fiscal 1997, the Company closed 130 U.S. restaurants not meeting specified financial criteria. As a result of these activities, $105.4 million of the reserves were utilized. As of April 30, 1998, the reserve balance was $3.5 million. Management continues to review all restaurants and market areas for compatibility with long term goals. 10 In addition to the restructuring charge, the 1996 consolidated financials statements reflect an additional noncash 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. 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-operated and franchised, and the sales volume of comparable restaurants (those restaurants open more than one year) are important factors to consider in evaluating the Company's results. Revenues totaled $242.3 million in fiscal 1998, a decrease of $57.6 million or 19.2 percent from 1997, compared with a decrease of $136.3 million or 31.2 percent in fiscal 1997 from fiscal 1996. The decline in fiscal 1998 is largely attributable to the closure of nine Company-operated restaurants, the sale of two Company-operated restaurants to franchisees and a net decrease of six franchised Sizzler restaurants. During the same time period, the Company added two KFC restaurants in Australia. Domestic revenues declined in fiscal 1998 by $25.5 million or 20.8 percent from the prior year primarily due to a net decrease of three Company-operated and nine franchised restaurants. Internationally, the Company had a net decrease of eight Sizzler Company-operated restaurants and a net increase of three franchised Sizzler restaurants. International operations also added two KFC restaurants during the fiscal year. The fiscal 1998 changes in international operations resulted in a $32.1 million or 18.1 percent decrease in revenues. Earnings before interest and taxes were $11.6 million in fiscal 1998, an improvement of $12.5 million from a $0.9 million loss in fiscal 1997. This increase was due to a $9.7 million improvement in domestic operations and a $3.1 million increase in international operations, partially offset by a $0.3 million increase in corporate and other expenses. Domestic operations benefited from cost reductions in the remaining restaurants and administrative expenses. The increase in international earnings was primarily due to cost reductions and higher check averages, offset by a 10.5 percent decrease in the Australian dollar exchange rate. DOMESTIC OPERATIONS - ------------------- Excluding franchise revenues, Company-operated restaurants contributed approximately 38.3 percent of consolidated revenues. Fiscal 1998 revenues decreased $23.6 million to $92.9 million or 20.3 percent when compared to the prior year, primarily due to the closure of Company-operated restaurants. On a comparative restaurant basis, for those restaurants open more than one year, average sales per Sizzler restaurant fell 0.4 percent, average customers per restaurant were 5.6 percent lower 11 and the average customer check increased 5.5 percent over the prior year. However, sales are continuing to show an upward trend as the fourth quarter comparable sales increased by 2.2 percent and the average customer check increased 8.6 percent from the prior year. Earnings before interest and taxes improved by $11.3 million to $1.3 million in fiscal 1998 from a loss of $10.0 million in fiscal 1997. The improvement was primarily a result of 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 1.9 percent and 3.0 percent, respectively. In fiscal 1997, revenues from domestic operations decreased $128.2 million to $116.5 million when compared to the prior year. This decrease was attributed to the closure of 130 restaurants and a decline in average sales per restaurant. Losses before interest and taxes from domestic operations improved by $11.4 million to a loss of $10.0 million in fiscal 1997 compared to a loss of $21.4 million in fiscal 1996. DOMESTIC FRANCHISE - ------------------ In 1998, domestic franchise revenues, including franchise fees, royalties and rental income accounted for 1.8 percent of consolidated revenues. Revenues declined $1.9 million or 30.5 percent versus fiscal 1997. Lower revenue is primarily the result of a net reduction of nine franchised restaurants and the impact of a temporary royalty abatement program pursuant to the plan of reorganization. During fiscal 1998, two Company-operated restaurants were sold to franchisees, eight new restaurants opened and 19 franchised restaurants were closed for a net reduction of nine franchised restaurants. At April 30, 1998, there were 199 domestic franchised restaurants in operation including ten restaurants in Latin America and U.S. territories. In 1997 domestic franchise revenues accounted for 2.0 percent of consolidated revenues. Revenues decreased $2.6 million or 30.2 percent versus fiscal 1996. The lower revenues resulted from the net reduction of 36 franchised restaurants and a decline of 18.9 percent in average sales per domestic franchised restaurant. At April 30, 1997, there were 208 domestic franchised restaurants in operation. INTERNATIONAL OPERATIONS - ------------------------ International operations generated approximately 59.9 percent of consolidated revenues in fiscal 1998. Revenues decreased by 18.1 percent or $32.1 million to $145.2 million when compared to the prior year, primarily due to lower foreign currency exchange rates and lower average sales. The closure of eight Company-operated Sizzler restaurants offset by the addition of two KFC restaurants also contributed to the decline in revenues. Earnings before interest and taxes increased $3.1 million to $8.2 million or 62.2 percent during fiscal 1998 due to improved margins and the implementation of cost cutting programs. At April 30, 1998, the International operation 12 included 83 Company-operated, joint ventured, and franchised Sizzlers and 98 KFC restaurants. Excluding franchise revenues, results from the Company-operated Sizzler restaurants reflect a 32.2 percent decrease in revenues, or $22.5 million, to $47.3 million from the prior fiscal year. This decrease reflects lower average restaurant sales, restaurant closings and a decrease in the Australian dollar exchange rate. On a comparative restaurant basis, sales in Australian dollars, decreased 13.2 percent, the check average increased 4.7 percent and customer counts decreased by 17.1 percent. At April 30, 1998, the Company operated 31 Sizzler restaurants versus 39 at the end of fiscal year 1997. The Company's international franchise revenues decreased $1.7 million or 44.1 percent to $2.1 million in 1998 versus 1997, due primarily to the closure of 39 franchised restaurants at the end of the previous year and the previously mentioned decline in the exchange rate. At April 30, 1998, there were 49 international franchised restaurants and three joint ventured restaurants in six countries. During fiscal 1998, five franchised restaurants were opened in Japan, Thailand and Indonesia and two restaurants were closed in South Korea and Taiwan. Revenues from the Company's KFC restaurants decreased $7.7 million to $94.8 million or 7.5 percent when compared to the prior year. This decrease reflects a decrease in the Australian dollar exchange rate. On a comparative restaurant basis, in Australian dollars, average restaurant sales and customer counts decreased 1.3 and 6.7 percent, respectively, The average customer check increased 5.7 percent, reflecting price increases. At April 30, 1998, the number of KFC restaurants was 98 versus 96 last year. In fiscal 1997, the Company's international operations accounted for approximately 59.1 percent of consolidated revenues. Revenues decreased by 3.0 percent or $5.4 million, to $177.3 million when compared to fiscal 1996. This reduction in revenues was primarily the result of a net reduction of five Company-operated Sizzler restaurants offset by the addition of four KFC restaurants. In fiscal 1997, Company-operated Sizzlers recorded a 12.5 percent or $9.9 million decline in revenues to $69.8 million from fiscal 1996, primarily reflecting 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 guest 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 at April 30, 1996. International franchise revenues increased $0.5 million or 16.3 percent to $3.8 million in 1997 versus 1996, due primarily to new restaurant openings in the Asian/Pacific region. At April 30, 1997, there were 46 international franchised restaurants and three joint ventured restaurants in six countries, versus 77 restaurants and two joint ventured restaurants in seven countries at April 30, 1996. 13 Fiscal 1997 revenues of $102.6 million from the Company's KFC restaurants increased $5.4 million or 5.5 percent when compared to the prior year. On a comparative restaurant basis, average restaurant sales, in Australian dollars, decreased 2.0 percent and the average guest check increased 2.8 percent, however, guest counts decreased 4.7 percent, compared to fiscal 1996. At April 30, 1997, the number of KFC restaurants was 96 versus 92 at April 30, 1996. Earnings before interest and taxes decreased $6.7 million to $5.0 million or 57.2 percent in fiscal 1997, compared to fiscal 1996. CONSOLIDATED COSTS AND EXPENSES - ------------------------------- Consolidated costs and expenses, as a percentage of revenues, were 5.4 percent lower in fiscal 1998. Payroll and related expenses, marketing expense and cost of sales decreased 1.7 percent, 1.0 percent and 0.6 percent, as a percentage of revenues, respectively. Interest expense decreased in 1998 from 1997 by $1.7 million primarily due to lower bankruptcy claim interest expense, partially offset by new borrowings. In fiscal 1997, interest expense increased $4.6 million from 1996, due to increased borrowings prior to bankruptcy filing and estimated accrued interest on prepetition liabilities. In fiscal 1997, consolidated costs and expenses, as a percentage of revenues, were 0.5 percent lower than the previous year, primarily due to decreases in payroll and related expense, occupancy costs and depreciation and amortization expense. The lower costs reflect the closure of under-performing restaurants. The provision for income taxes for fiscal 1998 was $2.2 million compared with a benefit of $7.3 million in fiscal 1997. The benefit recorded in 1997 related to the utilization of prior year foreign losses against foreign earnings generated in fiscal 1997. The remaining prior year foreign losses were utilized against fiscal 1998 foreign earnings, resulting in an effective tax rate of 29.3%. (See Note 4 of Notes to Consolidated Financial Statements). - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- WORKING CAPITAL - --------------- The Company's primary source of liquidity is cash flows from operations which was $1.6 million in fiscal 1998 compared to $2.0 million cash used in fiscal 1997. This increase is primarily due to improved U.S. and international operations, partially offset by the non-payment of pre-bankruptcy liabilities in fiscal 1997. The current ratio was 1.1 at April 30, 1998 and 1.5 at April 30, 1997. At April 30, 1998, working capital was $2.9 million compared to $15.9 million at the end of the prior year. The decrease in the 14 current ratio and working capital is primarily due to payment of allowed claims pursuant to the reorganization plan. TOTAL ASSETS/CAPITAL EXPENDITURES - --------------------------------- Total assets decreased $48.6 million or 28.9 percent in fiscal 1998. Property and equipment represented 66.3 percent of total assets at the end of fiscal 1998 and 62.4 percent at the end of fiscal 1997. In fiscal 1997, total assets decreased $10.4 million or 5.9 percent from fiscal 1996 as a result of restaurant closures. Capital expenditures were $8.9 million in fiscal 1998, which included new restaurant construction of $1.7 million and remodels of $7.2 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 Company anticipates capital expenditures in fiscal 1999 will be approximately $10.0 million, which will be used for new KFC restaurants and remodeling existing KFC and Sizzler restaurants. In fiscal 1997, capital expenditures were $6.4 million, consisting of new restaurant construction of $1.5 million and remodels of $4.9 million. DEBT - ---- On September 23, 1997, the Company obtained a $63.5 million AUD (approximately $46.9 million US) bank facility from Westpac Banking Corporation in order to refinance the claims of the Company's unsecured creditors. The Westpac loan provides for a five-year term at an interest rate equal to the Australian interbank borrowing rate, plus a margin. The margin will be based on a formula tied to the Company's international operations ratio of debt to earnings before interest and taxes, and will vary between 1.25% and 2.25%. The Westpac loan involved the collateralization of the Company's principal operating assets of its international division. The Westpac loan is subject to a number of financial covenants and other restrictions. Based on current levels of operations and anticipated sales growth, management believes that cash flow from operations will be sufficient to meet all of its debt service requirements when due and to fund its capital expenditure and working capital requirements. 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 15 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 possible 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. YEAR 2000 - --------- In fiscal 1998, the Company began a project to assess and modify its computer systems as necessary to ensure continued effective operations in the year 2000 ("Y2K") and beyond. A majority of the Company's computer systems has been outsourced to a service provider who has given assurances to the Company that its computer systems are Y2K compliant. In fiscal 1999, the Company will work with its key vendors and suppliers to identify the nature and potential impact of issues presented by the Y2K problem in completing transactions with their businesses. The estimated cost of the Y2K project is not expected to be material. The Company expects completion of the Y2K project by May 1999. 16 ITEM 8 - FINANCIAL STATEMENTS AND SUPLEMENTARY 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. Fiscal 1998 was a fifty-three week year, therefore, the fourth fiscal quarter includes thirteen weeks of operations.
- ---------------------------------------------------------------------------------------------------------- First Second Third Fourth Fiscal 1998 Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------------------------- Restaurants $58,270 $54,770 $68,311 $54,640 Franchise operations 1,316 1,737 1,762 1,527 ------- ------- ------- ------- Revenues 59,586 56,507 70,073 56,167 Cost of sales 21,721 20,567 25,917 20,275 Labor and related expenses 15,853 14,945 18,898 14,930 Other operating expenses 11,835 11,847 14,808 10,667 General and administrative costs 4,407 3,801 4,310 4,177 ------- ------- ------- ------- Earnings before interest, taxes and depreciation 5,770 5,347 6,140 6,118 Depreciation 2,819 2,931 3,430 2,589 ------- ------- ------- ------- Earnings before interest and taxes 2,951 2,416 2,710 3,529 ------- ------- ------- ------- Net income $ 1,487 $ 776 $ 755 $ 2,360 ======= ======= ======= ======= Basic and diluted earnings per share $ 0.05 $ 0.03 $ 0.03 $ 0.08 ========================================================================================================= - -------------------------------------------------------------------------------------------------------------- First Second Third Fourth Fiscal 1997 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------------- Restaurants $ 80,936 $ 65,660 $ 84,930 $ 58,535 Franchise operations 3,500 2,373 3,129 865 -------- -------- -------- -------- Revenues 84,436 68,033 88,059 59,400 Cost of sales 29,866 26,240 32,912 22,312 Labor and related expenses 24,414 19,043 24,344 17,337 Other operating expenses 18,028 13,869 19,629 14,430 General and administrative costs 7,047 5,893 7,577 1,675 -------- -------- -------- -------- Earnings before interest, taxes and depreciation 5,081 2,988 3,597 3,646 Depreciation 3,586 3,224 4,372 5,078 -------- -------- -------- -------- Earnings (loss) before interest and taxes 1,495 (236) (775) (1,432) -------- -------- -------- -------- Net income (loss) $ 494 $ (622) $ (1,281) $ 1,974 ======== ======== ======== ======== Basic and diluted earnings (loss) per share $ 0.02 $ (0.02) $ (0.04) $ 0.07 ===============================================================================================================
17 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, 1998 and 1997, and the related consolidated statements of operations, stockholders' investment and cash flows for each of the three years in the period ended April 30, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California June 16, 1998 18 SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except per share data)
For the Years Ended April 30, 1998 1997 1996 - ---------------------------------------------- ----------- ----------- ----------- Revenues Restaurants $235,991 $290,061 $ 424,218 Franchise operations 6,342 9,867 11,976 - ---------------------------------------------- -------- ------- ----------- Total revenues 242,333 299,928 436,194 - ---------------------------------------------- -------- -------- ----------- Costs and Expenses Cost of sales 88,480 111,330 158,587 Labor and related expenses 64,626 85,138 131,865 Other operating expenses 49,157 65,956 97,870 Depreciation and amortization 11,769 16,260 26,164 Non-recurring items - - 108,883 Impairment of long-lived assets - - 12,838 General and administrative expenses 16,695 22,192 32,232 - ---------------------------------------------- -------- -------- ----------- Total operating costs 230,727 300,876 568,439 - ---------------------------------------------- -------- -------- ----------- Interest expense 5,274 6,981 2,343 Investment income (1,271) (1,178) (991) - ---------------------------------------------- -------- -------- ----------- Total costs and expenses 234,730 306,679 569,791 - ---------------------------------------------- -------- -------- ----------- Income (loss) before income taxes 7,603 (6,751) (133,597) Provision (benefit) for income taxes 2,225 (7,316) 4,861 - ---------------------------------------------- -------- -------- ----------- Net income (loss) $ 5,378 $ 565 $(138,458) ============================================== ======== ======== =========== Basic and diluted earnings (loss) per share $ 0.19 $ 0.02 $ (4.99) ============================================== ======== ======== =========== Weighted average number of common shares outstanding 28,879 28,967 27,773 ============================================== ======== ======== ===========
The accompanying notes are an integral part of these consolidated financial statements. 19 SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands)
April 30, 1998 1997 - ----------------------------------------------------- ---------- --------- ASSETS Current assets Cash and cash equivalents $ 21,167 $ 34,085 Receivables, net of reserves of $2,608 2,926 4,398 in 1998 and $3,547 in 1997 Inventories 4,333 5,464 Prepaid expenses and other current assets 1,281 2,323 - ----------------------------------------------------- -------- -------- Total current assets 29,707 46,270 - ----------------------------------------------------- -------- -------- Property and equipment, at cost Land 22,252 30,583 Buildings and leasehold improvements 83,735 111,910 Equipment 62,942 71,819 Capital leases 2,616 3,147 Construction in progress 4,534 1,650 - ----------------------------------------------------- -------- -------- 176,079 219,109 Less - Accumulated depreciation and amortization 96,869 114,234 - ----------------------------------------------------- -------- -------- Total property and equipment, net 79,210 104,875 - ----------------------------------------------------- -------- -------- Long-term notes receivable, net of reserves of $772 in 1998 and $424 in 1997 1,268 1,619 Deferred income taxes 3,829 4,004 Intangible assets, net of accumulated amortization of $696 in 1998 and $698 in 1997 2,162 1,430 Other assets, net of accumulated amortization and reserves of $1 in 1998 and $6 in 1997 3,285 9,912 - ----------------------------------------------------- -------- -------- Total assets $119,461 $168,110 ===================================================== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 20 SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share data)
April 30, 1998 1997 - ---------------------------------------------------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' INVESTMENT Current liabilities Current portion of long-term debt $ 5,764 $ 94 Accounts payable 7,753 13,634 Other current liabilities 9,562 14,240 Income taxes payable 3,761 2,401 - ---------------------------------------------------- --------- --------- Total current liabilities 26,840 30,369 - ---------------------------------------------------- --------- --------- Long-term debt 35,497 329 Other liabilities 13,364 9,111 Liabilities subject to compromise under reorganization proceedings -- 83,900 Commitments and contingencies -- -- Stockholders' investment Preferred stock, authorized 1,000,000 shares, $5 par value; no shares issued -- -- Common stock, authorized 50,000,000 shares at $.01 par value; outstanding 28,840,908 in 1998 and 28,898,003 shares in 1997 288 289 Additional paid-in capital 277,353 276,200 Accumulated deficit (229,583) (234,961) Foreign currency translation adjustments (4,298) 2,873 - ---------------------------------------------------- --------- --------- Total stockholders' investment 43,760 44,401 - ---------------------------------------------------- --------- --------- Total liabilities and stockholders' investment $ 119,461 $ 168,110 ==================================================== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 21 SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands)
For the Years Ended April 30, 1998 1997 1996 - ------------------------------------------------------------------------- ----------- ----------- ----------- OPERATING ACTIVITIES Net income (loss) $ 5,378 $ 565 $(138,458) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 11,769 16,260 26,165 Deferred income tax provision (benefit) (925) (12,167) 103 Provision for bad debts 651 479 1,390 Non-recurring items and asset write down -- -- 121,721 Other (473) 791 2,450 - ------------------------------------------------------------------------- -------- -------- --------- 16,400 5,928 13,371 Changes in operating assets and liabilities: Receivables 1,015 704 (243) Inventories 1,131 1,421 (663) Prepaid expenses and other current assets 950 (477) (199) Accounts payable (5,881) 14,339 (1,928) Accrued liabilities (10,681) (19,740) (6,974) Income taxes payable 2,353 (1,329) (429) Changes due to reorganization activities: Payments of reorganization costs (6,442) (8,826) -- Interest expense accrued 2,773 6,000 -- - ------------------------------------------------------------------------- -------- -------- --------- Net cash provided by (used in) operating activities 1,618 (1,980) 2,935 - ------------------------------------------------------------------------- -------- -------- --------- INVESTING ACTIVITIES Additions to property and equipment (8,931) (6,399) (24,437) Disposal of property and equipment 28,896 21,370 1,087 Other, net (489) 739 (868) - ------------------------------------------------------------------------- -------- -------- --------- Net cash provided by (used in) investing activities 19,476 15,710 (24,218) - ------------------------------------------------------------------------- -------- -------- --------- FINANCING ACTIVITIES Long-term borrowings 46,895 11,461 17,000 Reduction of long-term debt (4,865) (266) (1,911) Dividends paid to stockholders -- -- (2,222) Cash surrender value of life insurance -- -- 5,444 Payment of allowed claims pursuant to the reorganization plan (75,159) -- -- Other, net (883) (56) (32) - ------------------------------------------------------------------------- -------- -------- --------- Net cash provided by (used in) financing activities (34,012) 11,139 18,279 - ------------------------------------------------------------------------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents (12,918) 24,869 (3,004) - ------------------------------------------------------------------------- -------- -------- --------- Cash and cash equivalents at beginning of year 34,085 9,216 12,220 - ------------------------------------------------------------------------- -------- -------- --------- Cash and cash equivalents at end of year $ 21,167 34,085 $ 9,216 ========================================================================= ======== ======== ========= Supplemental Cash Flow Disclosures Cash paid during the year for: Interest (net of amount capitalized) $ 2,481 1,175 $ 2,185 Income taxes 693 5,989 7,698
The accompanying notes are an integral part of these consolidated financial statements. 22 SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Investment (In thousands, except share data)
Foreign Additional Retained Currency Shares Common Paid-In Earnings Translation Outstanding Stock Capital (Deficit) Adjustments - ------------------------------------------------ --------------------------------------- -------------- ------------- Balance at April 30, 1995 27,775,434 $ 278 $ 274,111 $ (94,846) $ (2,473) Restricted stock repurchased (7,728) (32) Net loss (138,458) Dividends paid to stockholders (2,222) Amortization of restricted stock 142 Cumulative translation adjustments 6,967 - ------------------------------------------------ --------------------------------------------------------------------- Balance at April 30, 1996 27,767,706 278 274,221 (235,526) 4,494 Restricted stock repurchased (18,381) (1) (56) Restricted stock canceled (311,958) (3) Grant of restricted stock 1,457,000 15 651 Stock issued 3,636 10 Net income 565 Amortization of restricted stock 1,374 Cumulative translation adjustments (1,621) - ------------------------------------------------ --------------------------------------------------------------------- Balance at April 30, 1997 28,898,003 289 276,200 (234,961) 2,873 Restricted stock repurchased (7,022) (17) Restricted stock canceled (55,833) (1) Stock issued 5,760 14 Net income 5,378 Amortization of restricted stock 1,156 Cumulative translation adjustments (7,171) - ------------------------------------------------ ------------- --------- ----------------------------------------- Balance at April 30, 1998 28,840,908 $ 288 $ 277,353 $ (229,583) $ (4,298) ================================================ ============= ========= =========== ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 23 SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- INTRODUCTION: As discussed in Note 2, the Company operated as a debtor-in-possession under the provisions of Chapter 11 of the federal bankruptcy laws from June 2, 1996 to September 22, 1997, when the reorganization plans became effective. Consequently, the consolidated 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, 1980. 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 1998 presentation. ACCOUNTING PERIOD: The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Sunday nearest to April 30. Fiscal year 1998 was a fifty-three week year ending on May 3, 1998. 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 24 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: During the fiscal year ended April 30, 1998, the Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share (EPS), which replaced the previously reported primary and fully-diluted EPS. Basic EPS is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS is similar to the previously reported fully-diluted EPS. All EPS amounts for the periods presented have been restated to conform to the requirements of SFAS 128. CASH AND CASH EQUIVALENTS: At April 30, 1998, cash and cash equivalents consist primarily of short-term, money market accounts. At April 30, 1997, cash and cash equivalents consist primarily of interest-bearing time deposits with original maturities of 90 days or less, which are carried at cost, which approximates fair value. 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. 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. 25 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 $2,637,000 at April 30, 1998 and $10,234,000 at April 30, 1997, 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. 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 the Company's Executive Supplemental Benefit Plan of $9,803,000 and restructuring reserve of $3,513,000 in 1998 and restructuring reserve of $8,700,000 in 1997. 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. 26 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 owned and operated substantially all of the Company's U.S. restaurant businesses and assets. The Company's international division businesses and assets were owned and operated by separate subsidiaries and were not subject to the U.S. Chapter 11 cases. On June 2, 1997, the Bankruptcy Court entered an order confirming the Chapter 11 plans of reorganization of the Company, SRI and CPI. The plans of reorganization for Tenly and BRSH were confirmed on February 24, 1997, On September 23, 1997, the reorganization plans became effective and the Company and its subsidiaries emerged from the bankruptcy proceedings. The Company's plan of reorganization provided for full payment of allowed creditors' claims, including interest, over five years, from the operations of its international division. In September 1997, the Company obtained sufficient financing from Westpac Banking Corporation to pay its creditors' allowed claims in full including interest. All allowed claims for CPI, Tenly and BRSH have also been paid in full. SRI's plan provided for full payment of allowed unsecured creditors' claims (estimated at approximately $17 million) through the formation of a creditor trust. SRI's installment payments to the trust will be evidenced by a four-year note. The note will bear interest at the floating annual rate of prime plus one percent through the first year, prime plus two percent for the next two years, and prime plus three percent for the fourth year. SRI will secure the note with a pledge of the stock of its subsidiaries and with substantially all of the domestic division's operating assets. The Company and its subsidiaries have paid approximately $75 million in pre-petition claims and interest and reinstated the remaining pre-petition liabilities. Remaining bankruptcy liabilities were reclassified from "Liabilities subject to compromise under reorganization proceedings" to the appropriate liability captions of the consolidated balance sheet. 27 Reorganization Costs - -------------------- The Company incurred severance, temporary staff, legal and professional costs relating to the reorganization of $6,442 and $8,826 in fiscal 1998 and fiscal 1997, respectively. These reorganization costs were accrued in fiscal 1996 and were therefore charged against established reserves in fiscal 1998 and fiscal 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, 1998 were (in thousands):
Accrued Total Restructuring Restructuring Liabilities at Expenses April 30, 1998 -------------- ---------------- Market and restaurant closures $ 92,100 $ 3,513 Closure of regional offices and reduction of corporate headquarters 8,800 - Guarantee of co-op advertising obligations 3,500 - Franchise receivable 2,500 - Severance 2,000 - --------- ------- Total $ 108,900 $ 3,513 ========= =======
28 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 $7,642,000 of the Company's foreign operations at April 30, 1998. 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):
For the years ended April 30, 1998 1997 1996 - ---------------------------- ---------------------------------------- Current Federal $ - $ - $ - State - - - Foreign 3,150 4,851 4,758 ------------------------------------ 3,150 4,851 4,758 ------------------------------------ Deferred Federal - - - State 450 - - Foreign (1,375) (12,167) 103 ------------------------------------ (925) (12,167) 103 ------------------------------------ Total income tax provision (benefit) $ 2,225 $ (7,316) $4,861 ------------------------------------
A reconciliation of the statutory United States Federal income tax rate to the Company's consolidated effective income tax rate follows:
For the years ended April 30, 1998 1997 1996 - ----------------------------- --------------------------------------- Federal statutory tax rate 35.0% 35.0% 35.0% State and local income taxes, net of related Federal income tax benefit 6.1 6.1 6.1 Tax credits, net -- 3.3 0.2 Goodwill write-off and non-deductible amortization -- (3.3) (0.2) Valuation allowance (11.8) (149.1) (45.0) Other -- (0.4) 0.3 ----------------------------------- Effective tax rate 29.3% (108.4)% (3.6)% ===================================
29 Pre-tax income (loss) for domestic and foreign operations is as follows (in thousands):
For the years ended April 30, 1998 1997 1996 - ----------------------------- ------------------------------------ Domestic $3,527 $(6,137) $(125,442) Foreign 4,076 (614) (8,155) ---------------------------------- $7,603 $(6,751) $(133,597) ==================================
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):
April 30, 1998 1997 - --------------------------------------------------------------------- Deferred Tax Assets: Deferred income $ 4,493 $ 5,195 Foreign tax credit carryover 10,304 6,006 Minimum tax credit carryover 1,849 1,849 Other credits 2,840 2,860 Operating reserves and accruals 65,601 74,010 ----------------------- Total gross deferred tax assets 85,087 89,920 Less valuation allowance (72,455) (73,990) ----------------------- Net deferred tax assets 12,632 15,930 ----------------------- Deferred Tax Liabilities: State income taxes (2,476) (2,933) Property and equipment (3,969) (8,096) Capital leases (776) (888) Other (1,582) (9) ----------------------- Total gross deferred tax liabilities (8,803) (11,926) ----------------------- Net deferred tax assets $ 3,829 $ 4,004 =======================
30 Note 5 - Debt - -------------------------------------------------------------------------------- A summary of debt outstanding as of April 30, 1998 and 1997, is as follows (in thousands):
1998 1997 - ------------------------------------------------------------------------------ Unsecured borrowings, at variable interest rates, due through 2012 $ 2,608 $41,752 Mortgage notes payable, with interest rate of 10.015 percent, secured by land and building with an original cost of approximately $600 at April 30, 1998 and $1,707 at April 30, 1997, due through 2039 565 635 Other secured note, with a variable interest rate, due through 2002 37,035 -- Capital lease obligations 1,053 2,373 - ----------------------------------------------------------------------------- 41,261 44,760 Less - current portion 5,764 94 - ----------------------------------------------------------------------------- 35,497 44,666 Less - liabilities subject to compromise -- 44,337 - ----------------------------------------------------------------------------- Long-term debt $35,497 $ 329 =============================================================================
Payment of $5,542 long-term debt, excluding capital lease obligations is due in fiscal 1999, $5,571 in 2000, $5,575 in 2001, $5,573 in 2002, and $17,947 thereafter. On September 23, 1997, the Company obtained a $63.5 million AUD (approximately $46.9 million US) bank facility from Westpac Banking Corporation (included in `Other secured note' above) in order to refinance the claims of the Company's unsecured creditors. The Westpac loan provides for a five-year term at an interest rate equal to the Australian interbank borrowing rate, plus a margin. The margin will be based on a formula tied to the Company's international operations ratio of debt to earnings before interest and taxes, and will vary between 1.25% and 2.25%. The Westpac loan involved the collateralization of the Company's principal operating assets of its international division. The Westpac loan is subject to a number of financial covenants and other restrictions. The Company is in compliance with all covenants and restrictions. Management believes that the aggregate fair value of the Company's long-term debt approximates the aggregate book value, as substantially all such debt is comprised of variable-rate obligations. 31 Note 6 - Stock Options and Restricted Stock - -------------------------------------------------------------------------------- The Company has an Employee Stock Incentive Plan for certain officers and key employees, and a stock option plan for non-employee directors. The maximum number of shares that may be issued under these plans is 1,000,000 and 400,000 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.
1998 1997 1996 ---- ---- ---- Net Income (Loss): As Reported $5,378 $ 565 $(138,458) Pro Forma $4,515 $ 99 $(138,577) Basic and Diluted Earnings (Loss) Per Share: As Reported $ 0.19 $0.02 $ (4.99) Pro Forma $ 0.16 $0.00 $ (4.99) ------ ----- ---------
Stock Options: - ------------- The outstanding options become exercisable in varying amounts through 2005. A summary of stock option transactions follows:
For the years ended April 30, ----------------------------------------------------- Shares Outstanding 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Outstanding at the beginning of the year 109,347 1,471,074 1,111,800 Options granted 164,040 -- 750,603 Options exercised -- -- -- Options canceled (43,864) (1,361,727) (391,329) - -------------------------------------------------------------------------------------------------- Options outstanding at April 30 229,523 109,347 1,471,074 Options available for grant at April 30 1,235,950 366,305 149,620 - -------------------------------------------------------------------------------------------------- Total reserved shares 1,465,473 475,652 1,620,694 ================================================================================================== Options exercisable at April 30 97,483 73,226 540,101 ================================================================================================== Option prices per share: Granted $0.281-$3.906 -- $3.875-$6.875 Exercised -- -- -- Canceled $5.625-$12.50 $5.00-$17.125 $5.00-$12.500 ==================================================================================================
32 Restricted Stock Plan: - ---------------------- Stock issued under the Company's stock incentive plan is delivered subject to various conditions relating to corporate performance. Compensation expense related to these options amounted to approximately $1,156,000 in 1998, $1,374,000 in 1997 and $142,000 in 1996. A summary of restricted stock transactions follows:
For the years ended April 30, ---------------------------------------- Shares Outstanding 1998 1997 1996 - ----------------------------------------------------------------------------------------- Shares restricted at beginning of the year 1,016,625 110,498 132,348 Shares granted -- 1,457,000 -- Shares released (434,456) (238,915) (21,850) Shares canceled (55,833) (311,958) -- - --------------------------------------------------------------------------------------- Shares restricted at April 30 526,336 1,016,625 110,498 =======================================================================================
33 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):
Commitments ------------------------- ----------- Sublease Capital Operating Rental Years ended April 30, Leases Leases Income - -------------------- ------------------------- ----------- 1999 $ 333 $ 9,608 $ 701 2000 291 8,796 699 2001 196 7,899 635 2002 101 7,158 635 2003 101 6,497 574 Thereafter 562 25,658 2,917 ------------------------ ---------- Total minimum lease commitments/receivables 1,584 $65,616 $6,161 ======== ========== Less amount representing interest 531 ------ Present value of minimum lease payments 1,053 Less current portion of capital lease obligations 222 ------ Long-term capital lease obligations $ 831 ======
Rent expense consists of (in thousands):
---------------------------- Years ended April 30, 1998 1997 1996 - -------------------- ---------------------------- Minimum rentals $11,594 $11,355 $20,470 Contingent rentals 489 623 764 Less sublease rentals 1,078 2,141 4,230 --------------------------- Net rent expense $11,005 $ 9,837 $17,004 ===========================
34 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.
- ------------------------------------------------------------------------------------------- 1998 1997 1996 ---- ---- ---- Revenues (in thousands): - ------------------------ United States $ 97,127 40% $122,037 41% $252,872 58% International 145,206 60 177,891 59 183,322 42 - ------------------------------------------------------------------------------------------- Total $242,333 100% $299,928 100% $436,194 100% - ------------------------------------------------------------------------------------------- Operating Profits (Losses) (in thousands): - ------------------------------------------ United States $ 3,422 29% $ (5,646) (596)% $(22,881) (217)% International 8,184 71 4,698 496 12,357 117 - ------------------------------------------------------------------------------------------- Total $ 11,606 100% $ (948) 100% $(10,524) 100% - ------------------------------------------------------------------------------------------- Identifiable Assets (in thousands): - ----------------------------------- United States $ 45,896 38% $ 73,869 44% $ 77,648 43% International 73,565 62 94,241 56 100,899 57 - ------------------------------------------------------------------------------------------- Total $119,461 100% $168,110 100% $178,547 100% - -------------------------------------------------------------------------------------------
Note 9 - Commitments and Contingencies - -------------------------------------------------------------------------------- At April 30, 1998, there were no material commitments for capital projects. 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. 35 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 1998, 1997 or 1996. 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 $9,803,000 at April 30, 1998 and $12,989,000 at April 30, 1997 and April 30, 1996. Note 11 - Earnings Per Share - -------------------------------------------------------------------------------- During fiscal year 1998, the Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share (EPS), which replaced the previously reported primary and fully-diluted EPS. Basic EPS is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS is similar to the previously reported fully-diluted EPS. All EPS amounts for the periods presented have been restated to conform to the requirements of SFAS 128.
FOR THE YEARS ENDED APRIL 30, --------------------------------------- In thousands, except EPS 1998 1997 1996 ---- ---- ---- Numerator for both basic and diluted EPS - Net income (loss) $ 5,378 $ 565 $(138,458) ------- ------- --------- Denominator: Denominator for basic EPS - weighted average shares of common stock outstanding 28,864 28,967 27,773 Effect of dilutive stock options 15 -- (a) -- (a) ------- ------- --------- Denominator for diluted EPS - adjusted weighted average shares outstanding 28,879 28,967 27,773 ------- ------- --------- Basic and diluted earnings (loss) per share $ 0.19 $ 0.02 $ (4.99) ------- ------- ---------
(a) No recognition has been given to common stock equivalents as they are anti-dilutive. 36 Note 12 - Valuation Accounts - -------------------------------------------------------------------------------- The following is a summary of the activity in valuation accounts (in thousands):
Balance at Balance Beginning at End of of Period Additions Deductions Period ---------- --------- ---------- ---------- Reserve for doubtful accounts - ----------------------------- Year ended April 30, 1998 $ 3,971 $1,169 $ 1,760 $ 3,380 ======= ====== ======= ======= Year ended April 30, 1997 $10,291 $ 828 $ 7,148 $ 3,971 ======= ====== ======= ======= Year ended April 30, 1996 $ 8,148 $3,824 $ 1,681 $10,291 ======= ====== ======= ======= Reserve for excess properties - ----------------------------- Year ended April 30, 1998 - - - - ======= ====== ======= ======= Year ended April 30, 1997 - - - - ======= ====== ======= ======= Year ended April 30, 1996 $55,382 - $55,382 - ======= ====== ======= =======
37 Item 9. Changes in and Disagreements With Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosures. - --------------------- Not Applicable. PART III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ Information required by this item with respect to the Company's directors is set forth under the caption "Election of Directors" in the Company's Proxy Statement for its Annual Meeting of the Stockholders. Such information is incorporated herein by reference. Information required by this item with respect to the Company's executive officers is set forth in Part I of this Annual Report under the caption "Executive Officers of the Registrant as of June 30, 1998". Item 11. Executive Compensation - -------------------------------- Information required by this item is set forth under the caption "Executive Compensation" and "Election of Directors" in the Company's Proxy Statement for its Annual Meeting of the Stockholders. Such information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ Information required by this item is set forth under the caption "Stock Ownership of Management" in the Company's Proxy Statement for its Annual Meeting of the Stockholders. Such information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- Information required by this item is set forth under the caption "Transactions with Directors and Management" in the Company's Proxy Statement for its Annual Meeting of the Stockholders. Such information is incorporated herein by reference. 38 PART IV 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, 1998 Consolidated Balance Sheets of Sizzler International, Inc. and Subsidiaries as of April 30, 1998 and 1997 Consolidated Statements of Stockholders' Investment of Sizzler International, Inc. and Subsidiaries for each of the three years in the period ended April 30, 1998. Consolidated Statements of Cash Flows of Sizzler International, Inc. and Subsidiaries for each of the three years in the period ended April 30, 1998. Notes to Consolidated Financial Statements. (2) Financial Statement Schedules: Schedules 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: Number Description - ------ ----------- 2.1 Registrant's Sixth Amended Plan of Reorganization dated August 26, 1997, incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K report filed October 8, 1997. 2.2 Sizzler Restaurants International, Inc.'s Second Amended Plan of Reorganization, incorporated by reference to Exhibit 2.2 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1997. 2.3 Collins Properties, Inc.'s Plan of Reorganization, incorporated by reference to Exhibit 2.3 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1997. 3.1 Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit 3.1 to Amendment No. 1 to Registrant's Form S-4 Registration Statement Number 33-38412. 3.2 Bylaws of Registrant, incorporated herein by reference to Exhibit 3.2 to Amendment No. 2 to the Registrant's Form S-4 Registration Number 33-38412. 3.3 Certificate of Amendment of Bylaws of Registrant dated June 19, 1991, incorporated herein by reference to Exhibit 3.3 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1995. 39 4.1 Rights Agreement dated January 22, 1991 between The Bank of New York and Registrant, incorporated herein by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant's Form S-4 Registration Statement Number 33-38412. 4.2 Amendment to Rights Agreement dated March 20, 1996 between The Bank of New York and the Registrant, incorporated herein by reference to Exhibit 4.2 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1996. 4.3 Certificate of Designation of Series A Junior Participating Preferred Stock of Registrant, incorporated herein by reference to Exhibit 4.2 to Amendment No. 1 to Registrant's Form S-4 Registration Statement Number 33-38412. 10.1 Employee Savings Plan of Registrant, restated as of January 1, 1992, incorporated herein by reference to Exhibit 10.2 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1995. 10.2 Amendment to Employee Savings Plan of Registrant, incorporated by reference to Exhibit 2.2 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1997. 10.3 Registrant's Executive Supplemental Retirement Plan (effective May 1, 1985, and including amendments through May 1, 1993), incorporated herein by reference to Exhibit 10.3 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1996. 10.4 Employment Agreement dated May 1, 1996 between Registrant and Kevin W. Perkins, incorporated herein by reference to Exhibit 10.5 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1996. 10.5 Amendment to Employment Agreement dated September 25, 1996 between the Registrant and Kevin W. Perkins, incorporated by reference to Exhibit 10.6 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1997. 10.6 Amendment to Employment Agreement dated January 1, 1997 between the Registrant and Kevin W. Perkins, incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1997. 10.7 Third Amendment to Employment Agreement dated May 5, 1997 between the Registrant and Kevin W. Perkins, incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1997. 10.8 Employment Agreement dated May 1, 1996 between Registrant and Christopher R. Thomas, incorporated herein by reference to Exhibit 10.6 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1996. 10.9 Employment Agreement dated May 1, 1996 between Registrant and Ryan S. Tondro, incorporated herein by reference to Exhibit 10.9 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1996. 10.10 Employment Agreement dated May 1, 1996 between Registrant and Michael J. Raedeke, incorporated herein by reference to Exhibit 10.11 to the Registrant's Form 10-K for the fiscal year ended April 30, 1996. 10.11 Consulting Agreement dated December 17, 1996 between Barry Krantz and Collins Foods International Pty Ltd., incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1997. 40 10.12 Paid Leave Plan and Trust and Summary Plan Description of Registrant, as amended as of June 30, 1994, incorporated herein by reference to Exhibit 10.5 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1995. 10.13 1997 Employee Stock Incentive Plan of Registrant, incorporated herein by reference to Exhibit 99.1 to the Registrant's Form S-8 Registration Statement Number 333-476661 filed March 10, 1998. 10.14 1997 Non-Employee Directors Stock Incentive Plan of Registrant, incorporated herein by reference to Exhibit 99.1 to Registrant's Form S-8 Registration Statement No. 333-47659 filed March 10, 1998. 10.15 Form of Franchise Agreement between Sizzler USA Franchise, Inc. and Franchisee, incorporated by reference to Exhibit 10.26 to the Registrant's Form 10-Q report for the quarterly period ended February 1, 1998. 10.16 Development Agreement dated October 4, 1996 between Kentucky Fried Chicken Pty. Limited and Collins Foods International Pty Ltd., incorporated by reference to Exhibit 10.20 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1997. 10.17 Master Franchise Agreement dated October 4, 1996 between Kentucky Fried Chicken Pty Limited and Collins Foods International Pty Ltd., incorporated by reference to Exhibit 10.21 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1997. 10.18 Form of Franchise Agreement between Kentucky Fried Chicken Pty Limited and Collins Foods International Pty Ltd. relating to KFC restaurant franchise, incorporated by reference to Exhibit 10.22 to the Registrant's Form 10-K report for the fiscal year ended April 30, 1997. 10.19 Letter of Offer dated August 18, 1997 among certain subsidiaries of the Registrant and Westpac Banking Corporation, incorporated by reference to Exhibit 3.1 to the Registrant's Form 8-K report filed October 8, 1997. 10.20 A $63,500,000 Bill Acceptance and Discount Facility dated as of September 19, 1997 among certain subsidiaries of the Registrant and Westpac Banking Corporation, incorporated by reference to Exhibit 3.2 to the Registrant's Form 8-K report filed October 8, 1997. 10.21 Unlimited Cross Guarantee and Indemnity and Negative Pledge with Financial Ratio Covenants dated as of September 19, 1997 among certain subsidiaries of the Registrant and Westpac Banking Corporation, incorporated by reference to Exhibit 3.3 to the Registrant's Form 8-K report filed October 8, 1997. 10.22 Subordination Deed dated as of September 24, 1997 among the Registrant and certain of its subsidiaries and Westpac Banking Corporation, incorporated by reference to Exhibit 3.4 to the Registrant's Form 8-K report filed October 8, 1997. 10.23 Stock Pledge dated as of September 24, 1997 between the Registrant and Westpac Banking Corporation, incorporated by reference to Exhibit 3.5 to the Registrant's Form 8- K report filed October 8, 1997. 10.24 Form of Fixed and Floating Charge dated as of September 19, 1997 between various subsidiaries of the Registrant and Westpac Banking Corporation, incorporated by reference to Exhibit 3.6 to the Registrant's Form 8-K report filed October 8, 1997. 41 10.25 Corporate headquarters lease agreement between Pacifica Plaza Office Building and Sizzler USA Real Property, Inc.. 21.00 Subsidiaries of Registrant 23.00 Consent of Arthur Andersen LLP 27.00 Financial Data Schedule (b) Reports on Form 8-K Registrant has filed no reports on Form 8-K during the last quarter of its 1998 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 14, 1998 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. SIGNATURE TITLE DATE - --------- ----- ---- /s/ James A. Collins Chairman of the Board July 14, 1998 - ------------------------ James A. Collins /s/ Peter H. Dailey Director July 14, 1998 - ------------------------ Peter H. Dailey /s/ Barry E. Krantz Director July 14, 1998 - ------------------------ Barry E. Krantz 42 /s/ Phillip D. Matthews Director July 14, 1998 - ----------------------------- Phillip D. Matthews /s/H. Wallace Merryman Director July 14, 1998 - ----------------------------- H. Wallace Merryman /s/ Robert A. Muh Director July 14, 1998 - ----------------------------- Robert A. Muh /s/ Carol A. Scott, Ph.D. Director July 14, 1998 - ----------------------------- Carol A. Scott, Ph.D. /s/Charles F. Smith Director July 14, 1998 - ----------------------------- Charles F. Smith /s/ Ryan S. Tondro Vice President and July 14, 1998 - ----------------------------- Chief Financial Officer Ryan S. Tondro (principal financial and accounting officer) 43 EX-10.25 2 LEASE AGREEMENT - PACIFICA/PLAZA EXHIBIT 10.25 STANDARD OFFICE LEASE - GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. BASIC LEASE PROVISIONS ("Basic Lease Provisions") 1.1 PARTIES: This Lease, dated, for reference purposes only, October 20, 1997, is made by and between Pacifica Plaza Office Building, a California Limited Partnership, (herein called "Lessor") and Sizzler USA Real Property, Inc., a Delaware Corporation, doing business under the name of Sizzler International, Inc., (herein called "Lessee"). 1.2 PREMISES: Suite Number(s) 200, 2nd floors, consisting of approximately 35,975 feet, more or less, as defined in paragraph 2 and as shown on Exhibit "A" hereto (the "Premises"). 1.3 BUILDING: Commonly described as being located at 6101 West Centinela Avenue in the City of Culver City, County of Los Angeles, State of California, as more particularly described in Exhibit A-1 hereto, and as defined in paragraph 2. 1.4 USE: General Offices, subject to paragraph 6. 1.5 TERM: Forty-seven and 1/2 (47-1/2) months commencing November 16, 1997 ("Commencement Date") and ending October 31, 2001, as defined in paragraph 3. 1.6 BASE RENT: $34,176.25 per month, payable on the 1st day of each month, per paragraph 4.1. See paragraph 50 of Lease Addendum. 1.7 BASE RENT INCREASE: On January 1, 2000 the monthly Base Rent payable under paragraph 1.6 above shall be $42,450.50. 1.8 RENT PAID UPON EXECUTION: $153,253.50 for four (4) months rent (October 1998, December 1999, April 2000 and October 2001). 1.9 SECURITY DEPOSIT: None. 1.10 LESSEE'S SHARE OF OPERATING EXPENSE INCREASE: 33.9% as defined in paragraph 4.2. 2. PREMISES, PARKING AND COMMON AREAS. 2.1. PREMISES: The Premises are a portion of a building, herein sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic Lease Provisions. "Building" shall include adjacent parking structures used in connection therewith. The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to as the "Office Building Project". Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, the real property referred to in the Basic Lease Provisions, paragraph 1.2, as the "Premises," including rights to the Common Areas as hereinafter specified. 2.2 VEHICLE PARKING: So long as Lessee is not in default, and subject to the rules and regulations attached hereto, and as established by Lessor from time to time, Lessee shall be entitled to rent and use * parking spaces in the Office Building Project at the monthly rate applicable from time to time for monthly parking as set by Lessor and/or its licensee. * See paragraph 51 of Lease Addendum. 2.2.1 If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved or charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.2.2 The monthly parking rate per parking space with be $ * per month at the commencement of the term of this Lease, and is subject to change upon five (5) days prior written notice to Lessee. Monthly parking fees shall be payable one month in advance prior to the first day of each calendar month. * See paragraph 51 of Lease Addendum. 2.3 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Office Building Project that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of other lessees of the Office Building Project and their respective employees, suppliers, shippers, customers and invitees, including but not limited to common entrances, lobbies, corridors, stairways and stairwells, public restrooms, elevators, escalators, parking areas to the extent not otherwise prohibited by this Lease, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, ramps, driveways, landscaped areas and decorative walls. 2.4 COMMON AREAS - RULES AND REGULATIONS. Lessee agrees to abide by and conform to the rules and regulations attached hereto as Exhibit B with respect to the Office Building Project and Common Areas, and to cause its employees, suppliers, shippers, customers, and invitees to so abide and conform. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to modify, amend and enforce said rules and regulations. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees, their agents, employees and invitees of the Office Building Project. 2.5 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Building interior and exterior and Common Areas, including, without limitation, changes in the location, size, shape, number, and appearance thereof, including but not limited to the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, decorative walls, landscaped areas and walkways; provided, however, Lessor shall at all times provide the parking facilities required by applicable law; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land and improvements outside the boundaries of the Office Building Project to be a part of the Common Areas, provided that such other land and improvements have a reasonable and functional relationship to the Office Building Project; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs, or alterations to the Office Building Project, or any portion thereof; (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Office Building Project as Lessor may, in the exercise of sound business judgment deem to be appropriate. 3. TERM. 3.1 TERM. The term and Commencement Date of this Lease shall be as specified in paragraph 1.5 of the Basic Lease Provisions. 3.2 DELAY IN POSSESSION. Notwithstanding said Commencement Date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date and subject to paragraph 3.2.2, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term thereof; but, in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Lessee, as hereinafter defined; provided, however, that if Lessor shall not have delivered possession of the Premises within sixty (60) days following said Commencement Date, as the same may be extended under the terms of a Work Letter executed by Lessor and Lessee, Lessee may, at Lessee's Initials: -------- -------- (C) 1984 American Industrial Real Estate Association FULL SERVICE - GROSS PAGE 1 OF 10 PAGES option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided, however, that, as to Lessee's obligations, Lessee first reimburses Lessor for all costs incurred for Non-Standard improvements and, as to Lessor's obligations, Lessor shall return any money previously deposited by Lessee (less any offsets due Lessor for Non-Standard Improvements); and provided further, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. 3.2.1 POSSESSION TENDERED-DEFINED. Possession of the Premises shall be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to be provided by Lessor under this Lease are substantially completed, (2) the Building utilities are ready for use in the Premises, (3) Lessee has reasonable access to the Premises, and (4) ten (10) days shall have expired following advance written notice to Lessee of the occurrence of the matters described in (1), (2) and (3), above of this paragraph 3.2.1. 3.2.2 DELAYS CAUSED BY LESSEE. There shall be no abatement of rent, and the sixty (60) day period following the Commencement Date before which Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended to the extent of any delays caused by acts or omissions of Lessee, Lessee's agents, employees and contractors. 3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not change the termination date, and Lessee shall pay rent for such occupancy. 3.4 UNCERTAIN COMMENCEMENT. In the event commencement of the Lease term is defined as the completion of the improvements, Lessee and Lessor shall execute an amendment to this Lease establishing the date of Tender of Possession (as defined in paragraph 3.2.1) or the actual taking of possession by Lessee, whichever first occurs, as the Commencement Date. 4. RENT. 4.1 BASE RENT. Subject to adjustment as hereinafter provided in paragraph 4.3, and except as may be otherwise expressly provided in this Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of the Basic Lease Provisions, without offset or deduction. Lessee shall pay Lessor upon execution hereof the advance Base Rent described in paragraph 1.8 of the Basic Lease Provisions. Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 4.2 OPERATING EXPENSE INCREASE: DELETED 4.3 RENT INCREASE: DELETED Initials: ------- ------- (C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS PAGE 2 OF 10 PAGES 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. If the monthly Base Rent shall, from time to time, increase during the term of this Lease, Lessee shall, at the time of such increase, deposit with Lessor additional money as a security deposit so that the total amount of the security deposit held by Lessor shall at all times bear the same proportion to the then current Base Rent as the initial security deposit bears to the initial Base Rent set forth in paragraph 1.6 of the Basic Lease Provisions. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not heretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. USE. 6.1 USE. The Premises shall be used and occupied only for the purpose set forth in paragraph 1.4 of the Basic Lease Provisions or any other use which is reasonably comparable to that use and for no other purpose. 6.2 COMPLIANCE WITH LAW. (a) Lessor warrants to Lessee that the Premises, in the state existing on the date that the Lease term commences, but without regard to alterations or improvements made by Lessee or the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record, or any applicable building code, regulation or ordinance in effect on such Lease term Commencement Date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such violation. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises. Lessee shall conduct its business in a lawful manner and shall not use or permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Office Building Project. 6.3 CONDITION OF PREMISES. (a) Lessor shall deliver the Premises to Lessee in a clean condition on the Lease Commencement Date (unless Lessee is already in possession) and Lessor warrants to Lessee that the plumbing, lighting, air conditioning, and heating system in the Premises shall be in good operating condition. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises and the Office Building Project in their condition existing as of the Lease Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any easements, covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use, and that neither Lessor nor Lessor's agent or agents has made any representation or warranty as to the present or future suitability of the Premises, Common Areas, or Office Building Project for the conduct of Lessee's business. 7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES. 7.1 LESSOR'S OBLIGATIONS. Lessor shall keep the Office Building Project, including the Premises, interior and exterior walls, roof, and common areas, and the equipment whether used exclusively for the Premises or in common with other premises, in good condition and repair; provided, however, Lessor shall not be obligated to paint, repair or replace wall coverings, or to repair or replace any improvements that are not ordinarily a part of the Building or are above then Building standards. Except as provided in paragraph 9.5, there shall be no abatement of rent or liability of Lessee on account of any injury or interference with Lessee's business with respect to any improvements, alterations or repairs made by Lessor to the Office Building Project or any part thereof. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. 7.2 LESSEE'S OBLIGATIONS. (a) Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any Premises improvements that are not ordinarily a part of the Building or that are above then Building standards. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the cost of which is otherwise Lessee's responsibility hereunder. (b) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Lessee. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, funishings and equipment. Except as otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, air conditioning, window coverings, wall coverings, carpets, wall panelling, ceilings and plumbing on the Premises and in good operating condition. 7.3 ALTERATIONS AND ADDITIONS (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, Utility Installations or repairs in, on or about the Premises, or the Office Building Project. As used in this paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and wall coverings, power panels, electrical distribution systems, lighting fixtures, air conditioning, plumbing, and telephone and telecommunication wiring and equipment. At the expiration of the term, Lessor may require the removal of any or all of said alterations, improvements, additions or Utility Installations, and the restoration of the Premises and the Office Building Project to their prior condition, at Lessee's expense. Should Lessor permit Lessee to make its own alterations, improvements, additions or Utility Installations, Lessee shall use only such contractor as has been expressly approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion to the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor may, at any time during the term of this Lease, require that Lessee remove any part or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises or the Office Building Project that Lessee shall desire to make shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent of Lessee's making such alteration, improvement, addition or Utility Installation, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Lessor prior to the commencement of the work, and compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, the Building or the Office Building Project, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises by Lessee, and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy Initials: -------- (C) 1984 American Industrial Real Estate Association -------- FULL SERVICE-GROSS PAGE 3 OF 10 PAGES any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, the Building or the Office Building Project, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises, the Building and the Office Building Project free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorneys' fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest so to do. (e) All alterations, improvements, additions and Utility installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made to the Premises by Lessee, including but not limited to, floor coverings, panelings, doors, drapes, built-ins, moldings, sound attenuation, and lighting and telephone or communication systems, conduit, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided Lessee is not in default, notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal property and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises or the Building, and other than Utility Installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. (f) Lessee shall provide Lessor with as-built plans and specifications for any alterations, improvements, additions or Utility Installations. 7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or additional utility facilities throughout the Office Building Project for the benefit of Lessor or Lessee, or any other lessee of the Office Building Project, including, but not by way of limitation, such utilities as plumbing, electrical systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. INSURANCE; INDEMNITY. 8.1 LIABILITY INSURANCE - LESSEE. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Comprehensive General Liability insurance utilizing an Insurance Services Office standard form with Broad Form General Liability Endorsement (GLO404), or equivalent, in an amount of not less than $1,000,000 per occurrence of bodily injury and property damage combined or in a greater amount as reasonably determined by Lessor and shall insure Lessee with Lessor as an additional insured against liability arising out of the use, occupancy or maintenance of the Premises. Compliance with the above requirement shall not, however, limit the liability of Lessee hereunder. 8.2 LIABILITY INSURANCE - LESSOR. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Broad Form Property Damage Insurance, plus coverage against such other risks Lessor deems advisable from time to time, insuring Lessor, but not Lessee, against liability arising out of the ownership, use, occupancy or maintenance of the Office Building Project in an amount not less than $5,000,000.00 per occurrence. 8.3 PROPERTY INSURANCE - LESSEE. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease for the benefit of Lessee, replacement cost fire and extended coverage insurance, with vandalism and malicious mischief, sprinkler leakage and earthquake sprinkler leakage endorsements, in an amount sufficient to cover not less than 100% of the full replacement cost, as the same may exist from time to time, of all of Lessee's personal property, fixtures, equipment and tenant improvements. 8.4 PROPERTY INSURANCE - LESSOR. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Office Building Project improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in the amount of the full replacement cost thereof, as the same may exist from time to time, utilizing Insurance Services Office standard form, or equivalent, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, plate glass, and such other perils as Lessor deems advisable or may be required by a lender having a lien on the Office Building Project. In addition, Lessor shall obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. Lessee will not be named in any such policies carried by Lessor and shall have no right to any proceeds therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain such deductibles as Lessor or the aforesaid lender may determine. In the event that the Premises shall suffer an insured loss as defined in paragraph 9.1(f) hereof, the deductible amounts under the applicable insurance policies shall be deemed an Operating Expense. Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by Lessor. Lessee shall pay the entirety of any increase in the property insurance premium for the Office Building Project over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 INSURANCE POLICIES. Lessee shall deliver to Lessor copies of liability insurance policies required under paragraph 8.1 or certificates evidencing the existence and amounts of such insurance within seven (7) days after the Commencement Date of this Lease. No such policy shall be cancellable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals thereof. 8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other, for direct or consequential loss or damage arising out of or incident to the perils covered by property insurance carried by such party, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. If necessary all property insurance policies required under this Lease shall be endorsed to so provide. 8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor and its agents, Lessor's master or ground lessor, partners and lenders, from and against any and all claims for damage to the person or property of anyone or any entity arising from Lessee's use of the Office Building Project, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims, costs and expenses arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, employees, or invitees, and from and against all costs, attorney's fees, expenses and liabilities incurred by Lessor as the result of any such use, conduct, activity, work, things done, permitted or suffered, breach, default or negligence, and in dealing reasonably therewith, including but not limited to the defense or pursuit of any claim or any action or proceeding involved therein; and in case any action or proceeding be brought against Lessor by reason of any such matter, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Office Building Project arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for loss of or damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Office Building Project, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from theft, fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Office Building Project, or from other sources or places, or from new construction or the repair, alteration or improvement of any part of the Office Building Project, or of the equipment, fixtures or appurtenances applicable thereto, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible, Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Office Building Project, nor from the failure of Lessor to enforce the provisions of any other lease of any other lessee of the Office Building Project. 8.9 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified in this paragraph 8 are adequate to cover Lessee's property or obligations under this Lease. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any extent. (b) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent (50%) of the then Replacement Cost of the building. (c) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent (50%) or more of the then Replacement Cost of the Building. (d) "Office Building Project Buildings" shall mean all of the buildings on the Office Building Project site. (e) "Office Building Project Buildings Total Destruction" shall mean if the Office Building Project Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent (50%) or more of the then Replacement Cost of the Office Building Project Buildings. (f) "Insured Loss" shall mean damage or destruction which was caused by an event required to be covered by the insurance described in paragraph 8. The fact that an Insured Loss has a deductible amount shall not make the loss an uninsured loss. (g) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring, excluding all improvements made by lessees, other than those installed by Lessor at Lessee's expense. Initials: _______ _______ (C) 1984 American Industrial Real Estate Association FULL SERVICE - GROSS PAGE 4 OF 10 PAGES 9.2 PREMISES DAMAGE; PREMISES BUILDING PARTIAL DAMAGE. (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Damage or Premises Building Partial Damage, then Lessor shall, as soon as reasonably possible and to the extent the required materials and labor are readily available through usual commercial channels, at Lessor's expense, repair such damage (but not Lessee's fixtures, equipment or tenant improvements originally paid for by Leasee) to its condition existing at the time of the damage, and this Lease shall continue in full force and effect. (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from making any substantial use of the Premises, Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage, in which event this Lease shall terminate as of the date of the occurrence of such damage. 9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTAL DESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, which falls into the classifications of either (i) Premises Building Total Destruction, or (ii) Office Building Project Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction as soon as reasonably possible at Lessor's expense (to the extent the required materials are readily available through usual commercial channels) to its condition existing at the time of the damage, but not Lessee's fixtures, equipment or tenant improvements, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall terminate as of the date of the occurrence of such damage. 9.4 DAMAGE NEAR END OF TERM. (a) Subject to paragraph 9.4(b), if at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within 30 days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss falling within the classification of Premises Damage during the last twelve (12) months of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary. 9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event Lessor repairs or restores the Building or Premises pursuant to the provisions of this paragraph 9, and any part of the Premises are not usable (including loss of use due to loss of access or essential services), the rent payable hereunder (including Lessee's Share of Operating Expense Increase) for the period during which such damage, repair or restoration continues shall be abated, provided (1) the damage was not the result of the negligence of Lessee, and (2) such abatement shall only be to the extent the operation and profitability of Lessee's business as operated from the Premises is adversely affected. Except for said abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises or the Building under the provisions of this Paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such occurrence, or if Lessor shall not complete the restoration and repaid within six (6) months after such occurrence, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement or completion, respectively, of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. (c) Lessee agrees to cooperate with Lessor in connection with any such restoration and repair, including but not limited to the approval and/or execution of plans and specifications required. 9.6 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 WAIVER. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as defined in paragraph 10.3, applicable to the Office Building Project subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2. 10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for paying any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Office Building Project by other lessees or by Lessor for the exclusive enjoyment of any other lessee. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 DEFINITION OF "REAL PROPERTY TAX." As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Office Building Project or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Office Building Project or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Office Building Project. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax," or (ii) the nature of which was hereinbefore included within the definition of "real property tax," of (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a change in ownership, as defined by applicable local statutes for property tax purposes, of the Office Building Project or which is added to a tax or charge herein before included within the definition of real property tax by reason of such change of ownership, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 10.4 JOINT ASSESSMENT. If the improvements or property, the taxes for which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not separately assessed, Lessee's portion of that tax shall be equitably determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information (which may include the cost of construction) as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 PERSONAL PROPERTY TAXES. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES. 11.1 SERVICES PROVIDED BY LESSOR. Lessor shall provide heating, ventilation, air conditioning, and janitorial service as reasonably required, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use, and replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. 11.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. 11.3 HOURS OF SERVICE. Said services and utilities shall be provided during generally accepted business days and hours or such other days or hours as may hereafter be set forth. Utilities and services required at other times shall be subject to advance request and reimbursement by Lessee to Lessor of the cost thereof. Initials: --------- --------- (C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS PAGE 5 OF 10 PAGES 11.4 EXCESS USAGE BY LESSEE. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security services, over standard office usage for the Office Building Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. 11.5 INTERRUPTIONS. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a material default and breach of this Lease without the need for notice to Lessee under paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall include the transfer or transfers aggregating: (a) if Lessee is a corporation, more than twenty-five percent (25%) of the voting stock of such corporation, or (b) if Lessee is a partnership, more than twenty-five percent (25%) of the profit and loss participation in such partnership. 12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate"; provided that before such assignment shall be effective, (a) said assignee shall assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall be given written notice of such assignment and assumption. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, no assignment or subletting shall release Lessee of Lessee's obligations hereunder or alter the primary liability of Lessee to pay the rent and other sums due Lessor hereunder including Lessee's Share of Operating Expense Increase, and to perform all other obligations to be performed by Lessee hereunder. (b) Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. (c) Neither a delay in the approval or disapproval of such assignment or subletting, nor the acceptance of rent, shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this paragraph 12 or this Lease. (d) If Lessee's obligations under this Lease have been guaranteed by third parties, then an assignment or sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (e) The consent by Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability under this Lease or said sublease; however, such persons shall not be responsible to the extent any such amendment or modification enlarges or increases the obligations of the Lessee or sublessee under this Lease or such sublease. (f) In the event of any default under this Lease, Lessor may proceed directly against Lessee, any guarantors or any one else responsible for the performance of this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (g) Lessor's written consent to any assignment or subletting of the Premises by Lessee shall not constitute an acknowledgement that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (h) The discovery of the fact that any financial statement relied upon by Lessor in giving its consent to an assignment or subletting was materially false shall, at Lessor's election, render Lessor's said consent null and void. 12.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to become due under the sublease. Lessee agrees that such sublessee shall have the right to rely upon any such statement and request from Lessor, and that such sublessee shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee or Lessor for any such rents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unless and until it has been approved in writing by Lessor. In entering into any sublease, Lessee shall use only such form of sublessee as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed or modified without Lessor's prior written consent. Any sublease shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to Lessee or for any other prior defaults of Lessee under such sublease. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the sublessee. Such sublessee shall have the right to cure a default of Lessee within three (3) days after service of said notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by the sublessee. 12.5 LESSOR'S EXPENSES. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable costs and expenses incurred in connection therewith, including attorneys', architects', engineers' or other consultants' fees. 12.6 CONDITIONS TO CONSENT. Lessor reserves the right to condition any approval to assign or sublet upon Lessor's determination that (a) the proposed assignee or sublessee shall conduct a business on the Premises of a quality substantially equal to that of Lessee and consistent with the general character of the other occupants of the Office Building Project and not in violation of any exclusives or rights then held by other tenants, and (b) the proposed assignee or sublessee be at least as financially responsible as Lessee was expected to be at the time of the execution of this Lease or of such assignment or subletting, whichever is greater. 13. DEFAULT; REMEDIES. 13.1 DEFAULT. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The vacation or abandonment of the Premises by Lessee. Vacation of the Premises shall include the failure to occupy the Premises for a continuous period of sixty (60) days or more, whether or not the rent is paid. (b) The breach by Lessee of any of the covenants, conditions or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f) (false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33 (auctions), or 41.1 (easements), all of which are hereby deemed to be material, non-curable defaults without the necessity of any notice by Lessor to Lessee thereof. (c) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. Initials: -------- -------- (C) 1984 American Industrial Real Estate Association FULL SERVICE - GROSS PAGE 6 OF 10 PAGES (d) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee other than those referenced in subparagraphs (b) and (c), above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (e) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as defined in 11 U.S.C. (S)101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days; (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provision of this paragraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's obligation hereunder, was materially false. 13.2 REMEDIES. In the event of any material default or breach of this Lease by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time such award exceeds the amount of such rental loss for the same period that lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such 30-day period and thereafter diligently pursues the same to completion. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operation Expense Increase or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Office Building Project. Accordingly, if any installment of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 14. CONDEMNATION. If the Premises or any portion thereof or the Office Building Project are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs; provided that if so much of the Premises or the Office Building Project are taken by such condemnation as would substantially and adversely affect the operation and profitability of Lessee's business conducted from the Premises, Lessee shall have the option, to be exercised only in writing within thirty (30) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent and Lessee's Share of Operating Expense Increase shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. Common Areas taken shall be excluded from the Common Areas usable by Lessee and no reduction of rent shall occur with respect thereto or by reason thereof. Lessor shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Lessee of such election within thirty(30) days after receipt of notice of a taking by condemnation of any part of the Premises or the Office Building Project. Any award for the taking of all or any part of the Premises or the Office Building Project under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any separate award for loss of or damage to Lessee's trade fixtures, removable personal property and unamortized tenant improvements that have been paid for by the Lessee. For that purpose the cost of such improvements shall be amortized over the original term of this Lease excluding any options. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. BROKER'S FEE. (a) The brokers involved in this transaction are Pacifica Holding Company ------------------------ as "listing broker" and none as "cooperating broker," licensed real estate ---- broker(s). A "cooperating broker" is defined as any broker other than the listing broker entitled to a share of any commission arising under this Lease. Upon execution of this Lease by both parties, Lessor shall pay to said brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate agreement between Lessor and said broker(s), or in the event there is no separate agreement between Lessor and said broker(s), the sum of $ none, for brokerage services rendered by said broker(s) to Lessor ---- in this transaction. (b) Lessor further agrees that (i) if Lessee exercises any Option, as defined in paragraph 39.1 of this Lease, which is granted to Lessee under this Lease, or any subsequently granted option which is substantially similar to an Option granted to Lessee under this Lease, or (ii) if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or (iii) if Lessee remains in possession of the Premises after the expiration of the term of this Lease after having failed to exercise an Option, or (iv) if said broker(s) are the procuring cause of any other lease or sale entered into between the parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (v) if the Base Rent is increased, whether by agreement or operation of an escalation clause contained herein, then as to any of said transactions or rent increases, Lessor shall pay said broker(s) a fee in accordance with the schedule of said broker(s) in effect at the time of execution of this Lease. Said fee shall be paid at the time such increased rental is determined. (c) Lessor agrees to pay said fee not only on behalf of Lessor but also on behalf of any person, corporation, association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this paragraph 15. Each listing and cooperating broker shall be a third party beneficiary of the provisions for this paragraph 15 to the extent of their interest in any commission arising under this Lease and may enforce that right directly against Lessor; provided, however, that all brokers having a right to any part of such total commission shall be a necessary party to any suit with respect thereto. (d) Lessee and Lessor each represent and warrant to the other that neither has had any dealings with any person, firm broker or finder (other that the person(s), if any, whose names are set forth in paragraph 15(a), above) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and no other broker or other person, firm or entity is entitled to any commission or finder's fee in connection with said transaction and Lessee and Lessor do each hereby indemnify and hold the other harmless from and against any costs, expenses, attorneys' fees or liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying party. 16. ESTOPPEL CERTIFICATE. (a) Each party (as "responding party") shall at any time upon not less than ten (10) days' prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date Initials: ___________ ___________ (C) 1984 American Industrial Real Estate Association FULL SERVICE - GROSS PAGE 7 OF 10 PAGES to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Office Building Project or of the business of Lessee. (b) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. (c) If Lessor desires to finance, refinance, or sell the Office Building Project, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor's such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a lessee's interest in a ground lease of the Office Building Project, and except as expressly provided in paragraph 15, in the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law or judgments from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. TIME OF ESSENCE. Time is of the essence with respect to the obligations to be performed under this Lease. 21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expense Increase and any other expenses payable by Lessee hereunder shall be deemed to be rent. 22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Office Building Project and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 23. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given if delivered or addressed to Lessee or to Lessor at the address noted below or adjacent to the signature of the respective parties, as the case may be. Mailed notices shall be deemed given upon actual receipt at the address required, or forty-eight hours following deposit in the mail, postage prepaid, whichever first occurs. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. 26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, except that the rent payable shall be two hundred percent (200%) of the rent payable immediately preceding the termination date of this Lease, and all Options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee hall be deemed both a covenant and a condition. 29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Office Building Project is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Office Building Project is located. 30. SUBORDINATION. (a) This Lease, and any Option or right of first refusal granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Office Building Project and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgage, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attornment, a subordination, or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. ATTORNEY'S FEES. 31.1 If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, trial or appeal thereon, shall be entitled to his reasonable attorneys' fees to be paid by the losing party as fixed by the court in the same or a separate suit, and whether or not such action is pursued to decision or judgment. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 31.2 The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred in good faith. 31.3 Lessor shall be entitled to reasonable attorneys' fees and all other costs and expenses incurred in the preparation and service of notice of default and consultations in connection therewith, whether or not a legal transaction is subsequently commenced in connection with such default. 32. LESSOR'S ACCESS. 32.1 Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders or lessees, taking such safety measures, erecting such scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the Premises or to the Office Building Project as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. 32.2 All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. Initials ---------- ---------- (C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS PAGE 8 OF 10 PAGES 32.3 Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and safes, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forceable or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holding of any auction on the Premises or Common Areas in violation of this paragraph shall constitute a material default of this Lease. 34. SIGNS. Lessee shall not place any sign upon the Premises or the Office Building Project without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Office Building Project. 35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. CONSENTS. Except for paragraphs 33 (auctions) and 34 (signs) hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 37. GUARANTOR. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Office Building Project. 39. OPTIONS. 39.1 DEFINITION. As used in this paragraph the word "Option" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option of right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Office Building Project or other property of Lessor or the right of first offer to lease other space within the Office Building Project or other property of Lessor; (3) the right or option to purchase the Premises or the Office Building Project, or the right of first refusal to purchase the Premises or the Office Building Project or the right of first offer to purchase the Premises or the Office Building Project, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is personal to the original Lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee; provided, however, that an Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple options to extend or renew this Lease a later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance alleged in said notice of default is cured, or (ii) during the period of time commencing on the day after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) and continuing until the obligation is paid, or (iii) in the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, during the 12 month period of time immediately prior to the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants or conditions of this Lease. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(d) within thirty (30) days after the date that Lessor give notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, or (iii) Lessor gives to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants and conditions of this Lease. 40. SECURITY MEASURES -- LESSOR'S RESERVATIONS. 40.1 Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Office Building Project. Lessee assumes all responsibility for the protection of Lessee, its agents, and invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Office Building Project or any part thereof, in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth in paragraph 4.2(b). 40.2 Lessor shall have the following rights: (a) To change the name, address or title of the Office Building Project or building in which the Premises are located upon not less than 90 days prior written notice; (b) To, at Lessee's expense, provide and install Building standard graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; (c) To permit any lessee the exclusive right to conduct any business as long as such exclusive does not conflict with any rights expressly given herein; (d) To place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the buildings or the Office Building Project or on pole signs in the Common Areas; 40.3 Lessee shall not: (a) Use a representation (photographic or otherwise) of the Building or the Office Building Project or their name(s) in connection with Lessee's business; (b) Suffer or permit anyone, except in emergency, to go upon the roof of the Building. 41. EASEMENTS. 41.1 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restriction, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sigh any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 41.2 The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. 42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. Initials: ------- (C) 1984 American Industrial Real Estate Association ------- FULL SERVICE -- GROSS PAGE 9 OF 10 PAGES 43. AUTHORITY. If Lessee is a corporation, trust, or general or limited partnership, Lessee, and each individual executing this Lease on behalf of such entity represent and warrant that such individual is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 44. CONFLICT. Any conflict between the printed provisions, Exhibits or Addenda of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 45. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 46. LENDER MODIFICATION. Lessee agrees to make such reasonable modifications to this Lease as may be reasonably required by an institutional lender in connection with the obtaining of normal financing or refinancing of the Office Building Project. 47. MULTIPLE PARTIES. If more than one person or entity is named as either Lessor or Lessee herein, except as otherwise expressly provided herein, the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, respectively. 48. WORK LETTER. This Lease is supplemented by that certain Work Letter of even date executed by Lessor and Lessee, attached hereto as Exhibit C, and incorporated herein by this reference. 49. ATTACHMENTS. Attached hereto are the following documents which constitute a part of this Lease: Lease Addendum including paragraphs 50 - 53 LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR LESSEE Pacifica Plaza Office Building Sizzler USA Real Property, Inc. - ----------------------------------- ------------------------------------- By /s/ Robert Leonard By --------------------------------- ----------------------------------- Robert Leonard Christopher R. Thomas Its General Partner Its President ------------------------- --------------------------- By By /s/ Michael B. Green --------------------------------- ----------------------------------- Michael B. Green Its Its Secretary ------------------------- ---------------------------- Executed at Executed at Los Angeles CA ------------------------ -------------------------- on November 13, 1997 on November 12, 1997 --------------------------------- ----------------------------------- Address Address 12655 W. Jefferson Bl, L.A.CA ---------------------------- ----------------------------- (C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS PAGE 10 OF 10 PAGES For these forms write or call the American Industrial Real Estate Association, 700 South Flower Street, Suite 600, Los Angeles CA 90017. (213) 687-8777. (C) 1984 - By American Industrial Real Estate Association. All rights reserved. No part of these words may be reproduced in any form without permission in writing. STANDARD OFFICE LEASE FLOOR PLAN [SECOND FLOOR AREA CALCS] EXHIBIT A SITE PLAN EXHIBIT "A-1" LEASE ADDENDUM This Lease Addendum is to the Lease dated October 20, 1997 by and between Pacifica Plaza Office Building ("Lessor") and Sizzler USA Real Property, Inc., ("Lessee") for office space located at 6101 West Centinela Avenue, Culver City, California. 50. The Base Rent is predicated upon terms of a sublease negotiated between Lessee and Digital Equipment Corporation ("DEC"), a tenant in the Building. In lieu of a sublease between Lessee and DEC, Lessor and DEC have agreed to reduce DEC's leased Premises by 35,975 square feet (the entire second floor) and DEC will pay to Lessor the difference between DEC's scheduled rent (plus utilities) and Lessee's rent through the Term of the Lease as per the Rent Reduction Analysis attached hereto as Exhibit A-3. The Base Rent shall be as per the following schedule:
Period Base Monthly Rent ------ ----------------- November 1997 - January 1998 Rent Abated February 1998 $17,088.12 March 1998 - March 1999 $34,176.25 April 1999 - May 1999 $17,088.12 June 1999 - December 1999 $34,176.25 January 2000 $38,313.38 February 2000 - October 2001 $42,450.50
Note: The Base Rent for the four (4) months of October 1998, December 1999, April 2000 and October 2001 has been prepaid upon execution of this Lease. Due to the mid-month Commencement Date of November 16, 1997, the 18th month abated rent shall be adjusted to one-half (1/2) rent for the two (2) months of April and May, 1999. 51. Lessee shall have seventy-two (72) assigned parking spaces in the garage, and one hundred and eight (108) parking spaces in common in the surface lot. Visitor parking shall be in common with the other tenants in the Building. Parking charges shall be abated during the initial Term of the Lease. 52. Lessee shall have the right, at its sole cost and expense, including the maintenance and repair thereof, to construct and/or install one (1) monument sign by using the existing concrete base adjacent to the entry on Centinela Avenue, or replacing this sign with a new monument sign at a different location as agreed by Lessor and Lessee. 53. This Lease has been prepared by Pacifica Holding Company, a California Corporation, at the request of the Lessor and Lessee, who are herein referred to as "the Parties" without regard to number or gender. The Parties have been advised to have this document reviewed by their own independent council, and confirm that in signing this document, they have not relied on acts or conduct of Pacifica Holding Company, and its agents with regard to interpretation or meaning of this document. The parties jointly and severally waive any and all claims, actions, demands, and loss against Pacifica Holding Company, its agents, employees, and each of them, that a Party may incur by reason of any act, error, or omission in the preparation of this document and in its interpretation and meaning, whether or not the interpretation and meaning is the result of determination by a court or arbitration panel of competent jurisdiction. The preceding waiver provisions have been negotiated by and between the Parties on the one part, and Pacifica Holding Company on the other part. LESSOR LESSEE Pacifica Plaza Office Building: Sizzler USA Real Property, Inc.: By /s/ Robert Leonard By /s/ Christopher R. Thomas -------------------------------- -------------------------------- Robert Leonard Christopher R. Thomas Its General Partner Its President ------------------------- --------------------------- Date 11/13/97 Date November 12, 1997 ------------------------------ ----------------------------- DEC CULVER CITY RENT REDUCTION ANALYSIS [LOGO OF STUDLEY]
- -------------------------------------------------------------------------------- CALENDAR MONTH MASTER LEASE NEGOTIATED REMAINING RENT REDUCTION RENT START 11/1/97 START 11/16/97 - -------------------------------------------------------------------------------- Nov-97 $96,673.50 $0.00 $96,673.50 Dec-97 $96,673.50 $0.00 $96,673.50 Jan-98 $96,673.50 $0.00 $96,673.50 Feb-98 $96,673.50 ($17,088.12) $79,585.38 Mar-98 $96,673.50 ($34,176.25) $62,497.25 Apr-98 $96,673.50 ($34,176.25) $62,497.25 May-98 $96,673.50 ($34,176.25) $62,497.25 Jun-98 $96,673.50 ($34,176.25) $62,497.25 Jul-98 $96,673.50 ($34,176.25) $62,497.25 Aug-98 $96,673.50 ($34,176.25) $62,497.25 Sep-98 $96,673.50 ($34,176.25) $62,497.25 Oct-98 $96,673.50 ($34,176.25) $62,497.25 Nov-98 $100,304.33 ($34,176.25) $66,128.08 Dec-98 $100,304.33 ($34,176.25) $66,128.08 Jan-99 $100,304.33 ($34,176.25) $66,128.08 Feb-99 $100,304.33 ($34,176.25) $66,128.08 Mar-99 $100,304.33 ($34,176.25) $66,128.08 Apr-99 $100,304.33 ($17,088.12) $83,216.21 May-99 $100,304.33 ($17,088.12) $83,216.21 Jun-99 $100,304.33 ($34,176.25) $66,128.08 Jul-99 $100,304.33 ($34,176.25) $66,128.08 Aug-99 $100,304.33 ($34,176.25) $66,128.08 Sep-99 $100,304.33 ($34,176.25) $66,128.08 Oct-99 $100,304.33 ($34,176.25) $66,128.08 Nov-99 $104,064.35 ($34,176.25) $69,888.10 Dec-99 $104,064.35 ($34,176.25) $69,888.10 Jan-00 $104,064.35 ($38,313.38) $65,750.97 Feb-00 $104,064.35 ($42,450.50) $61,613.85 Mar-00 $104,064.35 ($42,450.50) $61,613.85 Apr-00 $104,064.35 ($42,450.50) $61,613.85 May-00 $104,064.35 ($42,450.50) $61,613.85 Jun-00 $104,064.35 ($42,450.50) $61,613.85 Jul-00 $104,064.35 ($42,450.50) $61,613.85 Aug-00 $104,064.35 ($42,450.50) $61,613.85 Sep-00 $104,064.35 ($42,450.50) $61,613.85 Oct-00 $104,064.35 ($42,450.50) $61,613.85 Nov-00 $107,966.93 ($42,450.50) $65,516.43 Dec-00 $107,966.93 ($42,450.50) $65,516.43 Jan-01 $107,966.93 ($42,450.50) $65,516.43 Feb-01 $107,966.93 ($42,450.50) $65,516.43 Mar-01 $107,966.93 ($42,450.50) $65,516.43 Apr-01 $107,966.93 ($42,450.50) $65,516.43 May-01 $107,966.93 ($42,450.50) $65,516.43 Jun-01 $107,966.93 ($42,450.50) $65,516.43 Jul-01 $107,966.93 ($42,450.50) $65,516.43 Aug-01 $107,966.93 ($42,450.50) $65,516.43 Sep-01 $107,966.93 ($42,450.50) $65,516.43 Oct-01 $107,966.93 ($42,450.50) $65,516.43 - -------------------------------------------------------------------------------- TOTAL $4,908,109.32 ($1,664,563.24) $3,243,546.08 - --------------------------------------------------------------------------------
EXHIBIT "A-2" RULES AND REGULATIONS FOR STANDARD OFFICE LEASE Dated: October 20, 1997 ---------------------------- By and Between Pacifica Plaza Office Building and Sizzler USA Real Property, ---------------------------------------------------------------- Inc., a Delaware Corp --------------------- GENERAL RULES 1. Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways and stairways. 2. Lessor reserves the right to refuse access to any persons Lessor in good faith judges to be a threat to the safety, reputation, or property of the Office Building Project and its occupants. 3. Lessee shall not make or permit any noise or odors that annoy or interfere with other lessees or persons having business within the Office Building Project. 4. Lessee shall not keep animals or birds within the Office Building Project, and shall not bring bicycles, motorcycles or other vehicles into areas not designated as authorized for same. 5. Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose. 6. Lessee shall not alter any lock or install new or additional locks or bolts. 7. Lessee shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein. 8. Lessee shall not deface the walls, partitions or other surfaces of the premises or Office Building Project. 9. Lessee shall not suffer or permit any thing in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Office Building Project. 10. Furniture, significant freight and equipment shall be move into or out of the building only with the Lessor's knowledge and consent, and subject to such reasonable limitations, techniques and timing, as may be designated by Lessor. Lessee shall be responsible for any damage to the Office Building Project arising from any such activity. 11. Lessee shall not employ any service or contractor for services or work to be performed in the Building, except as approved by Lessor. 12. Lessor reserves the right to close and lock the Building on Saturdays, Sundays and legal holidays, and on other days between the hours of _______P.M. and _____ A.M. of the following day. If Lessee uses the Premises during such periods, Lessee shall be responsible for securely locking any doors it may have opened for entry. 13. Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost. 14. No window coverings, shades or awnings shall be installed or used by Lessee. 15. No Lessee, employee or invitee shall go upon the roof of the Building. 16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Lessor or by applicable governmental agencies as non-smoking areas. 17. Lessee shall not use any method of heating or air conditioning other than as provided by Lessor. 18. Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor's written consent. 19. The Premises shall not be used for lodging or manufacturing, cooking or food preparation. 20. Lessee shall comply with all safety, fire protection and evacuation regulations established by Lessor or any applicable governmental agency. 21. Lessor reserves the right to waive any one of these rules or regulations, and/or as to any particular Lessee, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such Lessee. 22. Lessee assumes all risks from theft or vandalism and agrees to keep its Premises locked as may be required. 23. Lessor reserves the right to make such other reasonable rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Office Building Project and its occupants. Lessee agrees to abide by these and such rules and regulations. PARKING RULES 1. Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles." 2. Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 3. Parking stickers or identification devices shall be the property of Lessor and be returned to Lessor by the holder thereof upon termination of the holder's parking privileges. Lessee will pay such replacement charge as is reasonably established by Lessor for the loss of such devices. 4. Lessor reserves the right to refuse the sale of monthly identification devices to any person or entity that willfully refuses to comply with the applicable rules, regulations, laws and/or agreements. 5. Lessor reserves the right to relocate all or a part of parking spaces from floor to floor, within one floor, and/or to reasonably adjacent offsite location(s), and to reasonably allocate them between compact and standard size spaces, as long as the same complies with applicable laws, ordinances and regulations. 6. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking. 7. Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Lessor will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area. 8. Validation, if established, will be permissible only by such method or methods as Lessor and/or its licensee may establish at rates generally applicable to visitor parking. 9. The maintenance, washing, waxing or cleaning of vehicles in the parking structure or Common Areas is prohibited. 10. Lessee shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations, laws and agreements. 11. Lessor reserves the right to modify these rules and/or adopt such other reasonable and non-discriminatory rules and regulations as it may deem necessary for the proper operation of the parking area. 12. Such parking use as is herein provided is intended merely as a license only and no bailment is intended or shall be created hereby. Initials:__________ __________ (C) 1984 American Industrial Real Estate Association FULL SERVICE-GROSS EXHIBIT B PAGE 1 OF 1 PAGES GUARANTY OF LEASE [LOGO OF AIR] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION WHEREAS, Pacifica Plaza Office Building, a California Limited Partnership, ---------------------------------------------------------------- hereinafter referred to as "Lessor," and Sizzler USA Real Property, Inc., a ---------------------------------- Delaware Corporation, hereinafter referred to as "Lessee," are about to execute - -------------------- a document entitled "Lease" dated October 20, 1997 concerning the premises ---------------- commonly known as Suite 200, 6101 W. Centinela Ave., Culver City, CA 90230 -------------------------------------------------------- wherein Lessor will lease the premises to Lessee, and WHEREAS, Sizzler International, Inc. hereinafter referred to as --------------------------- "Guarantors" have a financial interest in Lessee, and WHEREAS, Lessor would not execute the Lease if Guarantors did not execute and deliver to Lessor this Guarantee of Lease. NOW THEREFORE, for and in consideration of the execution of the foregoing Lease by Lessor and as a material inducement to Lessor execute said Lease. Guarantors hereby jointly, severally, unconditionally and irrevocably guarantee the prompt payment by Lessee of all rentals and all other sums payable by Lessee under said Lease and the faithful and prompt performance by Lessee of each and every one of the terms, conditions and covenants of said Lease to be kept and performed by Lessee. It is specifically agreed and understood that the terms of the foregoing Lease may be altered, affected, modified or changed by agreement between Lessor and Lessee, or by a course of conduct, and said Lease may be assigned by Lessor or any assignee of Lessor without consent or notice to Guarantors and that this Guaranty shall thereupon and thereafter guarantee the performance of said Lease as so changed, modified, altered or assigned. This Guaranty shall not be released, modified or affected by failure or delay on the part of Lessor to enforce any of the rights or remedies of the Lessor under said Lease, whether pursuant to the terms thereof or at law or in equity. No notice of default need be given to Guarantors, it being specifically agreed and understood that the guarantee of the undersigned is a continuing guarantee under which Lessor may proceed forthwith and immediately against Lessee or against Guarantors following any breach or default by Lessee or for the enforcement of any rights which Lessor may have as against Lessee pursuant to or under the terms of the within Lease or at law or in equity. Lessor shall have the right to proceed against Guarantors hereunder following any breach or default by Lessee without first proceeding against Lessee and without previous notice to or demand upon either Lessee or Guarantors. Guarantors hereby waive (a) notice of acceptance of this Guaranty, (b) demand of payment, presentation and protest, (c) all right to assert or plead any statute of limitations as to or relating to this Guaranty and the Lease, (d) any right to require the Lessor to proceed against the Lessee or any other Guarantor or any other person or entity liable to Lessor, (e) any right to require Lessor to apply to any default any security deposit or other security it may hold under the Lease, (f) any right to require Lessor to proceed under any other remedy Lessor may have before proceeding against Guarantors, (g) any right of subrogation. Guarantors do hereby subrogate all existing or future indebtedness of Lessee to Guarantors to the obligations owed to Lessor under the Lease and this Guaranty. Any married woman who signs this Guaranty expressly agrees that recourse may be had against her separate property for all of her obligations hereunder. The obligations of Lessee under the Lease to execute and deliver estoppel statements and financial statements, as therein provided, shall be deemed to also require the Guarantors hereunder to do and provide the same relative to Guarantors. The term "Lessor" whenever hereinabove used refers to and means the Lessor in the foregoing Lease specifically named and also any assignee of said Lessor, whether by outright assignment or by assignment for security, and also any successor to the interest of said Lessor or of any assignee in such Lease or any party thereof, whether by assignment or otherwise. So long as the Lessor's interest in or to the leased premises or the rests, issues and profits therefrom, or in, to or under said Lease, are subject to any mortgage or deed of trust or assignment for security, no acquisition by Guarantors of the Lessor's interest in the leased premises or under said Lease shall affect the continuing obligation of Guarantors under this Guaranty which shall nevertheless continue in full force and effect for the benefit of the mortgagee, beneficiary, trustee or assignee under such mortgage, deed of trust or assignment, of any purchase at sale by judicial foreclosure or under private power of sale, and of the successors and assigns of any such mortgagee, beneficiary, trustee, assignee or purchaser. The term "Lessee" whenever hereinabove used refers to and means the Lessee in the foregoing Lease specifically named and also any assignee or sublessee of said Lease and also any successor to the interests of said Lessee, assignee or sublessee of such Lease or any part thereof, whether by assignment, sublease or otherwise. In the event any action be brought by said Lessor against Guarantors hereunder to enforce the obligation of Guarantors hereunder, the unsuccessful party in such action shall pay to the prevailing party therein a reasonable attorney's fee which shall be fixed by the court. If this Form has been filled in it has been prepared for submission to your attorney for his approval. No representation or recommendation is made by the real estate broker or its agents or employees as to the legal sufficiency, legal effect, or tax consequences of this Form or the transaction relating thereto. Executed at Los Angeles, Calif Sizzler International, Inc. ------------------------ -------------------------------- on November 12, 1997 --------------------------------- -------------------------------- Christopher R. Thomas President Address 12655 W. Jefferson Bl ---------------------------- -------------------------------- Los Angeles, CA 90066 "GUARANTORS" ---------------------------- 1977 - American Industrial Real Estate Association. All right reserved. No part of these works may be reproduced in any form without permission in writing. NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current from: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION. 345 So. Figueroa St M 1 Los Angeles CA 90071 (213) 687 8777 EX-21 3 SUBSIDIARIES OF REGISTRANT SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES EXHIBIT 21 PARENTS AND SUBSIDIARIES - ------------------------ James A. Collins, Chairman of the Board, owned of record and beneficially, at June 30, 1998, 3,800,840 shares of the Company's common stock, representing approximately 13 percent of the Company's total shares outstanding and may be considered a "parent" of the Company as such term is defined by the rules and regulations of the Securities and Exchange commission under the Securities Act of 1933, as amended. Set forth below is a list of all of the Company's subsidiaries as of June 30, 1998: Jurisdiction of Name of Subsidiary Incorporation - ----------------------------------------------------------------- Buffalo Ranch Australia Pty, Ltd. Australia Buffalo Ranch Steakhouses, Inc. California CFI Insurers, Ltd. Bermuda Collins Finance and Management Pty, Ltd. Australia Collins Foods Australia Pty, Ltd. Australia Collins Foods International, Pty, Ltd. Nevada Collins International, Inc. Delaware Collins Properties, Inc. Delaware Collins Property Development Pty, Ltd. Australia Curly's of Springfield, P.A., Inc. Pennsylvania Dalton's Roadhouse, Inc. California F.R. Group #3756, Inc. Maryland F.R. Group #3799, Inc. Maryland Furnace Concepts Australia Corp. Nevada Furnace Concepts International, Inc. Nevada Gulliver's Australia Pty, Ltd. Australia J.S.S. Restaurants Ltd. Canada Josephina's, Inc. California Mexican Concepts, Inc. California Restaurant Concepts International, Inc. Nevada Restaurant Concepts of Australia Pty, Ltd. Nevada Rustler No. 3, Inc. Maryland Scott's & Sizzler Ltd. Canada Jurisdiction of Name of Subsidiary Incorporation - ---------------------------------------------------------------- SizHarCo, Inc. Maryland SizMoCo, Inc. Maryland Sizzler Australia Pty, Ltd. Australia Sizzler Family Steak Houses, Inc. Nevada Sizzler Franchise Development, Ltd. Bermuda Sizzler Holdings of Canada, Inc. Canada Sizzler International Marks, Inc. Delaware Sizzler New Zealand Limited Nevada Sizzler of N.Y., Inc. New York Sizzler of VA., Inc. Virginia Sizzler Restaurant Services, Inc. Nevada Sizzler USA Restaurants, Inc. Delaware Sizzler Restaurants Management, Inc. California Sizzler South Pacific Pty, Ltd. Nevada Sizzler Southeast Asia, Inc. Nevada Sizzler Steak Seafood Salad (S) Pte. Ltd. Singapore Sizzler USA Franchise, Inc. Delaware Sizzler USA Real Property, Inc. Delaware Sizzler USA. Inc. Delaware Tenly Enterprises, Inc. Pennsylvania The Italian Oven Australia Pty, Ltd. Australia EX-23 4 CONSENT OF ARTHUR ANDERSEN LLP SIZZLER INTERNATIONAL, INC. AND SUBSIDIARIES EXHIBIT 23 ---------- CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- To Sizzler International, Inc. As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement file Number 33-39414. ARTHUR ANDERSEN LLP Los Angeles, California July 14, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS MAY-03-1998 APR-28-1997 MAY-03-1998 21,167 0 5,534 2,608 4,333 29,707 176,079 96,869 119,461 26,840 0 0 0 288 43,472 119,461 235,991 242,333 88,480 88,480 0 0 5,274 7,603 2,225 5,378 0 0 0 5,378 0.19 0.19
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