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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X|Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 2000
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ________ to ________
Commission file number 333-90817
SBARRO, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 11-2501939
(State or other jurisdiction of incorporation
or organization) (I.R.S. Employer Identification No.)
401 Broad Hollow Road, Melville, New York 11747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 715-4100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days. Yes X No ----
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 this Form 10-K or any
amendment to this Form 10-K [ X ].
The registrant's common stock is not publicly-held nor publicly traded.
The number of shares of Common Stock of the registrant outstanding as
of March 15, 2001 was 7,064,328.
DOCUMENTS INCORPORATED BY REFERENCE
None
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SBARRO, INC.
Unless the context otherwise requires, all references to "we", "us",
"our", "Sbarro" or the "Company" include Sbarro, Inc. and our subsidiaries.
PART I
Forward-Looking Statements
This report contains certain forward-looking statements about our
financial condition, results of operations, future prospects and business. These
statements appear in a number of places in the report and include statements
regarding our intent, belief, expectation, strategies or projections at that
time. These statements generally contain words such as "may", "should", "seeks",
"believes", "expects", "intends", "plans", "estimates", "projects", "strategy"
and similar expressions or the negative of those words.
Forward-looking statements are subject to a number of known and unknown
risks and uncertainties that could cause actual results to differ materially
from those projected, expressed or implied in the forward-looking statements.
These risks and uncertainties, many of which are not within our control, include
but are not limited to, general economic, weather and business conditions; the
availability of suitable restaurant sites in appropriate regional shopping malls
and other locations on reasonable rental terms; changes in consumer tastes;
changes in population and traffic patterns; our ability to continue to attract
franchisees; the success of the our present, and any future, joint ventures and
other expansion opportunities; the availability of food (particularly cheese and
tomatoes) and paper products at current prices; our ability to pass along cost
increases to our customers; no material increase occurring in the Federal
minimum wage; the continuity of services of members of our senior management
team; our ability to attract and retain competent restaurant and executive
managerial personnel; competition; the level of, and our ability to comply with,
government regulations; our ability to generate sufficient cash flow to make
interest payments and principal under our senior notes and credit agreement; the
effects which restrictions imposed on us under the Indenture for the senior
notes and the credit agreement may have on our ability to operate our business;
and our ability to repurchase Senior Notes to the extent required and make
repayments under our credit agreement to the extent required in the event we
make certain asset sales or experience a change of control.
You are cautioned not to place undue reliance on these statements,
which speak only as of the date of the report. We do not undertake any
responsibility to release publicly any revisions to these forward-looking
statements to take into account events or circumstances that occur after the
date of this report, other than as required by law. Additionally, we do not
undertake any responsibility to update you on the occurrence of any
unanticipated events which may cause actual results to differ from those
expressed or implied by the forward-looking statements contained in this report.
2
ITEM 1. BUSINESS
Sbarro, Inc., a New York corporation, was organized in 1977
and is the successor to a number of family food and restaurant businesses
developed and operated by the Sbarro family. Today, we are a leading owner,
operator and franchisor of quick-service restaurants, serving a wide variety of
Italian specialty foods with 939 restaurants worldwide at December 31, 2000. In
addition since 1995, we have created, primarily through joint ventures, other
restaurant concepts for the purpose of developing growth opportunities in
addition to the Sbarro restaurants. We presently operate 34 new concept units
through joint ventures or wholly owned subsidiaries. (See "New Concept
Development", below.)
Going Private Transaction
On September 28, 1999, members of the Sbarro family (who prior
thereto owned approximately 34.4% of our common stock) became the holders of
100% of our issued and outstanding common stock as a result of a merger in which
(i) a company owned by the members of the Sbarro family merged with and into us,
(ii) our shareholders (other than the members of the Sbarro family and the
company owned by them) received the right to receive $28.85 per share in cash in
exchange for the approximately 13.5 million shares of our common stock not owned
by the members of the Sbarro family, and (iii) all outstanding stock options,
including stock options held by the members of the Sbarro family, were
terminated in exchange for a cash payment equal to the number of shares subject
to the options multiplied by the excess, if any, of $28.85 over the applicable
option exercise price. The cost of the merger, including fees and expenses, was
funded through the use of substantially all of the our cash on hand and the
placement of $255.0 million of 11.0% Senior Notes due September 15, 2009 (the
"Senior Notes") sold at a price of 98.514% of par to yield 11.25% per annum. The
Senior Notes were issued under an Indenture dated September 28, 1999 (the
"Indenture"). We also entered into a five year, $30 million unsecured senior
revolving bank credit facility under a Credit Agreement dated as of September
23, 1999 (the "Credit Agreement"). The Credit Agreement provides an unsecured
senior revolving credit facility which enables us to borrow, on a revolving
basis from time to time during its five-year term, up to $30.0 million,
including a $10.0 million sublimit for standby letters of credit. Our payment
obligations under the Senior Notes and the Credit Agreement are jointly,
severally, unconditionally and irrevocably guaranteed by all of our current
Restricted Subsidiaries (as defined in the Indenture) and is to be similarly
guaranteed by our future Restricted Subsidiaries. See "Selected Financial Data"
included in Item 6 of this report, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 of this
report, "Financial Statements and Supplementary Data" included in Item 8 of the
report and "Certain Relationships and Related Transactions" included in Item 13
of this report.
3
General
We are a leading owner, operator and franchisor of quick
service restaurants, serving a wide variety of Italian specialty foods. Under
the "Sbarro" and "Sbarro The Italian Eatery" names, we developed one of the
first quick-service concepts that extended beyond offering one primary specialty
item, such as pizza or hamburgers. Our diverse menu offering includes pizza,
pasta and other hot and cold Italian entrees, salads, sandwiches, cheesecake and
other desserts and beverages. All of our entrees are prepared fresh daily in
each restaurant using special recipes developed by us. We focus on serving our
customers generous portions of high quality Italian-style food at attractive
prices. We believe that the Sbarro concept is unlike other quick-service Italian
restaurants due to its diverse menu selection and its fast, cafeteria-style
service.
Since our inception in 1959, we have focused on high customer
traffic venues due to the large number of captive customers who base their
eating decision primarily on impulse and convenience. We therefore do not have
to incur the significant advertising and promotional expenditures that certain
of our competitors incur to attract customers to their destination restaurants.
These factors, combined with adherence to strict cost controls, provide us with
high and stable operating margins. Over the past ten years, we have extended the
Sbarro concept from downtown locations and enclosed shopping malls to other high
customer traffic venues, including toll roads, airports, sports arenas,
hospitals, convention centers, university campuses and casinos. We believe the
opportunity to open additional Sbarro units in these and other new venues should
continue to increase as companies, municipalities and others seek to outsource
their non-core food operations to companies with an established brand name.
In addition, since 1995, we have created and operated, through
joint ventures, other casual and fine dining concepts for the purpose of
developing growth opportunities in addition to our Sbarro restaurants.
As of December 31, 2000, we operated 939 quick service
restaurants, consisting of 636 Company-owned and 303 franchised restaurants
located in 48 States, the District of Columbia, the Commonwealth of Puerto Rico,
certain United States territories and 21 countries throughout the world, and,
with our joint venture partners or in wholly owned subsidiaries, 33 casual and
fine dining restaurants featuring varying cuisines.
Restaurant Expansion
We have grown from 103 Sbarro-owned or franchised quick
service restaurants at the time of our initial public offering in 1985 to 939 as
of December 31, 2000 excluding 33 new concept units. During 2000, 49 new Sbarro
restaurants were opened, of which 13 were Company-owned and 36 were franchised,
16 Company-owned and 18 franchised units were closed and one unit that had been
a franchise unit became a Company-owned unit. In addition, we and joint ventures
in which we participate opened seven casual and fine dining units in 2000. (See
"New Concept Development" below).
4
The following table summarizes the number of Sbarro-owned and
franchised quick service restaurants in operation during each of the years from
1996 through 2000:
Fiscal Year
-------------------------------
2000 1999 1998 1997 1996
Company-owned Sbarro restaurants:
Opened during period (1) 13 24 25 28 26
(Sold to) acquired from franchisees
during period 1 (1) 1 4 1
Closed during period (2) (16) (9) (20) (8) (4)
---- --- ---- --- ---
Open at end of period (3) 636 638 624 618 594
Franchised Sbarro restaurants:
Opened during period 36 49 43 47 36
Acquired from (sold to) Company
during period (1) 1 (1) (4) (1)
Closed or terminated during period (18) (32) (13) (23) (16)
---- ---- ---- ---- ----
Open at end of period 303 286 268 239 219
All Sbarro restaurants:
Opened during period (1) 49 73 68 75 62
Closed or terminated during period (2) (34) (41) (33) (31) (20)
---- ---- ---- ---- ----
Open at end of period (3) 939 924 892 857 813
Kiosks (all franchised) open at end of year 5 4 8 7 7
(1) Excludes 7, 7, 7, 5 and 7 new concept units opened during the
respective fiscal years.
(2) See Note (3) to "Selected Financial Data" in Item 6 of this Report for
information with respect to charges in 1998, 1997 and 1995 relating to
the closing and planned closing of certain Company-owned units.
(3) Excludes 33, 26, 19, 14 and 8 new concept units at the end of the
respective fiscal years.
Traditional Quick Service Concept and Menu
Sbarro quick service restaurants are family oriented, offering
quick, efficient, cafeteria and buffet style service designed to minimize
customer waiting time and facilitate table turnover. The decor of a Sbarro
restaurant incorporates a contemporary motif that blends with the
characteristics of the surrounding area.
5
As of December 31, 2000, there were 256 "in-line" Sbarro
restaurants and 676 "food court" Sbarro quick service restaurants. In addition,
franchisees operated seven freestanding Sbarro restaurants. "In-line"
restaurants, which are self-contained restaurants, usually occupy between 1,500
and 3,000 square feet, contain the space and furniture to seat approximately 60
to 120 people and employ 10 to 40 persons, including part-time personnel. "Food
court" restaurants are primarily located in areas of shopping malls designated
exclusively for restaurant use and share a common dining area provided by the
mall. These restaurants generally occupy between 500 and 1,000 square feet and
contain only kitchen and service areas. They frequently have a more limited menu
than an "in-line" restaurant and employ 6 to 30 persons, including part-time
personnel.
Sbarro restaurants are generally open seven days a week
serving lunch, dinner and, in a limited number of locations, breakfast, with
hours conforming to those of the major department stores or other large
retailers in the mall or trade area in which they are located. Typically, mall
restaurants are open to serve customers 10 to 12 hours a day, except on Sunday,
when mall hours may be more limited. For Sbarro - owned restaurants open a full
year, average sales in fiscal 2000 were $0.7 million for "in-line" restaurants
and $0.5 million for "food court" restaurants.
Sbarro restaurants feature a menu of popular Italian food,
including pizza with a variety of toppings, a selection of pasta dishes and
other hot and cold Italian entrees, salads, sandwiches, cheesecake and other
desserts. In addition to soft drinks, a limited number of the larger restaurants
serve beer and wine.
All of our entrees are prepared fresh daily in each restaurant
according to special recipes developed by us. We place emphasis on serving
generous portions of quality Italian-style food at attractive prices. Entree
selections, excluding pizza, generally range in price from $2.79 to $6.69. We
believe that pizza, which is sold predominantly by the slice, accounts for
approximately 50% of Sbarro restaurant sales.
Substantially all of the food ingredients and related
restaurant supplies used by the restaurants are purchased from a national
independent wholesale food distributor which is required to adhere to
established product specifications for all food products sold to our
restaurants. Breads, pastries, produce, fresh dairy and certain meat products
are purchased locally for each restaurant. Soft drink mixes are purchased from
major beverage producers under national contracts. We believe that there are
other distributors who would be able to service our needs and that satisfactory
alternative sources of supply are generally available for all items regularly
used in our restaurants.
Restaurant Management
Each Sbarro restaurant is managed by one general manager and
one or two co-managers or assistant managers, depending upon the size of the
location. Managers are required to participate in Sbarro training sessions in
restaurant management and operations prior to the assumption of their duties. In
addition, each restaurant manager is required to comply with an extensive
operations manual containing procedures for assuring uniformity of operations
and consistent high quality of products. We have a restaurant management bonus
program that provides the management teams of Sbarro-owned restaurants with the
opportunity to receive cash bonuses based on certain performance-related
criteria of their location.
6
We employ area and regional directors, each of whom is
typically responsible for the operations of 6 to 14 Sbarro-owned restaurants in
a given area. Before each new restaurant opening, we assign an area or regional
director to coordinate opening procedures. Area and regional directors recruit
and supervise the managerial staff of all Sbarro-owned restaurants and report to
one of the four regional vice presidents. The regional vice presidents
coordinate the activities of the area and regional directors assigned to their
areas of responsibility and report to the President of our Quick Service
Division.
Franchise Development
Growth in franchise operations occurs through the
establishment of new Sbarro restaurants by new franchisees and existing
franchisees who have multi-unit franchise agreements. We rely principally upon
our reputation and the strength of our existing restaurants, as well as to
participation in national franchise conventions, to attract new franchisees.
As of December 31, 2000, we had 303 franchised Sbarro
restaurants operated by 79 franchisees in 37 states of the United States as well
as its territories and in 24 countries throughout the world. We are presently
considering additional franchise opportunities in the United States and other
countries. In certain instances, we have established franchise locations under
territorial agreements in which we have granted, for specified time periods,
exclusive rights to enter into franchise agreements for restaurant units in
certain geographic areas (primarily foreign countries) or venues (primarily
specified non-mall locations such as for certain toll roads or airports).
In order to obtain a franchise, we generally require payment
of an initial fee and continuing royalties at rates of 3.5% to 10.0% of gross
revenues. Franchise agreements entered into prior to 1988 generally have an
initial term of 15 years with the franchisee having a renewal option provided
that the agreement has not been previously terminated by either party for
specified reasons. Since 1988, we have required the franchise agreements to end
at the same time as the underlying lease, but generally in not less than ten nor
more than twenty years. Since 1990, the renewal option has also been subject to
conditions, including a remodel or image enhancement requirement. Franchise
agreements granted under territorial agreements and those for non-traditional
sites are at negotiated fees, royalty rates and terms and conditions other than
those contained in our basic franchise agreement. The franchise and territorial
agreements provide us with the right to terminate a franchisee for a variety of
reasons, including insolvency or bankruptcy, failure to operate its restaurant
according to standards, understatement of gross receipts, failure to pay fees,
or material misrepresentation on an application for a franchise.
We presently employ fourteen management level individuals
responsible for overseeing the operations of franchise units and for developing
new units. These employees report to the President of our Franchising and
Licensing Division.
7
New Concept Development
Since 1995, we have entered into several joint ventures to
develop new restaurant concepts and established two concepts on our own to
provide growth opportunities that leverage our restaurant management and
financial expertise. Our joint ventures and other new concepts presently operate
33 restaurants. We have chosen to develop the joint ventures with restaurateurs
experienced in the particular food area and we are actively involved in the
day-to-day operations of each venture. These concepts are in various stages of
development and expansion and we are considering additional concepts for
potential development.
The following is a summary of our existing joint ventures and
other new concepts:
o We have a 100% interest in a new concept that presently
operates one moderately priced casual dining restaurant
serving Italian food under the name "Mama Sbarro's" in a strip
center location. The format is both quick-service and table
service with take-out service available. We are planning to
open additional sites of this concept.
o We have a 100% interest in a concept that presently operates
three moderately priced casual dining restaurants serving
Italian food under the name "Tony and Bruno's" in strip center
locations. The restaurants primarily provide table service and
cater to families. Take-out service is also available. We are
not planning to open additional sites of this concept.
o We have a 100% interest in a joint venture that presently
operates moderately priced casual family restaurants serving
Italian food under the name "Umberto of New Hyde Park" in six
mall and eight strip center locations. The format is both
quick-service and table service. In the non-mall locations,
take-out service is also available. One non-mall location was
closed in 1998. In March 2001, we acquired the ownership
interests of our 20% partner in this venture as of December
31, 2000 in connection with the settlement of litigation
against this partner. See "Legal Proceedings" in Item 3 of
this report for further discussion of the action. We do not
plan to open any additional restaurants under this brand name
at this time.
o We have a 40% interest in a joint venture that presently
operates six casual dining restaurants with a Rocky Mountain
steakhouse motif under the name "Boulder Creek Steaks &
Saloon." This venture also operates three fine dining steak
restaurants under the names "Rothmann's Steakhouse" and
"Burton & Doyle". We are planning to open additional sites of
each type of restaurant.
o We have a 70% interest in two moderately priced, table service
restaurants featuring an Italian Mediterranean menu that
operate under the names "Salute" and "Cafe Med" which are
located in New York City. During 1997, this venture closed two
other restaurants, resulting in a $3.3 million before tax, or
$2.0 million after tax, charge to our earnings. An additional
$1.0 million charge to earnings before tax, or $0.6 million
after tax, was recorded in 1999 when we subsequently agreed to
absorb a portion of our joint venture partners' losses on
these units upon their disposition. We do not plan to open any
additional restaurants in this group at this time.
8
o We have a 100% interest in two moderately priced, table
service restaurants featuring an Italian Mediterranean menu
that operate under the names "BICE Ristorante" in Las Vegas
and "The Grill on the Park" in New York City, each of which
opened in the latter portion of 2000. There currently is
another restaurant under construction in New York City that
will be part of this venture. No further restaurants are
planned in this group at this time.
o We have a 50% interest in a joint venture which, in June 1999,
acquired two Mexican style restaurants operating in strip
centers under the name "Baja Grill". We are currently
evaluating whether to expand this concept.
o We have a 25% interest in a joint venture that was formed in
1999 that has operated one seafood restaurant under the name
"Vincent's Clam Bar". There are no plans to open more
restaurants under this name at this time.
All joint venture restaurants, except four Umberto of New Hyde
Park mall units and one restaurant in Las Vegas, are presently located in the
New York City metropolitan area. We are continually evaluating the operating
performance of these ventures to assess their feasibility and future growth
potential. We intend to seek to expand our existing ventures, if appropriate,
and to develop new restaurant concepts either independently or through existing
or new joint ventures. There can be no assurance as to the performance of the
existing joint ventures or our ability to successfully identify and develop new
concepts.
All of our new concepts presently operate through unrestricted
subsidiaries which do not guarantee our Senior Notes and obligations under our
Credit Agreement. As such, we have certain restrictions as to the financing we
can provide to these new concepts and these entities are not subject to the
restrictions contained in the Indenture and our Credit Agreement. Ventures in
which we have a 50% or less interest are accounted for under the equity method
of accounting.
As of December 31, 2000, we had an aggregate investment in these
unrestricted subsidiaries and joint ventures of approximately $33.8 million,
which does not include guarantees of indebtedness and reimbursement obligations
in respect of letters of credit in the aggregate amount of approximately $8.9
million and guarantees of certain real property lease obligations of these
subsidiaries and related joint ventures. In addition, we have also sublet
locations to, guaranteed all or portions of joint venture location leases and
provided other credit enhancements for these joint ventures.
9
Employees
As of December 31, 2000, we employed approximately 6,800
persons, excluding employees of new concepts, of whom approximately 3,000 were
full-time field and restaurant personnel, approximately 3,500 were part-time
restaurant personnel and 300 were corporate administrative personnel. None of
our employees are covered by collective bargaining agreements. We believe our
employee relations are satisfactory.
Competition
The restaurant business is highly competitive. Many of our
direct competitors operate within the pizza restaurant segment. We believe we
compete on the basis of menu selection, price, service, location and food
quality. Factors that affect our and our franchisees' business operations
include changes in consumer tastes, national, regional and local economic
conditions, population, traffic patterns, changes in discretionary spending
priorities, demographic trends, consumer confidence in food wholesomeness,
handling and safety, weather conditions, the type, number and location of
competing restaurants and other factors. There is also active competition for
management personnel and attractive commercial shopping mall, center city and
other locations suitable for restaurants. We compete in each market in which we
operate with locally-owned restaurants, as well as with national and regional
restaurant chains. Factors such as inflation and increased food, beverage,
labor, occupancy and other costs could also adversely affect us and others in
the restaurant industry.
Although we believe we are well positioned to compete in the
quick-service Italian specialty food business because of our leading market
position, focus, expertise and strong national brand name recognition, we could
experience increased competition from existing or new companies and loss of
market share, which could have an adverse effect on our operations.
Trademarks
Our Sbarro restaurants operate principally under the "Sbarro"
and "Sbarro The Italian Eatery" service marks, which are registered with the
United States Patent and Trademark Office for terms presently expiring in 2004
and 2001, respectively. Registered service marks may continually be renewed for
10 year periods. We have also registered or filed applications to register
"Sbarro" and "Sbarro The Italian Eatery" in several other countries. We believe
that these marks continue to be materially important to our business. The joint
ventures to which we are a party have also applied for United States trademarks
covering trade names used by them.
Governmental Regulation
We are subject to various federal, state and local laws affecting our
businesses, as are our franchisees. Each of our restaurants and those owned by
our franchisees and joint ventures are subject to a variety of licensing and
governmental regulatory provisions relating to wholesomeness of food,
sanitation, health, safety and, in certain cases, licensing of the sale of
alcoholic beverages. Difficulties in obtaining, or the failure to obtain,
required licenses or approvals can delay or prevent the opening of a new
restaurant in any particular area. Our operations and those of our franchisees
and joint ventures are also subject to federal laws, such as minimum wage laws,
the Fair Labor Standards Act and the Immigration Reform and Control Act of 1986.
They are also subject to state laws governing such matters as wages, working
conditions, employment of minors, citizenship requirements and overtime. Some
states have set minimum wage requirements higher than the federal level.
10
We are also subject to Federal Trade Commission regulations
and various state laws regulating the offer and sale of franchises. The FTC and
various state laws require us to furnish to prospective franchisees a franchise
offering circular containing prescribed information. We are currently registered
to offer and sell franchises in six states and are currently exempt from the
franchise registration requirements in five states based upon "large franchisor"
exemptions, which are based upon our experience and meeting certain size tests,
generally requiring a net worth of at least $5 to $15 million (depending on the
state). The states in which we are registered, and a number of states in which
we may franchise, require registration of a franchise offering circular or a
filing with state authorities. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist in a substantial number of
states, and bills have been introduced in Congress from time to time which
provide for federal regulation of the franchisor-franchisee relationship in
certain respects. The state laws often limit, among other things, the duration
and scope of non-competition provisions and the ability of a franchisor to
terminate or refuse to renew a franchise.
Although alcoholic beverage sales are not emphasized in our Sbarro quick
service restaurants, our new concepts serve alcoholic beverages and some of our
larger restaurants serve beer and wine. Sales of beer and wine contributed less
than 1% of our total revenues during fiscal 2000. We submitted timely
applications where appropriate to amend our liquor license applications to
reflect the going private transaction and have received approvals in all
jurisdictions except California. While we do not anticipate the denial of our
application in California, there can be no assurance thereof.
We believe that we are in compliance in all material respects
with the laws to which we are subject.
ITEM 2. PROPERTIES
All Sbarro restaurants are typically leased under ten-year
leases that often do not include an option to renew the lease. We have
historically been able to renew or extend leases on existing sites. As of
December 31, 2000, we leased 653 restaurants, of which 24 were subleased to
franchisees under terms which cover all of our obligations under the lease. The
remaining franchisees directly lease their restaurant spaces. Most of our
restaurant leases provide for the payment of base rents plus real estate taxes,
utilities, insurance, common area charges and certain other expenses, as well as
contingent rents generally ranging from 8% to 10% of net restaurant sales in
excess of stipulated amounts.
11
Leases to which we were a party at December 31, 2000 have
initial terms expiring as follows:
Years Initial Lease Number of Sbarro- Number of Franchised
Terms Expire owned Restaurants Restaurants
- ------------ ----------------- -----------
2001.................... 37 4
2002.................... 50 4
2003.................... 73 3
2004.................... 49 2
2005.................... 68 2
Thereafter.............. 352 9
We own a four-story office building in Melville, New York with
approximately 100,000 square feet and a cafeteria style restaurant operated by
us. This building was purchased and renovated at a total cost of approximately
$21.5 million. Approximately 73% of the rentable square feet is currently under
lease to unaffiliated third parties. One floor of the building is occupied by us
as our principal executive offices. On March 3, 2000, we obtained a ten year,
8.4%, $16.0 million mortgage loan on this property.
We also occupy a two-story 20,000 square foot office building
for administrative support functions located in Commack, New York. We have
leased the building since May 1986 from a partnership owned by some of our
shareholders at an annual base rental of $0.3 million for the remainder of the
lease term, which expires in 2011. In addition, we pay real estate taxes,
utilities, insurance and certain other expenses for the facility. See "Certain
Relationships and Related Transactions" in Item 13 of this Report for a
description of the lease.
In addition, our new restaurant concepts, including joint
ventures, own one facility and lease 35 facilities.
ITEM 3. LEGAL PROCEEDINGS
In February 1999, the Umberto of New Hyde Park joint venture
companies, in which we have an 80% interest, began an action in the U.S.
District Court for the Eastern District of New York against Umberto Corteo, who
owns the remaining 20% interest in the joint venture companies, and against
three other restaurants controlled by Mr. Corteo. We alleged, among other
things, that Mr. Corteo engaged in unfair trade practices and in trademark
infringement, thereby breaching the joint venture agreements. We were seeking an
accounting, compensatory and punitive damages and injunctive relief. The answer
filed by Mr. Corteo and his co-defendants denied our claims and further alleged
that non-competition restrictions against Mr. Corteo in the joint venture
agreements are unenforceable. Mr. Corteo and his co-defendants had also
counterclaimed against us alleging misappropriation of trademark rights and
failure to perform administrative duties that amounted to a breach of the
agreements. In March 2001, we acquired the 20% interest owned in this venture by
Mr. Corteo in final settlement of this litigation. The terms of the settlement
agreement do not have a material impact upon either our financial condition or
results of operations.
12
On November 17, 1999, an action entitled Shan Wanli, Basem
Tawil, Abdul Hamid v. Sbarro, Inc. was filed in the Superior Court of the State
of Washington for King County. The plaintiffs allege that they served as store
managers, general managers, assistant managers or co-managers in our restaurants
in the State of Washington at various times since November 17, 1996 and that, in
connection with their employment, we violated the overtime pay provisions of the
State of Washington's Minimum Wage Act by treating them as overtime exempt
employees, breached alleged employment agreements and statutory provisions by
failing to record and pay for hours worked at the contract rates and/or
statutory minimum wage rates and failed to provide statutorily required meal
breaks and rest periods. The plaintiffs represent substantially all of our
restaurant managers employed for any period of time on or after November 9, 1996
in the State of Washington. We currently own and operate 18 restaurants in the
State of Washington. The plaintiffs seek actual damages, exemplary damages and
costs of the lawsuit, including reasonable attorney's fees, each in unspecified
amounts, and injunctive relief. A settlement agreement has been approved by the
court and will not have a material impact upon either our financial condition or
results of operations.
On December 20, 1999, Antonio Garcia and eleven other current
and former general managers of Sbarro restaurants in California amended a
complaint filed in the Superior Court of California for Orange County. The
complaint alleges that the plaintiffs were improperly classified as exempt
employees under the California wage and hour law. The plaintiffs are seeking
actual damages, punitive damages and costs of the lawsuit, including reasonable
attorney's fees, each in unspecified amounts. Plaintiff's filed a motion to
certify the lawsuit as a class action, but the motion was denied by the court.
We believe that we have substantial defenses to the claims and are vigorously
defending this action.
On September 6, 2000, Manuel Jimenez and seven other current
and former general managers of Sbarro restaurants in California filed a
complaint against Sbarro in the Superior Court of California for Orange County
alleging that the plaintiffs were improperly classified as exempt employees
under California wage and hour law. Plaintiffs are represented by the same
counsel who is representing the plaintiffs in the Garcia case. We believe that
we have substantial defenses to the claims and are vigorously defending this
action.
From time to time, we are a party to certain claims and legal
proceedings in the ordinary course of business, none of which, in our opinion,
would have a material adverse effect on our financial position or results of
operations.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
As a result of the going private transaction, our Common Stock
is not publicly-held nor publicly traded. We currently have six shareholders of
record. (See Item 12 "Security Ownership of Certain Beneficial Owners and
Management").
During 2000, we declared dividends to our shareholders of
$22.1 million, of which $3.8 million were in the form of tax distributions
pursuant to the Tax Agreement with our shareholders (see Item 13, "Certain
Relationships and Related Transactions - Tax Payment Agreement").
Amount
Date Per Share Total Type
March 15, 2000 $2.548 $18,000,000 General Distribution
December 15, 2000 0.046 327,870 General Distribution
------- -----------
2.594 18,327,870
------- ----------
April 17, 2000 0.072 511,156 Tax Distribution (1)
June 13, 2000 0.457 3,229,743 Tax Distribution (1)
September 15, 2000 0.009 59,096 Tax Distribution (1)
----- ------------
0.538 3,799,995
----- ---------
$3.132 $22,127,865 (1)
====== ===========
In addition, on January 15, 2001, we declared dividends to our shareholders as
follows:
Amount
Date Per Share Total Type
January 15, 2001 $0.50 $3,562,937 Tax Distribution (1)
===== ==========
(1) For tax distributions pursuant to the Tax Payment Agreement between us and
our shareholders (see "Certain Relationships and Related Party Transactions" in
Item 13 "Executive Compensation").
14
The Indenture under which our Senior Notes are issued and our Credit
Agreement contain various covenants that may limit our ability to make
"restricted payments" including, among other things, dividend payments (other
than as distributions pursuant to the Tax Payment Agreement). As of December 31,
2000, $14.9 million was available to make restricted payments. Among other
covenants, the Indenture requires that, in order to make a restricted payment,
our consolidated interest ratio coverage (as defined in the Indenture), after
giving pro forma effect to the restricted payment, for the four most recently
ended fiscal quarters must be at least 2.0 to 1. As of December 31, 2000 that
ratio was 2.56 to 1. In addition, our Credit Agreement requires us to maintain a
ratio of EBITDA to consolidated interest expense (as defined in the Credit
Agreement) of at least 2.0 to 1. As of December 31, 2000 that ratio was 2.64 to
1.
In 1997 and 1996, we declared dividends of $22.1 million and
$18.7 million, respectively. Dividends were thereafter suspended pending our
consideration of the original proposals which resulted in the going private
transaction.
15
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 of this report and our consolidated financial
statements and the related notes included in Item 8 of this report, which
consolidated financial statements have been audited and reported on by Arthur
Andersen LLP, independent public accountants.
Fiscal Year
(Dollars in thousands)
2000 1999 1998(1) 1997 1996
---- ---- ------- ---- ----
System Sales (unaudited) $569,260 $543,219 $524,572 $473,716 $439,802
======== ======== ======== ======== ========
Income Statement Data:
Revenues:
Restaurant sales $382,365 $375,514 $370,101 $344,190 $323,544
Franchise related income 11,231 8,688 8,284 7,175 6,229
Real estate and other 5,812 5,495 3,402 1,764 1,366
--------- -------- -------- --------- ----------
Total revenues 399,408 389,697 381,787 353,129 331,139
Costs and expenses:
Restaurant operating expenses:
Costs of food and paper products 74,405 75,956 78,603 70,994 69,644
Payroll and other employee benefits 101,553 97,336 93,338 85,021 79,346
Other operating costs 114,122 108,599 102,927 94,468 84,437
Depreciation and amortization(2) 29,039 25,712 22,784 24,357 23,092
General and administrative costs 30,882 28,854 23,999 21,241 17,952
Provision for unit closings(3) -- 1,013 2,515 3,300 --
Terminated transaction costs(4) -- -- 986 -- --
Litigation settlement and related costs(5) -- -- 3,544 -- --
Loss on land to be sold(6) -- -- 1,075 -- --
--------- -------- ---------- ---------
Total costs and expenses 350,001 337,470 329,771 299,381 274,471
Operating income before minority interest 49,407 52,227 52,016 53,748 56,668
Minority interest (46) 266 (101) 208 35
------------ ---------- ----------- --------- ----------
Operating income 49,361 52,493 51,915 53,956 56,703
---------- --------- -------- -------- --------
Other (expense) income:
Interest expense (30,243) (7,899) -- -- --
Interest income 949 3,828 5,120 4,352 3,798
Equity in net income (loss) of
unconsolidated affiliates 303 423 (296) (111) (195)
--------- ---------- --------- ---------- --------
Net other (expense) income (28,991) (3,648) 4,824 4,241 3,603
-------- ------- ----- ----- -----
Income before income taxes and cumulative
effect of change in method of accounting
for start-up costs 20,370 48,845 56,739 58,197 60,306
Income taxes (credit) (7) (5,075) 19,322 21,547 22,115 22,916
------- ------ -------- -------- --------
Income before cumulative effect of change in
method of accounting for start-up costs 25,445 29,523 35,192 36,082 37,390
Cumulative effect of change in method of accounting
for start-up costs, net of income taxes of $504 -- -- (858) -- --
------ ------ --------- ------- -------
Net income $25,445 $ 29,523 $ 34,334 $ 36,082 $ 37,390
======= ======== ======== ======== ========
16
2000 1999 1998(1) 1997 1996
---- ---- ------- ---- ----
(Dollars in thousands)
Other Financial and Restaurant Data:
Net cash provided by
operating activities(8) $48,329 $62,282 $59,199 $61,939 $55,716
Net cash used in
investing activities(8) (31,158) (25,227) (20,661) (27,020) (27,200)
Net cash used in
financing activities(8) (8,606) (158,356) (3,377) (20,012) (17,030)
EBITDA (9) 78,703 78,628 74,403 78,202 79,600
EBITDA margin(9) 19.7% 20.2% 19.5% 22.1% 24.0%
Capital expenditures(10) $31,193 $25,282 $28,213 $29,758 $ 27,792
Ratio of earnings to fixed
charges(11) 1.4x 2.6x 3.8x 4.1x 4.6x
Number of restaurants at end
of period:
Company-owned (12) 636 638 624 618 594
Franchised 303 286 268 239 219
--- ---------- ------- ------- -------
Total number of restaurants 939 924 892 857 813
=== ========== ======= ======= =======
Balance Sheet Data (at end of period):
Total assets $428,555 $417,543 $308,251 $278,811 $ 258,817
Working capital (deficiency) 9,217 (1,935) 126,619 93,464 78,214
Total long-term obligations 274,269 263,090 14,902 17,270 18,856
Shareholders' equity 113,597 110,280 256,918 220,439 205,207
17
(1) Our fiscal year ends on the Sunday nearest December 31. Our 1998 fiscal
year contained 53 weeks. All other fiscal years presented contained 52
weeks. As a result, our 1998 fiscal year benefited from one additional
week of operations over the other reported fiscal years. The additional
week contributed revenues, net income and EBITDA of approximately $8.6
million, $1.7 million and $2.7 million, respectively.
(2) Includes amortization of the excess purchase price over the book value
of assets acquired as a result of the going private transaction on
September 28, 2000 of $4.8 million and $2.0 million in fiscal 2000 and
1999, respectively. In fiscal 2000, we finalized our allocation of the
purchase price from the going private transaction based on an
evaluation of our net assets at September 29, 1999 resulting in lower
annual amortization expense than originally estimated.
(3) Represents provisions of (a) a special allocation of losses in fiscal
1999 which arose as a result of the final disposition of two joint
venture unit closings recorded in 1997, (b) $2.5 million for the
closing of 20 restaurants in fiscal 1998 and (c) $3.3 million for the
closing of two joint venture units in fiscal 1997.
(4) Represents a charge for costs associated with the termination of a
prior going private proposal by the Sbarro family.
(5) Represents a charge in connection with the settlement of a lawsuit.
(6) Represents a write down of the carrying cost on a parcel of undeveloped
land that we own.
(7) A credit of $5.6 million was recorded in 2000 to write-off deferred
income taxes as a result of electing to be taxed under the provisions
of Subchapter S of the Internal Revenue Code and, where applicable and
permitted, under similar state and local income tax provisions
beginning in fiscal 2000. For a discussion of the distributions that we
are permitted to make to our shareholders to pay taxes on our income,
see "Certain Relationships and Related Transactions - Tax Agreement" in
Item 13 of this report.
(8) For a more detailed presentation of our cash flow data, see our audited
consolidated financial statements and related notes for the year ended
December 31, 2000 included in Item 8 of this Report. In 2000, net cash
provided by operating activities before the change in deferred taxes
caused by the conversion to Subchapter S status and the change in
accrued interest payable was $53.5 million. In 1999, net cash provided
by operating activities before the change in accrued interest payable
was $53.8 million.
18
(9) EBITDA represents earnings before cumulative effect of change in
accounting method, interest income, interest expense, taxes,
depreciation and amortization. EBITDA includes the effect of the
unusual charges included in notes 3, 4, 5 and 6 above. EBITDA margin
represents EBITDA divided by total revenues. EBITDA should not be
considered in isolation from, or as a substitute for, net income, cash
flow from operations or other cash flow statement data prepared in
accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity. Rather, EBITDA is
presented because it is a widely accepted supplemental financial
measure, and we believe that it provides relevant and useful
information. Our calculation of EBITDA may not be comparable to a
similarly titled measure reported by other companies, since all
companies do not calculate this non-GAAP measure in the same manner.
Our EBITDA calculations are not intended to represent cash provided by
(used in) operating activities since they do not include interest and
taxes and changes in operating assets and liabilities, nor are they
intended to represent a net increase in cash since they do not include
cash provided by (used in) investing and financing activities.
(10) The following amounts related to the construction of our headquarters
are included as capital expenditures: $4.2 million in fiscal 1996, $5.0
million in fiscal 1997, which opened in late 1998, $4.8 million in
fiscal 1998, $1.6 million in fiscal 1999 and $0.4 million in fiscal
2000.
(11) The ratio of earnings to fixed charges has been determined by dividing
the total fixed charges into the sum of income before income taxes,
cumulative effect of change in method of accounting for start-up costs
and before minority interest and equity in net income (loss) of
unconsolidated affiliates and fixed charges. Fixed charges consist of
interest expense and one-third of rental expense, which we deem to be
a reasonable approximation of the interest factor of this expense.
(12) Excludes 33, 26, 19, 14 and 8 for new concept units opened at the end
of fiscal 2000, 1999, 1998, 1997 and 1996 respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements, the notes thereto and other data and information appearing
elsewhere in this report.
Results of Operations
Our fiscal year ends on the Sunday nearest to December 31. Our 1998
fiscal year, which ended on January 3, 1999, contained 53 weeks, while all other
reported fiscal years contained 52 weeks. As a result, our 1998 fiscal year
benefited from one additional week of operations. The additional week in fiscal
1998 produced revenues of $8.6 million, EBITDA of $2.7 million and net income of
$1.7 million. The going private transaction, including the purchase price
allocation and certain other related transactions described in the notes to the
consolidated financial statements, have affected the comparability of the
interest income, depreciation and amortization, interest expense and income tax
line items in our consolidated statements of operations for fiscal 2000 as
compared to fiscal 1999 and fiscal 1999 compared to fiscal 1998.
19
Fiscal 2000 Compared to Fiscal 1999
Our consolidated EBITDA for the fiscal year ended December 31, 2000 was
$78.7 million and our EBITDA margin was 19.7%, compared to $78.6 million and
20.2%, respectively, for the fiscal year ended January 2, 2000. EBITDA
represents earnings before cumulative effect of change in accounting method,
interest income, interest expense, taxes, depreciation and amortization. EBITDA
margin represents EBITDA divided by total revenues. EBITDA should not be
considered in isolation from, or as a substitute for, net income, cash flow from
operations or other cash flow statement data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity. Rather, EBITDA is presented because it is a widely
accepted supplemental financial measure, and we believe that it provides
relevant and useful information. Our calculation of EBITDA may not be comparable
to a similarly titled measure reported by other companies since all companies do
not calculate this non-GAAP measure in the same manner. Our EBITDA calculations
are not intended to represent cash provided by (used in) operating activities
since they do not include interest and taxes and changes in operating assets and
liabilities, nor are they intended to represent a net increase in cash since
they do not include cash provided by (used in) investing and financing
activities.
Restaurant sales from Sbarro-owned quick service units and consolidated
new concept units increased by $6.9 million or 1.8% to $382.4 million for fiscal
2000 from $375.5 million in fiscal 1999. Sales from new concept units
contributed $5.1 million of the increase in restaurant sales. Revenues from new
quick service units did not offset the loss of revenues from closed quick
service units as we closed two more units than we opened in 2000, including two
high volume units (one of which is being replaced in fiscal 2001). Comparable
Sbarro quick service unit sales increased 0.2% during fiscal 2000. Comparable
restaurant sales are made up of sales at locations that were open during the
entire current and prior fiscal year.
Franchise related income increased 29.3% to $11.2 million for the
fiscal year ended December 31, 2000 from $8.7 million for the fiscal year ended
January 2, 2000. The increase resulted from greater continuing royalties due to
a higher number of franchise units in operation, higher area development and
higher initial franchise fees in fiscal 2000 than in fiscal 1999, particularly
from international markets, and approximately $1.5 million recognized in fiscal
2000 related to the termination of our development agreement and the closing of
all Sbarro locations in Japan. In fiscal 2000, we entered into area development
agreements in specific domestic and international venues and markets with two
major food service operators. We believe these agreements will increase the rate
of future growth in our franchise operations.
Real estate and other revenues increased by $0.3 million to $5.8
million for the fiscal year ended December 31, 2000 from fiscal 1999 due to the
full year impact from leasing a majority of our corporate headquarters
building not occupied by Sbarro to third parties in 1999.
Cost of food and paper products as a percentage of restaurant sales
improved to 19.5% for fiscal 2000 from 20.2% in the 1999 fiscal year. This
improvement was primarily due to lower average cheese prices during fiscal 2000.
Cheese prices to date in the first quarter of fiscal 2001 have been higher than
comparable period in 2000.
Payroll and other employee benefits increased to 26.6% of restaurant
sales for the year ended December 31 2000 from 25.9% of restaurant sales in the
year ended January 2, 2000. This increase was primarily due to the tight labor
market, resulting in pressures on wages and salaries and associated increases in
amounts paid for payroll taxes.
20
Other operating expenses increased to 29.8% for fiscal 2000 from 28.9%
of restaurant sales for fiscal 1999 primarily due to increases in rent, utility
and other occupancy related expenses.
Depreciation and amortization expense increased by $3.3 million for
fiscal 2000 over fiscal 1999. Depreciation and amortization expense includes
$4.8 and $2.0 million in fiscal 2000 and 1999, respectively, for amortization
of the excess of the purchase price over the cost of net assets acquired in
connection with the completion of the going private transaction on September 28,
1999 representing a full year in 2000 compared to three months in 1999. In
fiscal 2000, we finalized our allocation of the purchase price from the going
private transaction based on an evaluation of our net assets at September 29,
1999 resulting in lower annual amoritzation expense than originally estimated.
General and administrative costs were $30.9 million, or 7.7% of total
revenues, for fiscal 2000, compared to $28.9 million, or 7.4% of total revenues,
for fiscal 1999. These increases were primarily due to higher payroll costs ,
costs incurred in expanding franchise and new concept operations and increases
in various professional fees, including litigation expenses. These expenses
include the cost of operating our corporate headquarters building.
The provision for unit closings is the result of a special allocation
of losses in fiscal 1999 of $1.0 million in connection with the final
disposition of two joint venture unit closings recorded in 1997.
Minority interest represents the share of the minority holders'
interests in the combined income in fiscal 2000 and combined loss in fiscal 1999
of the joint ventures in which we have a majority interest.
Interest expense of $30.2 million for fiscal 2000 relates to the 11%,
$255.0 million Senior Notes issued to finance our going private transaction on
September 28, 1999, the 8.4%, $16.0 million mortgage loan on our corporate
headquarters in 2000 and line fees for unused borrowing capacity under our
Credit Agreement. Results for fiscal 1999 included interest only from the date
of the going private transaction through the end of the 1999 fiscal year of $7.9
million for the Senior Notes and Credit Agreement line fees. Of these amounts,
$1.5 and $0.4 million for fiscal 2000 and 1999, respectively, represented
non-cash charges for the accretion of the original issue discount on our Senior
Notes and the amortization of deferred financing costs on the Senior Notes,
Credit Agreement and, in 2000, the mortgage loan.
Interest income was approximately $0.9 million and $3.8 million for the
fiscal years 2000 and 1999, respectively. We used substantially all of our
available cash on September 28, 1999 in order to fund the going private
transaction. Therefore, we had a substantial reduction in our interest income
for fiscal 2000. We will not realize the level of interest income as we have in
the past unless and until we rebuild our cash position.
21
Equity in the net income (loss) of unconsolidated affiliates represents
our share of earnings and losses in those new concepts in which the Company has
a 50% or less ownership interest.
We have elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code and, where applicable and permitted, under similar state
and local income tax provisions beginning January 3, 2000. As required by
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes", we recognized a $5.6 million credit associated with the reversal
of our deferred tax liabilities upon conversion to S corporation status in the
first quarter of fiscal 2000. Under the provisions of Subchapter S,
substantially all taxes on our income is now paid by our shareholders rather
than us. Our tax expense for the fiscal 2000 included $0.5 million for taxes
owed to jurisdictions that do not recognize S corporation status or that tax
entities based on factors other than income.
Fiscal 1999 Compared to Fiscal 1998
Our 1998 fiscal year benefited from one additional week of operations
compared to fiscal year. The additional week in fiscal 1998 produced revenues of
$8.6 million, EBITDA of $2.7 million and net income of $1.7 million.
Our consolidated EBITDA for our 1999 fiscal year, ended January 2,
2000, was $78.6 million and our EBITDA margin was 20.2%, compared to $74.4
million and 19.5%, respectively, for our 1998 fiscal year, ended January 3,
1999.
Restaurant sales from Sbarro-owned units and consolidated new concept
units increased $5.4 million or 1.5% to $375.5 million from $370.1 million in
the 1998 fiscal year. Sales from new concept units contributed $2.6 million of
the increase in restaurant revenues. Sales for 1998 included $8.6 million
generated in the 53rd week of the 1998 fiscal year. The increase in quick
service revenues resulted primarily from a higher number of units in operation
in fiscal 1999 than the comparable period in 1998 and selective menu price
increases of approximately 2.8%, 1.4% and .7% at Sbarro-owned units which became
effective in September 1999, September 1998 and February 1998, respectively.
Comparable unit sales increased 0.8% in the fiscal 1999 year from the first 52
weeks of the 1998 fiscal year primarily as a result of the menu price increases.
Comparable quick service restaurant sales are made up of sales at locations that
were open during the entire current and prior fiscal year.
Franchise related income increased 4.9% to $8.7 million in fiscal 1999
from $8.3 million in fiscal 1998. The increase resulted primarily from greater
continuing royalties due to a higher number of franchise units in operation in
fiscal 1999 than in the 1998 fiscal year partially offset by lower area
development and initial franchise fees in fiscal 1999.
Real estate and other revenues increased by $2.1 million to $5.5
million for the 1999 fiscal year compared to the 1998 fiscal year primarily as a
result of leasing a majority of our corporate headquarters building not
occupied by us to third parties.
22
Cost of food and paper products as a percentage of restaurant sales
improved to 20.2% for fiscal 1999 compared to 21.2% for the 1998 fiscal year.
This improvement was primarily due to lower average cheese prices during fiscal
1999 and the impact of the menu price increases described above.
Payroll and other benefits increased to 25.9% of restaurant sales in
fiscal 1999 from 25.2% of restaurant sales in fiscal 1998. This increase was
primarily due to the tight labor market, resulting in pressures on wages and
salaries and associated increases in amounts paid for payroll taxes.
Other restaurant operating expenses increased to 28.9% for fiscal 1999
from 27.8% of restaurant sales for fiscal 1998 primarily as a result of
increases in rent and other occupancy costs.
Depreciation and amortization expense increased by $2.9 million in
fiscal 1999 over fiscal 1998 primarily as a result of an increase in
depreciation and amortization of our new headquarters building that was
completed in the fourth quarter of fiscal 1998 and amortization of the excess of
the purchase price over the cost of net assets acquired in connection with the
going private transaction.
General and administrative costs were $28.9 million, or 7.4% of total
revenues, for the 1999 fiscal year, compared to $24.0 million, or 6.3% of total
revenues, for the 1998 fiscal year. The increase was primarily due to higher
payroll costs and costs associated with the administration of additional
Sbarro-owned restaurants, costs incurred in expanding joint venture operations,
higher litigation costs, increases in various field training and human resource
functions and costs associated with a full year of operations of our
headquarters building, which was completed during the fourth quarter of fiscal
1998.
Minority interests represent the share of the minority holders'
interests in the combined loss in fiscal 1999 and the combined income in fiscal
1998 of the joint ventures in which we have a majority interest.
Interest expense of $7.9 million in fiscal 1999 relates to the accrual
of interest, accretion of original issue discount and the amortization of
deferred financing charges with respect to the Senior Notes for the period
subsequent to their issuance on September 28, 1999 in financing the going
private transaction and the cost of the unused line of credit and the
amortization of deferred financing charges with respect to the bank credit
agreement entered into at that time.
The provision for unit closings is the result of a special allocation
of losses in fiscal 1999 of $1.0 million in connection with the final
disposition of two joint venture unit closings recorded in 1997. Results for
fiscal 1998 include one-time charges to operating income of $2.5 million before
tax, or $1.6 million after tax, for the closing of 20 Sbarro-owned restaurants
and $1.0 million before tax, or $0.6 million after tax, for costs associated
with the terminated negotiations of the initial going private proposal by the
Sbarro family. The 1998 fiscal year results also include a provision of $3.5
million before tax, or $2.2 million after tax, for costs associated with the
settlement approved and finalized in December 1998 of a lawsuit under the Fair
Labor Standards Act and a charge of $1.1 million before tax, or $0.7 million
after tax, for the difference between the carrying cost and proposed selling
price of a parcel of land sold by us.
23
Interest income was approximately $3.8 million for fiscal 1999 compared
to $5.1 million in fiscal 1998. We used substantially all of our available cash
in order to fund the going private transaction. Therefore, we generated a
minimal amount of interest income for the period from September 28, 1999, the
date of the going private transaction, to the end of the fiscal year.
Equity in the net income (loss) of unconsolidated affiliates represents
our share of earnings and losses in those new concepts in which the Company has
a 50% or less ownership interest.
The effective income tax rate was 39.6% and 38.0% for fiscal 1999 and
fiscal 1998, respectively. The increase in the effective income tax rate was
primarily a result of the non-deductible amortization expenses incurred as a
result of the going private transaction.
The cumulative effect of the change in method of accounting in fiscal
1998 resulted from Sbarro's implementation of Statement of Position 98-5 of the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants which required companies that had capitalized pre-opening and
similar costs to write off all those existing costs as a "cumulative effect of
accounting change" and to expense all those costs as incurred in the future. In
accordance with the early application provisions, we implemented SOP 98-5 as of
the beginning of our 1998 fiscal year and incurred a one-time charge of $0.9
million, net of an income tax benefit of $0.5 million, to write off all start-up
costs existing as of the beginning of that year.
Impact of Inflation and Other Factors
Food, labor, rent, construction and equipment costs are the items most
affected by inflation in the restaurant business. Although for the past several
years inflation has not been a significant factor, there can be no assurance
that this trend will continue. In addition, food and paper product costs may be
temporarily or permanently affected by weather, economic and other factors
beyond our control that may reduce the availability and increase the cost of
these items. Historically, the price of cheese has fluctuated more than our
other food ingredients and related restaurant supplies.
Seasonality
24
Seasonality
Our business is subject to seasonal fluctuations, and the effects of
weather and economic conditions. Earnings have been highest in our fourth fiscal
quarter due primarily to increased volume in shopping malls during the holiday
shopping season. Historically, the fourth fiscal quarter normally accounts for
approximately 40% of annual operating net income before the effect of additional
amortization associated with the going private transaction ("adjusted operating
income") and fluctuates due to the length of the holiday shopping period between
Thanksgiving and New Year's Day and the number of weeks in our fourth quarter.
Adjusted operating income for the fourth quarter of 2000 and 1999 would have
been approximately 37% and 39%, respectively, of adjusted operating income for
the respective fiscal year. The 1998 fiscal year, which contained 53 weeks, had
a 13 week fourth quarter. Excluding the impact of the thirteenth week, the
fourth quarter of fiscal 1998 would have accounted for 38% of our adjusted
operating income, which is consistent with the comparable prior year period.
Accounting Period
Our fiscal year ends on the Sunday nearest to December 31. The fiscal
year which ended on January 3, 1999 contained 53 weeks. All other reported
fiscal years contained 52 weeks.
Liquidity and Capital Resources
We have historically not required significant working capital to fund
our existing operations and have financed our capital expenditures and
investments in our joint ventures through cash generated from operations. At
December 31, 2000, we had unrestricted cash and cash equivalents of $42.3
million and working capital of $9.2 million compared to unrestricted cash and
cash equivalents of $33.8 million and a working capital deficiency of $1.9
million as of January 2, 2000.
As part of the going private transaction, we sold $255.0 million of 11%
Senior Notes (at a price of 98.514% of par to yield 11.25% per annum), the net
proceeds of which, together with substantially all of our then existing cash,
was used to finance the transaction, and entered into a $30.0 million Credit
Agreement. We have $26.9 million of undrawn availability under our Credit
Agreement, net of outstanding letters of credit and guarantees of reimbursement
obligations currently aggregating approximately $3.1 million.
Net cash provided by operating activities was $48.3 million and $62.3
million for the fiscal years ended December 31, 2000 and January 2, 2000,
respectively. The $14.0 million reduction was primarily due to a $22.3 million
increase in interest expense related to the issuance of our Senior Notes to
finance the going private transaction and the mortgage on our headquarters
building offset by the $5.6 million reversal of previously recorded net deferred
taxes as a result of our election to be treated as a Subchapter S corporation.
Net cash provided by operating activities before the change in accrued interest
payable and the reversal of deferred tax liabilities in 2000 upon conversion to
Subchapter S status was $53.5 and $54.8 million for fiscal 2000 and 1999,
respectively.
25
Net cash used in investing activities primarily relates to capital
expenditures, including investments made by our consolidated joint ventures. Net
cash used in investing activities was $31.1 million for 2000 compared $25.2
million for fiscal 1999.
Net cash used in financing activities was $8.6 million for the fiscal
year ended December 31, 2000 compared to $158.4 million of cash used by
financing activities for the comparable period in 1999. Cash used in financing
activities for fiscal 2000 resulted primarily from $22.1 million of
distributions to shareholders including tax distributions of $3.8 million (see
below) and a $2.0 million loan to our Chairman, President and CEO offset by
$15.6 million of net proceeds from a $16.0 million 8.4% ten year loan secured by
a mortgage on our corporate headquarters. Cash used in financing activities for
the comparable period of 1999 resulted primarily from $410.0 million of cash
used (net of accrued or previously paid going private costs) to pay the going
private consideration and related going private and financing costs offset, in
part, by approximately $251.2 million of net proceeds raised through the private
placement of the Senior Notes.
In March 2000, we elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code and, where applicable and permitted,
under similar state and local income tax provisions beginning January 3, 2000.
Under the provisions of Subchapter S, substantially all taxes on our income are
paid by our shareholders. We and our shareholders had a tax liability of
approximately 46% of our taxable income in 2000. This tax rate is higher than
our historical effective tax rate prior to 2000 due to (i) differences in tax
rates between individual and corporate taxpayers, (ii) the timing differences
previously accounted for as deferred taxes in our financial statements (which
deferred taxes were eliminated upon our conversion to S corporation status) and
(iii) the effect of double taxation in those state and local jurisdictions that
do not recognize S corporation status. The Indenture for the Senior Notes and
the Credit Agreement permit us to make distributions to shareholders for taxes
on our earnings. We made tax distributions of $3.8 million in fiscal 2000 and
$3.6 million in January 2001 and we expect to make an additional $4.0 million of
tax distributions in 2001 related to 2000 earnings.
We will incur annual cash interest expense of approximately $29.7
million under the Senior Notes and mortgage loan and may incur additional
interest expense for borrowings under our Credit Agreement. In addition to debt
service, we expect that our other liquidity needs will relate to capital
expenditures, working capital, investments in joint ventures, distributions to
shareholders as permitted under the Indenture for the Senior Notes and the
Credit Agreement and general corporate purposes. We expect our primary sources
of liquidity to meet these needs will be cash flow from operations and
availability under our Credit Agreement.
We believe that aggregate restaurant capital expenditures and our
investments in joint ventures during the next twelve months will be moderately
lower than levels in fiscal 2000. Unpaid capital expenditure commitments
aggregated approximately $4.6 million at December 31, 2000.
We do not have any principal repayment obligations under the Senior
Notes or our Credit Agreement until September 2009 and September 2004,
respectively. We were in compliance with the various covenants in the Indenture
for the Senior Notes, the Credit Agreement and the Mortgage as of December 31,
2000.
26
Recent Accounting Pronouncements
The Financial Accounting Standards Board issued SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities" as amended by SFAS No. 137
and SFAS No. 138, which is effective for fiscal years beginning after June 15,
2000. Presently, we do not use derivative instruments and therefore SFAS No.
133, while effective in fiscal 2001, is not currently applicable.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the recognition, presentation and disclosure
of revenues in financial statements and requires adoption no later than the
fourth quarter of fiscal 2001. The Company has evaluated the impact of SAB 101
and the interpretations thereunder and determined that it did not have a
material effect on the Company's consolidated financial position and results of
operations.
ITEM 7-A. QUALITATIVE AND QUANTITATIVE DISCLOSURES OF MARKET RISK
We have historically invested our cash on hand in short term, fixed
rate, highly rated and highly liquid instruments which are reinvested when they
mature throughout the year. The indenture under which our Senior Notes are
issued limits us to similar investments. Although our existing investments are
not considered at risk with respect to changes in interest rates or markets for
these instruments, our rate of return on short-term investments could be
affected at the time of reinvestment as a result of intervening events.
Our borrowings under our credit facility will be subject to
fluctuations in interest rates. However, we do not expect to enter into any
interest rate swaps or other instruments to hedge our borrowings under our
credit facility.
We have not purchased future, forward, option or other instruments to
hedge against fluctuations in the prices of the commodities we purchase. As a
result, our future commodities purchases are subject to changes in the prices of
such commodities.
All of our transactions with foreign franchisees have been denominated
in, and all payments have been made in, United States dollars, reducing the
risks attendant in changes in the values of foreign currencies. As a result, we
have not purchased future contracts, options or other instruments to hedge
against changes in values of foreign currencies.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sbarro, Inc.:
We have audited the accompanying consolidated balance sheets of Sbarro,
Inc. (a New York corporation) and subsidiaries as of December 31, 2000 and
January 2, 2000, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Sbarro, Inc. and
subsidiaries as of December 31, 2000 and January 2, 2000, and the results
of their operations and their cash flows for each of the three fiscal years
in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
New York, New York
March 29, 2001
28
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 2000 January 2, 2000
(In thousands except share date)
Current assets:
Cash and cash equivalents $42,319 $33,754
Restricted cash for untendered shares (Note 2) 153 298
Receivables, net of allowance for doubtful accounts
of $211 in 2000 and $419 in 1999
Franchise 1,350 1,429
Other 1,554 1,343
--------------- ------------
2,904 2,772
Inventories 3,531 3,717
Prepaid expenses 999 1,697
------------- ------------
Total current assets 49,906 42,238
Property and equipment, net (Note 4) 152,468 138,951
Excess of purchase price over the cost
of net assets acquired, net of accumulated
amortization of $2,000 (Notes 2 and 5) - 220,681
Intangible assets:
Franchise system and trademarks, net
(Notes 2 and 5) 201,044 432
Deferred financing costs and other,
net (Notes 2 and 5) 16,635 10,168
Loan receivable from officer (Note 10) 2,000 -
Other assets 6,502 5,073
------------ -------------
$428,555 $417,543
=========== ==========
29
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, 2000 January 2, 2000
----------------- ---------------
(In thousands except share data)
Current liabilities:
Amounts due for untendered shares (Note 2) $ 153 $ 298
Accounts payable 10,284 8,749
Accrued expenses (Note 6) 21,941 26,914
Accrued interest payable (Note 8) 8,181 7,480
Current portion of mortgage payable (Note 8) 130 -
Income taxes payable (Note 7) - 732
------------ ---------
Total current liabilities 40,689 44,173
Deferred rent 6,791 6,151
Deferred income taxes (Note 7) - 5,629
Long-term debt, net of original
issue discount (Note 8) 267,478 251,310
Commitments and contingencies (Note 9)
Shareholders' equity (Notes 2 and 12):
Preferred stock, $1 par value;
authorized 1,000,000 shares; none issued - -
Common stock, $.01 par value; authorized
40,000,000 shares; issued and outstanding
7,064,328 shares at December 31, 2000
and January 2, 2000 71 71
Additional paid-in capital 10 10
Retained earnings 113,516 110,199
--------- -------------
113,597 110,280
----------- -------------
$428,555 $417,543
============ ============
See notes to consolidated financial statements
30
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Fiscal Years Ended
Dec. 31, 2000 Jan. 2, 2000 Jan. 3, 1999
------------- ------------ ------------
(52 weeks) (52 weeks) (53 weeks)
(In thousands)
Revenues:
Restaurant sales $382,365 $375,514 $370,101
Franchise related income 11,231 8,688 8,284
Real estate and other 5,812 5,495 3,402
---------- ---------- ---------
Total revenues 399,408 389,697 381,787
Costs and expenses:
Restaurant operating expenses:
Cost of food and paper products 74,405 75,956 78,603
Payroll and other employee benefits 101,553 97,336 93,338
Other operating costs 114,122 108,599 102,927
Depreciation and amortization 29,039 25,712 22,784
General and administrative 30,882 28,854 23,999
Provision for unit closings (Note 11) - 1,013 2,515
Terminated transaction costs (Note 2) - - 986
Litigation settlement and related costs (Note 9) - - 3,544
Loss on land to be sold (Note 4) - - 1,075
------------- ------------ --------
Total costs and expenses 350,001 337,470 329,771
Operating income before minority interest 49,407 52,227 52,016
Minority interest (46) 266 (101)
---------- --------- ----------
Operating income 49,361 52,493 51,915
-------- ------- -------
Other (expense) income:
Interest expense (Note 8) (30,243) (7,899) -
Interest income 949 3,828 5,120
Equity in net income (loss) of
unconsolidated affiliates 303 423 (296)
--------- --------- --------
Net other (expense) income (28,991) (3,648) 4,824
-------- ------- -----
Income before income taxes and cumulative effect of
change in method of accounting for start-up costs 20,370 48,845 56,739
Income taxes (credit) (Note 7) (5,075) 19,322 21,547
------- ------ ------
Income before cumulative effect
of change in method of accounting 25,445 29,523 35,192
Cumulative effect of change in method of accounting
for start-up costs, net of income taxes of
$504 (Note 1) - - (858)
---------- ---------- ----------------
Net income $25,445 $29,523 $34,334
======= ======= =======
See notes to consolidated financial statements
31
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Number of Additional
shares of paid-in Retained
common stock Amount capital earnings Total
- -------------------------------------------- ------ ------- -------- ----------
(In thousands, except share data)
Balance at
December 29, 1997 20,446,654 $204 $32,444 $187,791 $220,439
Exercise of stock options 84,989 1 2,143 2,144
Net income 34,334 34,334
----------- --------- ------------ ---------- --------
Balance at
January 3, 1999 20,531,643 205 34,587 222,125 256,917
Exercise of stock options 17,337 - 426 - 426
Net income 29,523 29,523
Shares repurchased and
retired in going private
transaction (Note 2) (13,484,652) (134) (35,003) - (35,137)
Adjustment to original
cost basis of continuing
shareholders (Note 2) - - - (141,449) (141,449)
--------------- -------- --------- ----------- -----------
Balance at
January 2, 2000 7,064,328 71 10 110,199 110,280
Net income 25,445 25,445
Distributions to
shareholders - - - (22,128) (22,128)
--------------- -------- ----------- --------- --------
Balance at
December 31, 2000 7,064,328 $7l $10 $113,516 $113,597
========= === === ======== ========
See notes to consolidated financial statements
32
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended
December 31, January 2, January 3,
2000 2000 1999
---- ---- ----
(52 weeks) (52 weeks) (53 weeks)
(In thousands)
Operating activities:
Net income $25,445 $29,523 $34,334
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in method
of accounting for start-up costs - - 858
Depreciation and amortization 30,489 26,088 22,784
Increase (decrease) in deferred
income taxes - 710 (2,078)
Increase (decrease) in deferred rent, net 180 (107) 214
Provision for unit closings - 1,013 2,515
Loss on land to be sold - - 1,075
Minority interest 46 (266) 101
Equity in net (income) loss of
unconsolidated affiliates (303) (423) 296
Dividends received from
unconsolidated affiliates 156 - 75
Changes in operating assets and liabilities:
(Increase) decrease in receivables (132) 770 (1,147)
Decrease (increase) in inventories 186 (554) (163)
Decrease (increase) in prepaid expenses 698 (408) 488
Decrease (increase) in other assets 304 (2,898) (935)
(Decrease) increase in accounts payable
and accrued expenses (3,080) 2,762 1,413
Decrease in income taxes payable (732) (1,408) (631)
--------- ---------- ----------
Net cash provided by operating activities
before change in accrued interest payable and
effect of conversion to Subchapter S status 53,257 54,802 59,199
--
Change in deferred taxes due to conversion
to Subchapter S status (5,629) - -
Increase in accrued interest payable 701 7,480 -
-------- ------- ----------
Net cash provided by operating activities 48,329 62,282 59,199
------ ------ ------
(continued)
33
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Fiscal Years Ended
December 31, January 2, January 3,
2000 2000 1999
---- ---- ----
(52 weeks) (52 weeks) (53 weeks)
(In thousands)
Investing activities:
Purchases of property and equipment (31,193) (25,282) (28,213)
Proceeds from disposition of property
and equipment 35 55 52
Proceeds from maturities of marketable
securities - - 7,500
----------- ----------- -------
Net cash used in investing activities (31,158) (25,227) (20,661)
- ------- ------ -- ------
Financing activities:
Proceeds from mortgage 16,000 - -
Mortgage principal repayments (81) - -
Cost of mortgage (397) - -
Loan to officer (2,000) - -
Proceeds from long-term debt - 251,211 -
Cost of Merger and related financing - (411,000) -
Accrued and previously paid Merger costs - 1,007 -
Proceeds from exercise of stock options - 426 2,144
Distributions to shareholders (22,128) - (5,521)
--- --------- ------------- --------
Net cash used in financing activities (8,606) (158,356) (3,377)
------------- ---------- -- -----
Increase (decrease) in cash and cash
equivalents 8,565 (121,301) 35,161
Cash and cash equivalents at
beginning of year 33,754 155,055 119,894
---------- --------- ----------
Cash and cash equivalents at end of year $42,319 $33,754 $155,055
======= ======= ========
See notes to consolidated financial statements
34
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies:
Basis of financial statement presentation:
The consolidated financial statements include the accounts of Sbarro,
Inc., its wholly owned subsidiaries and the accounts of its
majority-owned joint ventures (together, "we", "our", "us", or
"Sbarro"). All significant intercompany accounts and transactions have
been eliminated. Minority interest includes the interests held by our
partners in certain of our majority-owned joint ventures. The minority
interests at the end of fiscal 2000 and 1999 were not material.
The preparation of our financial statements in conformity with
generally accepted accounting principles requires us to make estimates
and assumptions that may affect the amounts reported in the financial
statements and accompanying notes. Our actual results could differ from
those estimates.
Cash equivalents:
All highly liquid debt instruments with a maturity of three months or
less at the time of purchase are considered to be cash equivalents.
Inventories:
Inventories, consisting primarily of food, beverages and paper
supplies, are stated at cost, which is determined by the first-in,
first-out method.
Property and equipment:
Property and equipment are stated at cost, less accumulated
amortization and depreciation. Depreciation of equipment and
amortization of leasehold improvements is provided for by the
straight-line method over the estimated useful lives of the assets or
the lease term, whichever is shorter. One-half year of depreciation and
amortization is recorded in the year in which the restaurant commences
operations.
Intangible assets:
Intangible assets consist of our franchise system and trademarks,
goodwill and deferred financing costs. Franchise system and trademark
values and goodwill were determined based on an allocation of the
purchase price from the going private transaction (see Note 2)
35
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies (continued):
Intangible assets (continued):
and are being amortized on a straight line basis over 40 years.
Deferred financing costs were incurred as a result of the going private
transaction (see Note 2) and the mortgage on the corporate headquarters
building (see Note 8) and are being amortized as additional interest
expense over the respective lives of the related debt instrument.
Equity investments:
The Company accounts for its investments in 50% or less owned joint
ventures under the equity method of accounting. The equity in the net
income (loss) of these unconsolidated affiliates is recorded in the
accompanying consolidated statements of income.
Deferred charges:
We account for pre-opening and similar costs in accordance with
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up
Activities", of the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants, which required
companies to write off all such costs, net of tax benefit, as a
"cumulative effect of accounting change" upon our adoption of the SOP
and to expense all of those costs as incurred in the future. In
accordance with its early application provisions, we implemented the
SOP as of the beginning of our 1998 fiscal year which resulted in a
charge at that time of $1.4 million before tax, or $0.9 million after
tax.
Comprehensive income:
We observe the provisions of Statement of Financial Accounting
Standards ("SFAS") 130, "Reporting Comprehensive Income", which
establishes rules for the reporting of comprehensive income and its
components. The adoption of this statement had no impact on our net
income or shareholders' equity. For all years presented, our operations
did not give rise to items includible in comprehensive income which
were not already included in net income. Therefore, our comprehensive
income is the same as our net income for all periods presented.
36
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies (continued):
Franchise related income:
Initial franchise fees are recorded as income as restaurants are opened
by the franchisee and we have performed substantially all services.
Development fees are recognized over the number of restaurant openings
covered under each development agreement, with any remaining balance
recognized at the end of the term of the agreement. Royalty and other
fees from franchisees are accrued as earned. Revenues and expenses
related to construction of franchised restaurants are recognized when
contractual obligations are completed and the restaurants are opened.
Deferred rent:
The majority of our lease agreements provide for scheduled rent
increases during the lease term. Provision has been made for the excess
of operating lease rental expense over cash rentals paid, computed on a
straight-line basis over the lease terms.
Income taxes:
In March 2000, we elected to be taxed, beginning January 3, 2000, under
the provisions of Subchapter S of the Internal Revenue Code of 1986,
and, where applicable and permitted, under similar state and local
income tax provisions. With certain limited exceptions, we no longer
pay federal, state and local income taxes for periods for which we are
treated as an S corporation. Rather, our shareholders include their
pro-rata share of our taxable income on their individual income tax
returns and thus are required to pay taxes on their respective share of
our taxable income, whether or not it is distributed to them. We file a
consolidated federal income tax return for informational purposes.
Minority interest includes no provision or liability for income taxes
as any tax liability related to their interest is the responsibility of
the minority partners.
In accordance with SFAS No. 109, "Accounting for Income Taxes", we
reversed our net deferred taxes upon our conversion to S corporation
status. This resulted in a credit to income taxes of $5.6 million in
the first quarter fiscal 2000.
37
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies (continued):
Accounting period:
Our fiscal year ends on the Sunday nearest to December 31. Our 1998
fiscal year ended January 3, 1999 and contained 53 weeks. All other
reported fiscal years contained 52 weeks.
Long-lived assets:
Impairment losses are recorded on long-lived assets on a restaurant by
restaurant basis whenever impairment factors are determined to be
present, the undiscounted cash flows estimated to be generated by those
assets are less than the carrying value of such assets and events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Additionally, the Company periodically reviews the values
assigned to goodwill and other intangibles which resulted from the
going private transaction to determine if they have been permanently
impaired by adverse conditions.
Derivative instruments and hedging activities:
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended by SFAS No.
137 and SFAS No. 138, which is effective for fiscal years beginning after
June 15, 2000. Presently, we do not use derivative instruments and
therefore SFAS No. 133, while effective in fiscal 2001, is not currently
applicable.
Segment Reporting:
We have no material reportable segments under SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information", other than
our primary quick service restaurant business.
Reclassifications:
Certain items in the financial statements presented have been
reclassified to conform to the fiscal 2000 presentation.
38
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies (continued):
Supplemental disclosures of cash flow information:
For The Fiscal Years Ended
------------------------------------------------------------------------------------------------------------
December 31, January 2, January 3,
2000 2000 1999
---- ---- ----
(In thousands)
------------------------------------------------------------------------------------------------------------
Cash paid for:
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Income taxes $ 3,949 $20,129 $24,617
======== ======= =======
------------------------------------------------------------------------------------------------------------
Interest $28,104 $ 30 $ -
======= ======== ===============
2. Going private transaction:
On September 28, 1999, members of the Sbarro family (who prior thereto
owned approximately 34.4% of the Sbarro's common stock) became the
holders of 100% of our issued and outstanding common stock as a result
of a "going private" merger. The cost of the merger, including fees and
expenses, was funded through the use of substantially all of our then
cash on hand and the placement of $255.0 million of 11.0% Senior Notes
due September 15, 2009 sold at a price of 98.514% of par to yield
11.25% per annum. In April 2000, we exchanged these Senior Notes for
Senior Notes having the same terms, except that the new Senior Notes
("Senior Notes") were registered under the Securities Act of 1933. The
old senior notes and the Senior Notes were issued under an Indenture
dated September 28, 1999 (the "Indenture"). We also entered into a five
year, $30 million unsecured senior revolving bank credit facility under
a Credit Agreement dated as of September 23, 1999 (the "Credit
Agreement"). The Credit Agreement provides an unsecured senior
revolving credit facility which enables us to borrow, on a revolving
basis from time to time during its five-year term, up to $30.0 million,
including a $10.0 million sublimit for standby letters of credit. Our
payment obligations under the Senior Notes and the Credit Agreement are
jointly, severally, unconditionally and irrevocably guaranteed by all
of our current Restricted Subsidiaries (as defined in the Indenture)
and is to be similarly guaranteed by our future Restricted
Subsidiaries.
As of December 31, 2000, there was $0.2 million remaining on deposit
with a third party
39
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Going private transaction (continued):
paying agent for untendered shares to be redeemed as part of the merger
consideration. That amount is shown as restricted cash and amounts due for
untendered shares in the consolidated balance sheet. Funds for the
untendered shares are being returned to us to be held until claimed or
escheated to the appropriate jurisdictions.
In accordance with Emerging Issues Task Force Issue 88-16, "Basis in
Leveraged Buyout Transactions", the acquisition of all the outstanding
shares of common stock not owned by the Sbarro family and all
outstanding stock options have been accounted for under the purchase
method of accounting. As a result, the remaining shares of common stock
owned by the Sbarro family are presented in shareholder's equity at
their original basis in the accompanying consolidated balance sheet.
During fiscal 2000, we finalized an allocation of the purchase price
from the going private transaction based on an evaluation of the
Company at September 29, 1999. As a result, property and equipment and
intangible assets were increased by $7.0 million and $216.0 million,
respectively, and annual depreciation and amortization expense was
lower than originally estimated due to the allocation to assets with
different remaining useful lives (See Note 13).
All stock option plans that were in effect as of the date of the going
private transaction were terminated on September 29, 1999.
Summarized below are our unaudited pro forma results of operations for
the fiscal years ended January 2, 2000 and January 3, 1999 as if the
merger had taken place as of the beginning of that year.
Adjustments have been made for the amortization of the excess of the
purchase price over the cost basis of net assets acquired, interest
expense, including interest on the $16 million mortgage issued
subsequent to fiscal 1999 to one of the guaranteeing subsidiaries (Note
14) and related changes in income tax expense.
For the Fiscal Years Ended
January 2, 2000 January 3, 1999
--------------- ---------------
(In thousands)
Pro Forma:
Revenues $389,697 $381,787
======== ========
Income before cumulative
effect of accoun $ 6,662 $4,597
========== ======
Net incom $ 6,662 $3,767
========= ======
These pro forma results of operations are not necessarily indicative of
the actual results of
40
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Going private transaction (continued):
operations that would have occurred had the merger taken place at the
beginning of the periods presented or of results which may occur in the
future.
In connection with the termination of negotiations for the initial
proposal of our acquisition of all shares of common stock not owned by
such members of the Sbarro family, we recorded a charge of $1.0 million
before tax, or $0.6 million after tax, in fiscal 1998.
3. Description of business:
We and our franchisees develop and operate family oriented cafeteria
style Italian restaurants principally under the "Sbarro" and "Sbarro
The Italian Eatery" names. The restaurants are located throughout the
world, principally in shopping malls and other high traffic locations.
The following sets forth the number of restaurants in operation as of:
----------------------------- ---------------------- ---------------------- --------------------
December 31, January 2, January 3,
2000 2000 1999
---- ---- ----
----------------------------- ---------------------- ---------------------- --------------------
----------------------------- ---------------------- ---------------------- --------------------
----------------------------- ---------------------- ---------------------- --------------------
----------------------------- ---------------------- ---------------------- --------------------
Sbarro-owned (a) 636 638 624
----------------------------- ---------------------- ---------------------- --------------------
----------------------------- ---------------------- ---------------------- --------------------
Franchised 303 286 268
--- --- ---
----------------------------- ---------------------- ---------------------- --------------------
----------------------------- ---------------------- ---------------------- --------------------
939 924 892
=== === ===
(a) Excludes 33, 26, and 19 new concept units as of the end of the
respective fiscal years.
4. Property and equipment, net:
December 31, January 2,
2000 2000
---- ----
------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------(In thousands)-------------------------
Land and improvements (a) $ 3,781 $ 3,364
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Leasehold improvements 165,627 204,478
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Furniture, fixtures and equipment 78,237 112,087
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Construction-in-progress 717 3,157
------ -----
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
248,362 323,086
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Less accumulated depreciation and 95,894 184,135
------- -------
amortization (b)
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
$152,468 $138,951
======== ========
------------------------------------------------------------------------------------------------------
41
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Property and equipment, net (continued):
(a) During 1998, we recorded a charge of $1.1 million before tax,
$0.7 million after tax, for the difference between the
carrying cost and proposed selling price of a parcel of land
which is being offered for sale.
(b) Depreciation and amortization of property and equipment was
$24.0, $23.9 and $22.5 million in fiscal 2000, 1999 and 1998
respectively. In connection with the going private
transaction, an allocation of the purchase price resulted in
certain increases in the property and equipment, and changes
in accumulated depreciation and amortization during fiscal
2000. See Note 2.
5. Intangible assets:
--------------------------------------------------------------------------------------------------------
December 31, January 2,
2000 2000
---- ----
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
(In thousands)
--------------------------------------------------------------------------------------------------
Franchise system and trademarks $207,529 $560
Goodwill 8,520
Deferred financing costs 9,694 9,830
Other - 1,388
----------- -----
225,743 11,778
Less accumulated amortization 8,064 1,178
------- --------
$217,679 $10,600
6. Accrued expenses:
--------------------------------------------------------------------------------------------------------
December 31, January 2,
2000 2000
---- ----
(In thousands)
--------------------------------------------------------------------------------------------------
Compensation $5,265 $6,234
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Payroll and sales taxes 3,413 5,265
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Rent and related cost 3,625 2,438
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Provision for unit closings (Note 11) 50 863
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Other 9,588 12,114
----- ------
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
$21,941 $26,914
======= =======
7. Income taxes:
In March 2000, we elected to be taxed, beginning January 3, 2000, under
the provisions of Subchapter S of the Internal Revenue Code of 1986,
and, where applicable and permitted,
42
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income taxes (continued):
under similar state and local income tax provisions. With certain
limited exceptions, we no longer pay federal, state and local income
taxes for periods for which we are treated as an S corporation.
Rather, our shareholders include their pro-rata share of our taxable
income on their individual income tax returns and thus are required to
pay taxes on their respective share of our taxable income, whether or
not it is distributed to them.
In connection with the going private transaction and the related
financing, we have entered into a tax payment agreement with our
shareholders. The tax payment agreement permits us to make periodic tax
distributions to our shareholders in amounts that are intended to
approximate the income taxes, including estimated taxes, that would be
payable by our shareholders if their only income were their pro-rata
share of our taxable income and that income was taxed at the highest
applicable federal and New York State marginal income tax rates. We may
only make the tax distributions with respect to periods in which we are
treated as an S corporation for income tax purposes. We made
distributions to our shareholders in accordance with the tax payment
agreement of $3.8 million in fiscal 2000 and $3.6 million in January
2001 and estimate that an additional $4.0 million of distributions will
be made in 2001 related to 2000 earnings.
In accordance with SFAS No. 109, "Accounting for Income Taxes", we
reversed our net deferred taxes upon our conversion to S corporation
status. This resulted in a credit to income taxes of $5.6 million in
the first quarter of fiscal 2000.
-----------------------------------------------------------------------------------------------------------------
For the Fiscal Years Ended
December 31, January 2, January 3,
2000 2000 1999
---- ---- ----
(In thousands)
Federal:
Current $ - $14,758 $19,421
Deferred (4,589) 557 (2,209)
-------- ------- -------
(4,589) 15,315 17,212
------- ------ ------
State and local:
Current 554 3,854 4,708
Deferred (1,040) 153 (373)
-------- ------ ----
(486) 4,007 4,335
----- ------- -------
$(5,075) $19,322 $21,547
========= ======= =======
-----------------------------------------------------------------------------------------------------------
43
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income taxes (continued):
Deferred income taxes as of January 2, 2000 were comprised of the
following (in thousands):
Depreciation and amortization $11,097
------------------------------------------------------------
------------------------------------------------------------
Deferred charges 11
------------------------------------------------------------
------------------------------------------------------------
Other
495
------------------------------------------------------------
------------------------------------------------------------
Gross deferred tax liabilities 11,603
------
Accrued expenses (2,070)
-------------------------------------------------------------
-------------------------------------------------------------
Deferred income (3,496)
-------------------------------------------------------------
-------------------------------------------------------------
Other (408)
----
-------------------------------------------------------------
-------------------------------------------------------------
Gross deferred tax assets (5,974)
-------
--------------------------------------------------
$5,629
--------------------------------------------------
Actual tax expense differed from "expected" tax expense (computed by
applying the Federal corporate rate of 35% for the fiscal years ended
January 2, 2000, and January 3, 1999) as follows:
-----------------------------------------------------
For the Fiscal Years Ended
January 2, January 3,
2000 1999
---- ----
(In thousands)
Computed "expected" tax expense $17,096 $19,382
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal 2,605 2,725
income tax benefit
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Tax exempt interest income
and dividends received
deduction (1,002) (1,198)
Amortization of excess
purchase price over the cost
of net assets acquired 700 -
Other, net (77) 638
---- -----
$19,322 $21,547
======== =======
44
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income taxes (continued):
Deferred income taxes are provided for temporary differences between
financial and tax reporting. These differences and the amount of the
related deferred tax benefit are as follows (in thousands):
-------------------------------------------------------------------
For the Fiscal Years Ended
January 2, January 3,
2000 1999
---- ----
Depreciation and amortization $(408) $(1,824)
Accrued expenses 2,706 (624)
Other (1,588) 604
------- ---
$ 710 $(1,844)
8. Long-term debt:
(a) The cost of the merger, including fees and expenses, was funded
through the use of substantially all of our cash on hand and the
placement of $255 million of 11.0% senior notes due September 15, 2009
sold at a price of 98.514% of par to yield 11.25% per annum. In April
2000, we exchanged these senior notes for senior notes having the same
terms, except that the new senior notes ("Senior Notes") were
registered under the Securities Act of 1933. The old senior notes and
the Senior Notes were issued under an Indenture dated September 28,
1999 (the "Indenture").
Interest on the Senior Notes is payable semi-annually on March 15 and
September 15 of each year and commenced on March 15, 2000. Our payment
obligations under the Senior Notes are jointly, severally,
unconditionally and irrevocably guaranteed by all of Sbarro's current
Restricted Subsidiaries (as defined in the Indenture) and is to be
similarly guaranteed by our future Restricted Subsidiaries. The Senior
Notes and the subsidiary guarantees are senior unsecured obligations of
Sbarro and the guaranteeing subsidiaries, respectively, ranking pari
passu in right of payment to all of our and their respective present
and future senior debt, including amounts outstanding under the bank
credit agreement discussed below. The Indenture permits redemption of
the Senior Notes at our option at varying redemption prices and
requires us to offer to purchase Senior Notes in the event of a Change
of Control and in connection with certain Asset Sales (each as
defined). The Indenture contains various covenants on our part and the
guarantor subsidiaries, including, but not limited to, restrictions on
our payment of dividends, stock repurchases, certain investments and
other restricted payments, the incurrence of indebtedness and liens on
our assets, affiliate transactions, asset sales and mergers. We were in
compliance with the various covenants contained in the Indenture as of
December 31, 2000.
45
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Long-term debt (continued):
The discount at which the Senior Notes were issued, an aggregate of
approximately $3.8 million, is being accreted to the Senior Notes over
the original ten year life of the Senior Notes.
(b) On September 23, 1999, we entered into a Bank Credit Agreement (the
"Credit Agreement") which provides us with an unsecured senior
revolving credit facility that enables us to borrow, on a revolving
basis from time to time during its five-year term, up to $30 million,
including a $10 million sublimit for standby letters of credit. No
amounts were outstanding under the credit facility as of December 31,
2000.
Each of our current guaranteeing subsidiaries (the same entities as the
Restricted Subsidiaries under the Indenture) have agreed to, and the
future guaranteeing subsidiaries are to, unconditionally and
irrevocably guarantee our obligations under the Credit Agreement on a
joint and several basis. All borrowings under the Credit Agreement are
repayable on September 28, 2004. In addition, we will be required to
repay our loans and reduce the lenders' commitments under the Credit
Agreement using the proceeds of certain asset sales and issuances of
certain equity interests of, and sales of equity interests in, the
guaranteeing subsidiaries.
At our option, the interest rates applicable to loans under the Credit
Agreement will be at either (i) the bank's prime rate (8.0% at March
28, 2001) plus a margin ranging from zero to 0.75% (the margin at March
28, 2001 was 0.50%) or (ii) reserve adjusted LIBOR (5.05% at March 28,
2001) plus a margin ranging from 1.5% to 2.5% (the margin at March 28,
2001 was 2.25%). In each case, the margin depends upon the ratio of our
senior debt (as defined) to its earnings before interest, taxes and
depreciation and amortization ("EBITDA"). We have agreed to pay certain
fees in connection with the Credit Agreement, including an unused
commitment fee at a rate per year that will vary from 0.25% of the
undrawn amount of the facility to 0.45% of the undrawn amount of the
facility per year, depending upon the ratio of our senior debt to
EBITDA. The unused commitment fee at March 28, 2001 was 0.40% per year.
The Credit Agreement contains various covenants on our part and on the
part of the guaranteeing subsidiaries, including, but not limited to,
restrictions on the payment of dividends and making stock repurchases,
certain investments and other restricted payments, the incurrence of
indebtedness, guarantees, other contingent obligations, liens on
assets, affiliate transactions, asset sales and mergers, consolidations
and acquisitions of stock or
46
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Long-term debt (continued):
assets by us and our guaranteeing subsidiaries. The Credit Agreement
also contains provisions which, under certain circumstances, prohibit
redemptions or repurchases of the Senior Notes, including repurchases
that might otherwise be required pursuant to the terms of the
Indenture, and imposes certain conditions on our amending or
supplementing the Indenture. In addition, we are required to maintain a
minimum ratio of consolidated EBITDA to consolidated interest expense
(in each case with the guaranteeing subsidiaries) of at least 2.0 to
1.0 and a ratio of consolidated senior debt to consolidated EBITDA (in
each case with the guaranteeing subsidiaries) ranging from 4.3 to 1.0
through December 29, 2001, 4.1 to 1 thereafter through December 28,
2002 and 3.9 to 1.0 beginning December 29, 2002. We were in compliance
with the various covenants contained in the Credit Agreement as of
December 31, 2000.
(c) In March 2000, one of our Restricted Subsidiaries obtained a $16.0
million, 8.4% loan due in 2010, secured by a mortgage on our corporate
headquarters building. The loan is payable in monthly installments of
principal and interest of $0.1 million. The balance as of December 31,
2000 was $15.9 million. The mortgage agreement contains various
covenants including a requirement that the Restricted Subsidiary
maintain a minimum ratio of EBITDA to annual and quarterly debt service
of at least 1.2 to 1.0. We were in compliance with the various
covenants contained in the mortgage agreement as of December 31, 2000.
Scheduled maturities of long-term debt are as follows (in thousands):
Fiscal years ending:
December 30, 2001 $130
December 29, 2002 141
December 28, 2003 155
January 2, 2005 168
January 1, 2006 182
Later years 270,142
-------
270,918
Less:
Current maturities (130)
Unaccreted original issue discount (3,310)
-------------
$267,478
47
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Commitments and contingencies:
Commitments:
We conduct all of our operations in leased facilities. Most of our
restaurant leases provide for the payment of base rents plus real
estate taxes, utilities, insurance, common area charges and certain
other expenses, as well as contingent rents generally ranging from 8%
to 10% of net restaurant sales in excess of stipulated amounts.
Rental expense under operating leases, including common area charges,
other expenses and additional amounts based on sales, were as follows:
For the Fiscal Years Ended
December 31, January 2, January 3,
2000 2000 1999
---- ---- ----
(In thousands)
Minimum rentals $50,070 $47,627 $44,358
Common area charges 14,819 14,002 13,557
Contingent rentals 4,827 4,567 4,363
---------- --------- ---------
$69,716 $66,196 $62,278
======= ======= =======
Future minimum rental and other payments required under non-cancelable
operating leases for our restaurants that were open on December 31,
2000 and the existing leased administrative and support function office
(Note 10) are as follows (in thousands):
Fiscal Years Ending:
December 30, 2001 $75,146
December 29, 2002 73,525
December 28, 2003 70,401
January 2, 2005 67,135
January 1, 2006 63,562
Later years $239,351
We are the principal lessee under operating leases for certain
franchised restaurants which are subleased to the franchisee.
Franchisees pay rent and related expenses directly to the landlord.
Future minimum rental payments required under these non-cancelable
operating
48
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Commitments and contingencies:
Contingencies (continued):
leases for franchised restaurants that were open as of December 31,
2000 are as follows (in thousands):
Fiscal Years Ending:
December 30, 2001 $1,674
December 29, 2002 1,384
December 28, 2003 1,258
January 2, 2005 1,114
January 1, 2006 889
Later years $2,360
-
As of March 28, 2001, future minimum rental payments required under
non-cancelable operating leases for restaurants which had not as yet
opened as of December 31, 2000 are as follows (in thousands):
Fiscal Years Ending:
December 30, 2001 $1,880
December 29, 2002 3,257
December 28, 2003 3,854
January 2, 2005 3,959
January 1, 2006 3,986
Later years $25,519
We are a party to contracts aggregating $12.8 million with respect to
the construction of restaurants. Payments of approximately $8.2 million
have been made on those contracts as of December 31, 2000.
We are the guarantor of $3.1 million of letters of credit and up to
$8.9 million for loans, a mortgage and a line of credit for certain of
our joint ventures.
Contingencies:
In February 1999, the Umberto of New Hyde Park joint venture companies,
in which we have an 80% interest, began an action in the U.S. District
Court for the Eastern District of New York against Umberto Corteo, who
owns the remaining 20% interest in the joint venture companies, and
against three other restaurants owned by Mr. Corteo. We alleged,
49
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Commitments and contingencies:
Contingencies (continued):
among other things, that Mr. Corteo engaged in unfair trade practices
and in trademark infringement, thereby breaching the joint venture
agreements. We were seeking an accounting, compensatory and punitive
damages and injunctive relief. The answer filed by Mr. Corteo and his
co-defendants denied our claims and further alleged that
non-competition restrictions against Mr. Corteo in the joint venture
agreements are unenforceable. Mr. Corteo and his co-defendants had also
counterclaimed against us alleging misappropriation of trademark rights
and failure to perform administrative duties that amounted to a breach
of the agreements. In March 2001, we acquired the 20% interest owned in
this venture by Mr. Corteo in final settlement of this litigation. The
terms of the settlement agreement do not have a material impact upon
either our financial condition or results of operations.
On November 17, 1999, an action was instituted against us in which the
plaintiffs allege that they served as store managers, general managers,
assistant managers or co-managers in our restaurants in the State of
Washington at various times since November 17, 1996 and that, in
connection with their employment, we violated the overtime pay
provisions of the State of Washington's Minimum Wage Act by treating
them as overtime exempt employees, breached alleged employment
agreements and statutory provisions by failing to record and pay for
hours worked at the contract rates and/or statutory minimum wage rates
and failed to provide statutorily required meal breaks and rest
periods. The plaintiffs represent substantially all of our restaurant
managers employed for any period of time on or after November 9, 1996
in the State of Washington. We currently own and operate 18 restaurants
in the State of Washington. The plaintiffs seek actual damages,
exemplary damages and costs of the lawsuit, including reasonable
attorney's fees, each in unspecified amounts, and injunctive relief. A
settlement agreement has been approved by the court for approval and
will not have a material impact upon either our financial condition or
results of operations.
On December 20, 1999, twelve current and former general managers of
Sbarro restaurants in California amended a complaint filed in the
Superior Court of California for Orange County. The complaint alleges
that the plaintiffs were improperly classified as exempt employees
under the California wage and hour law. The plaintiffs are seeking
actual damages, punitive damages and costs of the lawsuit, including
reasonable attorney's fees, each in unspecified amounts. Plaintiffs
filed a motion to certify the lawsuit as a class action, but the motion
was denied by the court. We believe that we have substantial defenses
to the claims and are vigorously defending this action.
50
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Commitments and contingencies:
Contingencies (continued):
On September 6, 2000, eight other current and former general managers
of Sbarro restaurants in California filed a complaint against Sbarro in
the Superior Court of California for Orange County alleging that the
plaintiffs were improperly classified as exempt employees under
California wage and hour law. Plaintiffs are represented by the same
counsel who is representing the plaintiffs in the case discussed in the
preceding paragraph. We believe that we have substantial defenses to
the claims and are vigorously defending this action.
From time to time, we are a party to certain claims and legal
proceedings in the ordinary course of business, none of which, in our
opinion, would have a material adverse effect on our financial position
or results of operations.
10. Transactions with related parties:
We are the sole tenant of an administrative office building which is
leased from a partnership owned by certain of Sbarro's shareholders.
For each of the 2000, 1999 and 1998 fiscal years, the annual rent paid
pursuant to the sublease was $0.3 million. The annual rent payable
pursuant to the sublease is $0.3 million each year for the remainder of
the lease term which expires in 2011. In addition, we are obligated to
pay real estate taxes, utilities, insurance and certain other expenses
for the facility. We believe that our rent is comparable to the rent
that would be charged by an unaffiliated third party.
In April 2000, we loaned our Chairman, President and Chief Executive
Officer, $2.0 million, pursuant to a note due on April 4, 2002 bearing
interest at 6.46%, payable annually.
On January 2 and 3, 2001, we loaned three executive officers and
directors, Mario, Anthony and Joseph Sbarro, $200,000, $300,000 and
$200,000, respectively, which loans were repaid on January 15, 2001
with interest at our bank's prime rate in effect at that time.
A member of our Board of Directors acts as a consultant to us for which
he received $0.3 million, $0.5 million and $0.1 million in the 2000,
1999 and 1998 fiscal years, respectively.
51
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Provision for unit closings:
In connection with the final disposition of two joint venture units
closings recorded in fiscal 1997, we agreed to a special allocation of
losses which resulted in an additional $1.0 million charge before tax,
or $0.6 million after tax, to earnings in fiscal 1999.
A provision for restaurant closings of $2.5 million before tax, or $1.6
million after tax, was established in fiscal 1998 relating to the
closing of 20 restaurant locations.
12. Dividends:
During 2000, we made distributions to our shareholders totaling $22.1
million including $3.8 million for taxes pursuant to the tax payment
agreement described in Note 7.
13. Quarterly financial information (unaudited):
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands)
Fiscal year 2000
Revenues $111,423 $88,306 $91,562 $108,118
Gross profit (a) 86,028 67,036 70,324 84,572
Net income (b) 5,194 1,447 2,446 16,358
=========== ======= ======== ========
Fiscal year 1999
Revenues $106,942 $83,534 $91,456 $107,765
Gross profit (a) 81,345 64,213 69,570 84,430
Net income (b) 6,912 6,234 7,563 8,814
========== ========== ========= ==========
(a) Gross profit represents the difference between restaurant sales and
the cost of food and paper products.
(b) See Notes 2 and 11 for
information regarding unusual charges in the fourth quarter of fiscal
2000 and 1999. See Note 7 regarding a $5.6 million credit to income
tax expense upon conversion to an S Corporation in the first quarter
of
52
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Quarterly financial information (unaudited) (continued):
2000. See Note 2 regarding a reduction of $2.4 million of depreciation and
amortization recorded in the fourth quarter of 2000 upon finalization of
the purchase price allocation from the going private transaction.
14. Guarantor and non-guarantor financial statements:
Certain subsidiaries have guaranteed amounts outstanding under the
Senior Notes and Credit Agreement. Each of the guaranteeing
subsidiaries is our direct or indirect wholly owned subsidiary and each
has fully and unconditionally guaranteed the Senior Notes and the
Credit Agreement on a joint and several basis.
The following condensed consolidating financial information presents:
(1) Condensed consolidating balance sheets as of December 31, 2000
and January 2, 2000 and related statements of income and cash
flows for the fiscal years ended December 31, 2000, January 2,
2000 and January 3, 1999 of (a) Sbarro, Inc., the parent,
(b) the guarantor subsidiaries as a group, (c) the
nonguarantor subsidiaries as a group and (d) the Company on a
consolidated basis.
(2) Elimination entries necessary to consolidate Sbarro, Inc., the parent,
with the guarantor and nonguarantor subsidiaries.
(3) Investments in subsidiaries are accounted for by the parent on the
cost method.
The principal elimination entries eliminate intercompany balances and
transactions.
53
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guarantor and non-guarantor financial statements (continued):
Consolidating Balance Sheet
As of December 31, 2000
ASSETS
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Current assets:
Cash and cash equivalents $36,963 $4,232 $1,124 $42,319
Restricted cash for untendered
shares 153 - - 153
Receivables less allowance for
doubtful accounts of $211:
Franchise 1,350 - - 1,350
Other 1,111 370 103 ($30) 1,554
------- -------- ------- -------- -------
2,461 370 103 (30) 2,904
Inventories 1,459 1,763 309 - 3,531
Prepaid expenses 836 136 27 - 999
------- ------ ------ -------- -------
Total current assets 41,872 6,501 1,563 (30) 49,906
Intercompany receivables 20,318 195,470 - (215,788) -
Investment in subsidiaries 65,469 - - (65,469) -
Property and equipment, net 45,486 88,026 18,956 - 152,468
Intercompany receivables -
long term 3,558 - - (3,558) -
Intangible assets:
Franchise system and trademarks,
net 201,044 - - - 201,044
Deferred financing costs and
other, net 16,262 373 - - 16,635
Loan receivable from officer 2,000 - - - 2,000
Other assets 10,788 52 (534) (3,804) 6,502
---------- ------------ ----------- --------- -------
$406,797 $290,422 $ 19,985 ($288,649) $428,555
======== ======== ======== ========== ========
54
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guarantor and non-guarantor financial statements (continued):
Consolidating Balance Sheet
As of December 31, 2000
LIABILITIES AND SHAREHOLDERS EQUITY
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Current liabilities:
Amounts due for
untendered shares $153 $153
Accounts payable 9,593 $135 $556 10,284
Accrued expenses 20,025 (1,094) 3,010 21,941
Accrued interest payable 8,181 - - 8,181
Current portion of
mortgage payable - 130 - - 130
--------- ------ --------- --------- -----
Total current liabilities 37,952 (829) 3,566 - 40,689
Intercompany payables 195,470 - 20,318 ($215,788) -
Deferred rent 6,791 - - - 6,791
Long-term debt, net of
original issue discount 251,689 15,789 - - 267,478
Intercompany payables - long term - 3,558 - (3,558) -
Shareholders' equity (deficit):
Preferred stock, $1 par value;
authorized 1,000,000 shares;
none issued - - - - -
Common stock, $.01 par value:
authorized 40,000,000 shares;
issued and outstanding
7,064,328 shares 71 - - - 71
Additional paid-in capital 10 65,469 2,507 (67,976) 10
Retained earnings (deficit) (85,186) 206,435 (6,406) (1,327) 113,516
--------- --------- --------- --------- --------
(85,105) 271,904 (3,899) (69,303) 113,597
--------- --------- --------- --------- --------
$406,797 $290,422 $19,985 ($288,649) $428,555
========= ========= ======== =========== =========
55
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guarantor and non-guarantor financial statements (continued):
Consolidating Balance Sheet
As of January 2, 2000
ASSETS
Guarantor Nonguarantor Consolidated
Current assets: Parent Subsidiaries Subsidiaries Eliminations Total
------ ------------ ------------ ------------ -----
Cash and cash equivalents $27,853 $4,391 $1,510 $33,754
Restricted cash for untendered
shares 298 - - 298
Receivables less allowance for
doubtful accounts of $419
Franchise 1,429 - - 1,429
Other 1,280 16 77 ($30) 1,343
-------- -------- -------- ----------- ---------
2,709 16 77 (30) 2,772
Inventories 1,594 1,963 160 - 3,717
Prepaid expenses 2,013 (377) 61 - 1,697
------- -------- -------- ----------- -------
Total current assets 34,467 5,993 1,808 (30) 42,238
Intercompany receivables 13,258 172,769 - (186,027) -
Investment in subsidiaries 66,237 - - (66,237) -
Property and equipment, net 47,570 82,216 9,165 - 138,951
Intercompany receivables
- long term 19,897 - - (19,897) -
Excess of purchase price over the
cost of net assets acquired, net 220,681 - - - 220,681
Intangible assets:
Franchise system and trademarks,
net 432 - - - 432
Deferred financing costs and other,
net 10,168 10,168
Other assets 6,263 706 (125) (1,771) 5,073
----- --- ----- --------- --------
$418,973 $261,684 $10,848 $(273,962) $417,543
========= ========= ======== =========== =========
56
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guarantor and non-guarantor financial statements (continued):
Consolidating Balance Sheet
As of January 2, 2000
LIABILITIES AND SHAREHOLDERS EQUITY
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Current liabilities:
Amounts due for
untendered shares $298 $298
Accounts payable 8,013 $296 $440 8,749
Accrued expenses 25,452 (348) 1,810 26,914
Accrued interest payable 7,480 - - 7,480
Income taxes 984 (180) (72) 732
------- --------- --------------------- --------
Total current liabilities 42,227 (232) 2,178 - 44,173
Intercompany payables 172,769 - 13,258 ($186,027) -
Deferred rent 6,151 - - - 6,151
Deferred income taxes 5,629 - - - 5,629
Long-term debt, net of
original issue discount 251,310 - - - 251,310
Intercompany payables - long term - 19,897 - (19,897) -
Shareholders' equity (deficit):
Preferred stock, $1 par value;
authorized 1,000,000 shares;
none issued - - - - -
Common stock, $.01 par value:
authorized 40,000,000 shares;
issued and outstanding
7,064,328 shares 71 - - - 71
Additional paid-in capital 10 66,238 1,800 (68,038) 10
Retained earnings (deficit) (59,194) 175,781 (6,388) - 110,199
---------- --------- --------- ------------ ----------
(59,113) 242,019 (4,588) (68,038) 110,280
---------- --------- ---------- ---------- ---------
$418,973 $261,684 $10,848 (273,962) $417,543
========= ======== ======== ========== ========
57
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guarantor and non-guarantor financial statements (continued):
Consolidating Statement of Income
For the fiscal year ended December 31, 2000
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Revenues:
Restaurant sales $163,903 $194,797 $23,665 $382,365
Franchise related income 11,231 - - 11,231
Real estate and other 3,161 3,490 - ($839) 5,812
Intercompany charges - 16,991 - (16,991) -
------------ -------- ----------- --------- -------------
Total revenues 178,295 215,278 23,665 (17,830) 399,408
------- ------- ------ ------- -------
Costs and expenses:
Restaurant operating expenses:
Cost of food and paper
products 28,760 39,186 6,459 - 74,405
Payroll and other
employee benefits 39,571 53,671 8,311 - 101,553
Other operating costs 46,929 60,667 6,526 - 114,122
Depreciation and
amortization 14,894 13,112 1,033 - 29,039
General and administrative 18,173 12,497 1,051 (839) 30,882
Intercompany charges 16,991 - - (16,991) -
------ --------- ---------- --------- ----------
Total costs and expenses 165,318 179,133 23,380 (17,830) 350,001
-------- --------- -------- ----------- ------------
Operating income before
minority interest 12,977 36,145 285 - 49,407
Minority interest - - (46) - (46)
---------- ---------- -------- ---------- --------
Operating income 12,977 36,145 239 - 49,361
Other (expense) income:
Interest expense (29,244) (999) (1,612) 1,612 (30,243)
Interest income 2,561 - - (1,612) 949
Equity in net income
of unconsolidated
affiliates 303 - - - 303
-------- ------------ ------------ ------------- ------
Net other (expense) income (26,380) (999) (1,612) - (28,991)
Income (loss) before income
taxes (13,403) 35,146 (1,373) - 20,370
Income taxes (benefit) (5,790) 743 (28) - (5,075)
---------- ------- --------- ---------- --------
Net income (loss) $(7,613) $34,403 $(1,345) $ - $25,445
========== ======== ======== ========== ==========
58
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guarantor and non-guarantor financial statements (continued):
Consolidating Statement of Income
For the fiscal year ended January 2, 2000
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Revenues:
Restaurant sales $162,770 $194,105 $18,639 $375,514
Franchise related income 8,688 - - 8,688
Real estate and other 2,659 2,913 (77) 5,495
Intercompany charges - 19,864 - $(19,864) -
------------- ----------- ----------- ---------- ------------
Total revenues 174,117 216,882 18,562 (19,864) 389,697
-------- --------- ------- ---------- -------
Costs and expenses:
Restaurant operating expenses:
Cost of food and paper
products 30,297 40,871 4,788 - 75,956
Payroll and other
employee benefits 42,844 48,509 5,983 - 97,336
Other operating costs 43,198 60,325 5,076 - 108,599
Depreciation and amortization 12,210 12,703 799 - 25,712
General and administrative 14,548 12,393 1,913 - 28,854
Provision for store closing - - 1,013 - 1,013
Intercompany charges 19,864 - - (19,864) -
-------- ------------ -------- ---------- -----------
Total costs and expenses 162,961 174,801 19,572 (19,864) 337,470
------- ------- -------- -------- ----------
Operating income (loss) before
minority interest 11,156 42,081 (1,010) - 52,227
Minority interest - - 266 - 266
----------- ---------- ------ -------- --------
Operating income (loss) 11,156 42,081 (744) - 52,493
Other (expense) income:
Interest expense (7,899) - (997) 997 (7,899)
Interest income 4,825 - - (997) 3,828
Equity in net income
of unconsolidated
affiliates 423 - - - 423
--------- ------------ ------------ ------------- ---------
Net other (expense) income (2,651) - (997) - (3,648)
------- ------------ -------- ------------- -------
Income (loss) before
income taxes 8,505 4 2,081 (1,741) - 48,845
Income taxes 3,365 16,646 (689) - 19,322
-------- ------- --------- ----------- --------
Net income (loss) $5,140 $25,435 $(1,052) $ - $29,523
======= ======= ========== ========== =======
59
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guarantor and non-guarantor financial statements (continued):
Consolidating Statement of Income
For the fiscal year ended January 3, 1999
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Revenues:
Restaurant sales $162,390 $192,127 $15,584 $370,101
Franchise related income 8,284 - - 8,284
Real estate and other 3,070 863 (531) 3,402
Intercompany charges - 21,176 - ($21,176) -
--------- ------------ -------- --------- ----------
Total revenues 173,744 214,166 15,053 (21,176) 381,787
--------- ---------- ------- --------- ---------
Costs and expenses:
Restaurant operating expenses:
Cost of food and paper products 32,279 42,279 4,045 - 78,603
Payroll and other employee benefits 38,192 50,398 4,748 - 93,338
Other operating costs 42,573 55,812 4,542 - 102,927
Depreciation and amortization 9,875 12,239 670 - 22,784
General and administrative 13,548 9,995 456 - 23,999
Provision for unit closings 2,515 - - - 2,515
Terminated transaction costs 986 - - - 986
Litigation settlement and related costs 3,544 - - - 3,544
Loss on land to be sold 1,075 - - - 1,075
Intercompany charges 21,176 - - (21,176) -
--------- ---------- ---------- ----------- -------
Total costs and expenses 165,763 170,723 14,461 (21,176) 329,771
--------- ---------- -------- -------- ---------
Operating income before
minority interest 7,981 43,443 592 - 52,016
Minority interest - - (101) - (101)
----------- ----------- ------- --------- -----
Operating income 7,981 43,443 491 - 51,915
-------- ------- ------- --------- --------
Other (expense) income:
Interest expense - - - - -
Interest income 5,120 - - - 5,120
Equity in net loss of
unconsolidated affiliates (296) - - - (296)
--------- ------------ ----------- ------------- -----------
Net other income 4,824 - - - 4,824
------- ------------ ----------- ------------- --------
Income before income taxes and cumulative
effect of change in method of accounting
for start-up costs 12,805 43,443 491 - 56,739
Income taxes (benefit) 4,813 16,509 225 - 21,547
---------- --------- --------- -------- --------
Income before cumulative change of
change in accounting method 7,992 26,934 266 - 35,192
Cumulative change in method of
accounting for start-up costs,
net of income taxes of $504 (682) - (176) - (858)
----------- ----------- ----------- ---------- -----------
Net income $7,310 $26,934 $90 $ - $34,334
======== ======= =========== ========= ========
60
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guarantor and non-guarantor financial statements (continued):
Consolidating Statement of Cash Flows
For the fiscal year ended December 31, 2000
Guarantor Nonguarantor Consolidated
Operating activities: Parent Subsidiaries Subsidiaries Eliminations Total
Net income (loss) ($7,613) $34,403 $(1,345) $ - $25,445
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 17,324 12,131 1,034 - 30,489
Increase in deferred rent, net 180 - - - 180
Minority interest - - 46 - 46
Equity in income of
unconsolidated affiliates (303) - - - (303)
Dividends received from
unconsolidated affiliates 156 - - - 156
Changes in operating assets
and liabilities:
Decrease(increase)in
receivables 248 (354) (26) - (132)
Decrease (increase) in
inventories 134 201 (149) - 186
Decrease (increase)in
prepaid expenses 1,177 (513) 34 - 698
(Increase) decrease in
other assets (9,441) 242 2,443 7,060 304
(Increase) decrease in accounts
(Decrease) increase in accounts
payable and accrued expenses (3,912) (438) 1,270 - (3,080)
(Decrease) increase in
income taxes payable (985) 180 73 - (732)
--------- --------- ------- ----------- -------
Net cash (used in) provided by operating
activities before change in accrued
interest payable and effect of
conversion to Subchapter S status(3,035) 45,852 3,380 7,060 53,257
Change in deferred taxes due to
Subchapter S conversion (5,629) - - - (5,629)
Increase in accrued interest payable 701 - - - 701
--------- ---------- --------- --------- --------
Net cash (used in) provided by
operating activities (7,963) 45,852 3,380 7,060 48,329
Investing activities:
Purchases of property and equipment (7,628) (12,740) (10,825) - (31,193)
Proceeds from disposition of
property and equipment 35 - - - 35
--------- ------------- ------------- ------------- ---------
Net cash used in investing
activities (7,593) (12,740) (10,825) - (31,158)
------- -------- -------- ------------- --------
61
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guarantor and non-guarantor financial statements (continued):
Consolidating Statement of Cash Flows
For the fiscal year ended December 31, 2000
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Financing activities:
Proceeds from mortgage - 16,000 - - 16,000
Mortgage principal repayments - (81) - - (81)
Cost of mortgage - (397) - - (397)
Loan to officer (2,000) - - - (2,000)
Distributions to shareholders (22,128) - - - (22,128)
Intercompany balances 48,793 (48,793) 7,060 (7,060) -
--------- -------- -------- -------- ------------
Net cash (used in) provided
by financing activities 24,665 (33,271) 7,060 (7,060) (8,606)
----------- --------- -------- ------- -------
Increase (decrease) in cash and
cash equivalents 9,109 (159) (385) - 8,565
Cash and cash equivalents
at beginning of year 27,853 4,391 1,510 - 33,754
--------- ------- ------- ------- --------
Cash and cash equivalents
at end of year $36,962 $4,232 $1,125 $ - $42,319
======== ======== ======= ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period
for income taxes $3,240 $676 $33 $ - $3,949
====== ==== === ====== ======
Cash paid during the period
for interest $27,152 $999 $ - $ - $28,151
======= ==== ====== ====== =======
62
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guarantor and non-guarantor financial statements (continued):
Consolidating Statement of Cash Flows
For the fiscal year ended January 2, 2000
Guarantor Nonguarantor Consolidated
Operating activities: Parent Subsidiaries Subsidiaries Eliminations Total
Net income (loss) $5,140 $25,435 $(1,052) $29,523
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and
amortization 13,017 12,269 802 26,088
Increase in deferred
income taxes 710 - - 710
Decrease in deferred rent, net (107) - - (107)
Provision for unit closings 1,013 - - 1,013
Minority interest - - (266) (266)
Equity in income of
unconsolidated affiliates (423) - - (423)
Changes in operating assets
and liabilities:
(Increase) decrease in
receivables 772 (11) 9 770
(Increase) decrease in
inventories (247) (309) 2 (554)
(Increase) decrease in
prepaid expenses (413) 73 (68) (408)
(Increase) decrease in
other assets (6,629) (17) 333 $3,415 (2,898)
Increase (decrease) in accounts
payable and accrued
expenses 2,967 (594) 389 - 2,762
(Decrease) increase in income
taxes payable (1,264) (92) (52) - (1,408)
--------- ------------ ----------- -------- ---------
Net cash provided by operating
activities before change
in accrued interest payable 14,536 36,754 97 3,415 54,802
Increase in accrued interest payable 7,480 - - - 7,480
----- - - - -----
Net cash provided by
operating activities 22,016 36,754 97 3,415 62,282
------ ------ -- ----- -----
Investing activities:
Purchases of property and equipment (8,877) (13,750) (2,655) - (25,282)
Proceeds from disposition of
property and equipment 55 - - - 55
--------- ------------- ------------- ------------- -----------
Net cash used in investing
activities (8,822) (13,750) (2,655) - (25,227)
--------- -------- ------- ------------- --------
63
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guarantor and non-guarantor financial statements (continued):
Consolidating Statement of Cash Flows
For the fiscal year ended January 2, 2000
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Financing activities:
Proceeds from long-term debt 251,211 - - - 251,211
Cost of merger and related
financing (411,000) - - - (411,000)
Accrued and previously paid
Merger costs 1,007 - - - 1,007
Proceeds from exercise of
stock options 426 - - - 426
Intercompany balances 24 ,880 (24,880) 3,415 (3,415) -
----------- -------- -------- --------- -----------
Net cash used in
financing activities (133,476) (24,880) 3,415 (3,415) (158,356)
------------ ----------- ------- -------- ---------
(Decrease) increase in cash and
cash equivalents (120,282) (1,876) 857 - (121,301)
Cash and cash equivalents
at beginning of year 148,134 6,268 653 - 155,055
----------- ------ ---- ---------- --------------
Cash and cash equivalents
at end of period $27,852 $4,392 $1,510 $ - $33,754
========= ======== ====== =========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period
for income taxes $17,540 $2,544 $45 $ - $20,129
======= ====== === ====== =======
Cash paid during the period
for interest $30 $ - $ - $ - $30
=== ====== ====== ====== ===
64
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guarantor and non-guarantor financial statements (continued):
Consolidating Statement of Cash Flows
For the fiscal year ended January 3, 1999
Guarantor Nonguarantor Consolidated
Operating activities: Parent Subsidiaries Subsidiaries Eliminations Total
Net income $7,310 $26,934 $90 $ - $34,334
Adjustments to reconcile net income
to net cash provided by
operating activities:
Cumulative effect of change in
method of accounting for
start-up costs 682 - 176 - 858
Depreciation and amortization 10,105 12,007 672 - 22,784
(Decrease) in deferred
income taxes (2,078) - - - (2,078)
Increase in deferred rent, net 214 - - - 214
Provision for unit closings 2,515 - - - 2,515
Loss on land to be sold 1,075 - - - 1,075
Minority interest - - 101 - 101
Equity in loss of
unconsolidated affiliates 296 - - - 296
Dividends received from
unconsolidated affiliates 75 - - - 75
Changes in operating assets
and liabilities:
(Increase) decrease in
receivables (1,160) (5) 18 (1,147)
Increase in inventories (67) (74) (22) - (163)
Decrease (increase) in prepaid
expenses 480 (40) 48 - 488
Increase (decrease) in
other assets (1,503) (480) 33 1,015 (935)
Increase (decrease) in accounts
payable and accrued expenses 1,330 (474) 557 - 1,413
Decrease in income taxes
payable (615) (16) - - (631)
--------- ------------ ----------- -------- ----------
Net cash provided by
operating activities 18,659 37,852 1,673 1,015 59,199
-------- ---------- --------- ------- ---------
Investing activities:
Purchases of property and equipment (14,882) (10,959) (2,372) - (28,213)
Proceeds from disposition of
property and equipment 52 - - - 52
Proceeds from maturities of
marketable securities 7,500 - - - 7,500
-------- ---------- ---------- ---------- -------
Net cash used in investing
activities (7,330) (10,959) (2,372) - (20,661)
---------- -------- ------- ---------- --------
65
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guarantor and non-guarantor financial statements (continued):
Consolidating Statement of Cash Flows
For the fiscal year ended January 3, 1999
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Financing activities:
Proceeds from exercise of
stock options 2,144 - - - 2,144
Distribution to shareholders (5,521) - - - (5,521)
Intercompany balances 25,116 (25,116) 1,015 (1,015) -
---------- -------- ------- ---------- -----------
Net cash used in
financing activities 21,739 (25,116) 1,015 (1,015) (3,377)
-------- ----------- ------- --------- ---------
Increase in cash and
cash equivalents 33,068 1,777 316 - 35,161
Cash and cash equivalents
at beginning of year 115,066 4,491 337 - 119,894
--------- ------- ---- -------- --------------
Cash and cash equivalents
at end of year $148,134 $6,268 $653 $ - $155,055
======== ======= ===== ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period
for income taxes $22,855 $1,750 $12 $ - $24,617
======= ====== === ===== =======
Cash paid during the period
for interest $ - $ - $ - $ - $ -
====== ====== ====== ====== ============
66
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company and their ages at
March 15, 2001 are:
Name Age Position
Mario Sbarro 59 Chairman of the Board, President, Chief
Executive Officer and Director
Anthony Sbarro 54 Vice Chairman of the Board, Treasurer and
Director
Joseph Sbarro 60 Senior Executive Vice President, Secretary
and Director
Carmela Sbarro 79 Vice President and Director
Anthony J. Missano 42 President -- Quick Service Division and
Corporate Vice President
Gennaro A. Sbarro 34 President-- Franchising and Licensing
Division and Corporate Vice President
Gennaro J. Sbarro 38 President -- Casual and Fine Dining
Division and Corporate Vice President
Robert G. Rooney 43 Senior Vice President and Chief Financial
Officer
Carmela N. Merendino 36 Vice President-- Administration
Joseph A. Fallarino 48 Vice President-- Human Resources
Henry G. Ciocca 54 Vice President and General Counsel
John Bernabeo 44 Vice President-- Architecture and
Engineering
Donald A. Dziomba 52 Vice President-- Management Information
Services
Steven B. Graham 47 Vice President and Controller
J. Peter Brown 49 Vice President-- Franchise Development
Harold L. Kestenbaum 51 Director
Richard A. Mandell 58 Director
Terry Vince 72 Director
Bernard Zimmerman 68 Director
MARIO SBARRO has been an officer, a director and a principal
shareholder of Sbarro since its organization in 1977, serving as Chairman of our
board of directors and Chief Executive Officer for more than the past five
years. Mr. Sbarro re-assumed the position as our President in May 1996 (a
position he held for more than five years prior to December 1993).
67
ANTHONY SBARRO has been an officer, a director and a principal
shareholder of Sbarro since its organization in 1977, serving as Vice Chairman
of our board of directors since May 1996 and as President and Chief Operating
Officer from December 1993 through May 1996. For more than five years prior to
December 1993, Mr. Sbarro was an Executive Vice President. He has also served as
our Treasurer for more than the past five years.
JOSEPH SBARRO has been an officer, a director and a principal
shareholder of Sbarro since its organization in 1977, serving as Senior
Executive Vice President since December 1993. For more than five years prior
thereto, Mr. Sbarro was an Executive Vice President. He has also served as our
Secretary for more than the past five years.
CARMELA SBARRO has been one of our Vice Presidents since March 1985. Mrs.
Sbarro was a founder of Sbarro, together with her late husband, Gennaro Sbarro.
Mrs. Sbarro devotes a substantial portion of her time to recipe and product
development. Our board of directors elected Mrs. Sbarro as a director in January
1998. Mrs. Sbarro previously served as a director from March 1985 until December
1988, when she was elected director emeritus.
ANTHONY J. MISSANO has been a Corporate Vice President since August
1996 and was elected President of our Quick Service Division in January 2000.
From February 1995 until August 1996, he served as Vice President -- Operations
(West), and from June 1992 until February 1995 he served as a Zone Vice
President.
GENNARO A. SBARRO has been a Corporate Vice President since August 1996
and was elected President of our Franchising and Licensing Division in January
2000. From February 1995 until August 1996 he served as Vice President --
Franchising, and for more than five years prior thereto Mr. Sbarro served in
various capacities for us.
GENNARO J. SBARRO has been a Corporate Vice President since August 1996
and was elected President of our Casual and Fine Dining Division in January
2000. From February 1995 until August 1996, he served as Vice President --
Operations (East), and from June 1992 until February 1995 he served as a Zone
Vice President.
ROBERT G. ROONEY was elected Senior Vice President and Chief Financial
Officer in January 2000. From June 1999, when he joined us, until January 2000,
Mr. Rooney served as Vice President-- Finance and Chief Financial Officer. From
December 1996 until he joined us, Mr. Rooney was employed by Discovery Zone,
Inc. (a national family entertainment center chain), serving as Senior Vice
President, Chief Financial and Administrative Officer since February 1997. From
March 1994 until September 1996, Mr. Rooney served as Senior Vice President and
Chief Financial Officer of Victory Capital LLC (formerly Forschner Enterprises,
Inc.), a venture capital firm, and, from September 1992 to February 1994, served
as a director and consultant on behalf of various investors and investment funds
affiliated with Forschner Enterprises, Inc. Discovery Zone, Inc., which had
filed under Chapter 11 of the United States Bankruptcy Code prior to Mr.
Rooney's joining that company, again filed under that law on April 20, 1999. Mr.
Rooney has been a certified public accountant in New York for over 20 years.
68
CARMELA N. MERENDINO was elected Vice President-- Administration in October
1988. Ms. Merendino joined us in March 1985 and performed a variety of corporate
administrative functions for us prior to her election as Vice President--
Administration.
JOSEPH A. FALLARINO joined Sbarro in September 1998 and was elected
Vice President -- Human Resources in November 1998. Prior to joining us, from
April 1998 until September 1998, Mr. Fallarino served as Director of Human
Resources of Ogden Corporation, an international diversified service
corporation; from March 1996 until March 1998, he served as Senior Vice
President -- Human Resources of Arbor Management LLC, a provider of financial
services and healthcare services; and from January 1994 until February 1996, he
served as Vice President -- Human Resources of AMS Corporation, a national
outsourcing company.
HENRY G. CIOCCA joined Sbarro in January 2000 and serves as Vice
President and General Counsel. From August 1997 to April 1999, Mr. Ciocca was an
advisor to the President of The Thomson Corporation, a worldwide information and
publishing company. From September 1995 to June 1997, Mr. Ciocca was President,
Chief Executive Officer and a Director of Markborough Properties, Inc., a
publicly-traded commercial real estate company headquartered in Toronto; from
June 1993 to August 1995, Mr. Ciocca was President and Chief Executive Officer
of Markborough Development, a division of The Thomson Corporation that developed
master planned communities in the United States; and from June 1987 to June
1993, Mr. Ciocca held various positions with The Thomson Corporation, including
Executive Vice President and General Counsel. Mr. Ciocca is admitted to practice
law in Connecticut, Florida and New York.
JOHN BERNABEO joined Sbarro in August 1992 and served in various
capacities prior to his election as Vice President -- Architecture and
Engineering in May 1997.
DONALD A. DZIOMBA was elected Vice President - Management Information
Services in January 2000. Mr. Dziomba had served as our Director of Management
Information Systems since joining Sbarro in November 1993.
STEVEN B. GRAHAM was elected Vice President and Controller in January 2000.
Mr. Graham has served as our Controller since joining Sbarro in April 1994. Mr.
Graham has been a certified public accountant in New York for over 20 years.
J. PETER BROWN jointed Sbarro in May 2000 as Vice President - Franchise
Development From May 1996 until joining us, Mr. Brown served as Vice President
of Business Development of Arby's Inc. (dba Triarc Restaurant Group), a
subsidiary of Triarc Companies, Inc., a branded consumer products company in
beverages and restaurant franchising. From July 1993 through April 1996 he
served as Vice President Asset Development with Scott's Food Services, a
subsidiary of Scott's Hospitality Inc., a food service and retail corporation.
69
HAROLD L. KESTENBAUM has been a practicing attorney in New York since 1976.
He became a director of Sbarro in March 1985. Mr. Kestenbaum is also a director
of Extravnet.com, Inc.
RICHARD A. MANDELL, a private investor and financial consultant, was a
Managing Director of BlueStone Capital Partners, L.P., an investment banking
firm, from February until April 1998 and Vice President -- Private Investments
of Clariden Asset Management (NY) Inc., a subsidiary of Clariden Bank, a private
Swiss bank, from January 1996 until February 1998. From 1982 until June 1995,
Mr. Mandell served as a Managing Director of Prudential Securities Incorporated,
an investment banking firm. He became a director of Sbarro in March 1986. Mr.
Mendel is also a director of Trend-Lines, Inc., U.S.A. Detergents, Inc. and
Shells Seafood Restaurants, Inc.
TERRY VINCE has been Chairman of the Board and President of Sovereign
Hotels, Inc. a company that owns and manages hotels, since October 1991 and
Chairman of the Board of Fame Corp., a food service management company, since
January 1994. Mr. Vince became a director of Sbarro in December 1988.
BERNARD ZIMMERMAN has been President of Bernard Zimmerman & Co., Inc. since
October 1972 and was Senior Vice President of The Zimmerman Group, Inc. from
January 1991 to November 1996, two financial and management consulting firms.
Mr. Zimmerman also served as President and a director of Beacon Hill Management,
Inc., an advisor to Beacon Hill Mutual Fund, Inc., from December 1994 until
October 1996. From September 1986 until September 1993, Mr. Zimmerman also
served as Chairman and President of St. Lawrence Seaway Corp., an owner and
manager of agricultural properties. Mr. Zimmerman has been a certified public
accountant in New York for more than the past thirty-five years. He became a
director of Sbarro in March 1985.
Our by-laws provide that the minimum number of directors that can
constitute our board is six and the maximum number of directors that can
constitute our board is twelve.
Our officers are elected annually by the board of directors at its
meeting held immediately after the annual meeting of our shareholders, and hold
their respective offices until their successors are duly elected and qualified.
Officers may be removed at any time by the board.
Mario, Anthony and Joseph Sbarro are the sons of Carmela Sbarro. Carmela N.
Merendino is the daughter, and Gennaro A. Sbarro is the son, of Mario Sbarro.
Gennaro J. Sbarro is the son, and Anthony J. Missano is the son-in-law, of
Joseph Sbarro.
During fiscal 2000, the Company's officers, directors and shareholders
were not required to file reports under Section 16(a) of the Securities Exchange
Act of 1934.
70
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the annual and
long-term compensation of our chief executive officer and other five most highly
compensated persons who were serving as executive officers at the end of our
2000 fiscal year for services in all capacities to us and our subsidiaries
during our 2000, 1999 and 1998 fiscal years.
Annual
Name and Compensation Other
Principal Position Year Salary Bonus Compensation
Mario Sbarro.......................................... 2000 $700,000 $ 300,000 --
Chairman of the Board, President and 1999 700,000 300,000 $2,221,987(1)
Chief Executive Officer 1998 713,462 300,000 --
Anthony Sbarro........................................ 2000 300,000 200,000 --
Vice Chairman of the Board and Treasurer 1999 300,000 200,000 $1,145,242(1)
1998 305,769 200,000 --
Joseph Sbarro......................................... 2000 300,000 200,000 --
Senior Executive Vice President and 1999 300,000 200,000 $1,323,743(1)
Secretary 1998 305,769 200,000 --
Anthony J. Missano.................................... 2000 200,000 150,000 --
President-- Quick Service Division 1999 200,000 150,000 $348,000(1)
1998 203,846 100,000 --
Gennaro A. Sbarro..................................... 2000 200,000 150,000 --
President-- and Licensing Division 1999 200,000 150,000 $389,168(1)
1998 203,846 100,000 --
Gennaro J. Sbarro..................................... 2000 200,000 150,000 --
President-- Casual and Fine Dining Division 1999 200,000 150,000 $348,000(1)
1998 203,846 100,000 --
- --------------------
(1) All of the options held by each executive officer named in the Summary
Compensation Table were terminated in the going private transaction in
exchange for a cash payment equal to the number of shares subject to
the options multiplied by the excess of $28.85 over the applicable
option exercise price. All option plans were terminated upon the
completion of the going private transaction.
71
Options/SAR Grants in Last Fiscal year.
We did not grant any options to purchase our securities or any stock
appreciation rights during fiscal 2000.
Aggregated Option Exercises in Last Fiscal Year and Year End Values
No options were exercised during fiscal 2000 and no options were
outstanding at the end of fiscal 2000.
Compensation of Directors
Our non-employee directors currently receive a retainer at the rate of
$16,000 per annum, $1,000 for each meeting of the Board attended and $500 for
each meeting attended of a committee of the board on which they serve if the
meeting is not held on the same day as a meeting of the board. Members of the
board also are reimbursed for reasonable travel expenses incurred in attending
board and committee meetings.
Bernard Zimmerman & Company, Inc., of which Bernard Zimmerman is
President and a majority shareholder, renders financial and consulting
assistance to us, for which it received fees of $340,400 for services rendered
during our 2000 fiscal year.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
Our board of directors does not presently have a Compensation
Committee. Decisions regarding the compensation of executive officers are being
made by our entire board. Accordingly, Mario Sbarro, Anthony Sbarro and Joseph
Sbarro, executive officers and directors, as well as Bernard Zimmerman, a
director and a consultant to us, may participate in deliberations of our board
concerning executive officer compensation.
See Item 13, "Certain Relationships and Related Transactions" in this
report, for information concerning related party transactions.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the
ownership of shares of our common stock as of March 15, 2000 with respect to (1)
holders known to us to beneficially own more than five percent of our
outstanding common stock, (2) each of our directors, (3) our Chief Executive
Officer and our five next most highly compensated executive officers and (4) all
of our directors and executive officers as a group. We understand that, except
as noted below, each beneficial owner has sole voting and investment power with
respect to all shares attributable to such owner.
72
Shares Beneficially Owned
Beneficial Owner Number Percent
- ---------------- ------ -------
Mario Sbarro(1)............................ 1,524,730(2) 21.6%
Anthony Sbarro(1).......................... 1,233,800 17.5%
Joseph Sbarro(1)........................... 1,756,022(3) 25.6%
Trust of Carmela Sbarro(1)................. 2,497,884(4) 35.3%
Harold L. Kestenbaum....................... -- --
Richard A. Mandell......................... -- --
Terry Vince................................ -- --
Bernard Zimmerman.......................... -- --
Anthony J. Missano......................... 25,946(5) 0.4%
Gennaro A. Sbarro.......................... -- --
Gennaro J. Sbarro.......................... 25,946 0.4%
All directors and executive officers
as a group (18 persons).................. 7,064,328 100.0%
(1) The business address of each of Mario Sbarro, Joseph Sbarro, Anthony Sbarro
and the Trust of Carmela Sbarro is 401 Broadhollow Road, Melville, New York
11747.
(2) Excludes the 2,497,884 shares held by the Trust of Carmela Sbarro, of
which trust Mario Sbarro serves as a co-trustee and as to which shares
Mr. Sbarro may be deemed a beneficial owner with shared voting and
dispositive power.
(3) Excludes 25,946 shares beneficially owned by each of Mr. Sbarro's son,
Gennaro J. Sbarro, reflected below, and daughter. Mr. Sbarro's daughter is
the wife of Anthony J. Missano.
(4) The trust was created by Carmela Sbarro for her benefit and for the
benefit of her descendants, including Mario, Joseph and Anthony Sbarro.
The trustees of the trust are Franklin Montgomery, whose business
address is 90 Broad Street, 19th Floor, New York, New York 10274, and
Mario Sbarro. As trustees, Franklin Montgomery and Mario Sbarro may be
deemed to be the beneficial owners of these shares with shared voting
and dispositive power.
(5) Represents shares owned by Mr. Missano's wife. Mr. Missano disclaims
beneficial ownership of these shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the caption "Compensation Committee Interlocks and
Insider Participation in Compensation Decisions" in Item 11, "Executive
Compensation", in this report for information concerning the participation of
Mssrs. Mario Sbarro, Anthony Sbarro, Joseph Sbarro and Bernard Zimmerman in
executive compensation determinations.
73
We are the sole tenant of an administrative office building, which is
leased from Sbarro Enterprises, L.P. The annual rent payable pursuant to the
sublease is $0.3 million each year for the remainder of the lease term, which
expires in 2011. In addition, we are obligated to pay real estate taxes,
utilities, insurance and certain other expenses for the facility. We believe
that our rent is comparable to the rent that would be charged by an unaffiliated
third party. The limited partners of Sbarro Enterprises, L.P. are Mario, Joseph,
Anthony and Carmela Sbarro.
We, our subsidiaries and the joint ventures in which we have an
interest have purchased printing services from a corporation owned by a
son-in-law of Mario Sbarro for which they paid, in the aggregate, $547,480
during fiscal 2000. We believe that these services were provided on terms
comparable to those that would have been available from unrelated third parties.
During fiscal 2000, we paid cash dividends to our shareholders totaling
$22.1 million including $3.8 million of distributions made pursuant to the Tax
Agreement described below.
On April 4, 2000, we loaned $2.0 million to Mario Sbarro, our Chairman,
President and Chief Executive Officer, under a note that is payable on April 4,
2002. The note bears interest at the rate of 6.46%, payable annually. We believe
that the loan is on terms that are no less favorable to us than would have been
obtained in a comparable transaction by us with an unrelated person.
On January 2 and 3, 2001, we loaned $200,000 to Mario Sbarro, $300,000
to Joseph Sbarro and $200,000 to Anthony Sbarro which loans were repaid on
January 15, 2001 with interest at the prime rate in effect from time to time at
European American Bank.
Companies owned by a son of Anthony Sbarro and a company owned by the
daughter of Joseph Sbarro paid royalties to us under franchise agreements
containing terms similar to those in agreements entered into by us with
unrelated franchisees. Royalties paid to us aggregated $18,624 and $108,741,
respectively, during fiscal 2000.
Bernard Zimmerman & Company, Inc., of which Bernard Zimmerman is President
and a majority shareholder, renders financial and consulting assistance to us,
for which it received fees of $340,400 for services during our 2000 fiscal year.
In addition to the compensation of Mario, Anthony, Joseph, Gennaro A.
and Gennaro J. Sbarro and Anthony J. Missano:
o Carmela Sbarro, the mother of Mario, Anthony and Joseph
Sbarro, who was a co-founder of Sbarro and serves as Vice
President and a director, received $100,000 from us for
services rendered during fiscal 2000; and
o Carmela N. Merendino, a daughter of Mario Sbarro, who serves
as Vice President -- Administration, received $207,924 from us
for services rendered during fiscal 2000.
74
In addition, other members of the immediate families of Mario, Anthony,
Joseph and Carmela Sbarro, who are our employees, earned an aggregate of
$809,585 during fiscal 2000.
Tax Agreement
We have elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code of 1986, and, where applicable and permitted, under
similar state and local income tax provisions, beginning in fiscal 2000. With
certain limited exceptions, we do not pay federal and state and local income
taxes for periods for which we are treated as an S corporation. Rather, our
shareholders do include their pro-rata share of our taxable income on their
individual income tax returns and thus are required to pay taxes with respect to
their respective shares of our taxable income, whether or not it is distributed
to them.
We have entered into a tax payment agreement with our shareholders. The
tax payment agreement permits us to make periodic tax distributions to our
shareholders in amounts that are intended to approximate the income taxes,
including estimated taxes, that would be payable by our shareholders if their
only income were their pro-rata shares of our taxable income and that income was
taxed at the highest applicable federal and New York State marginal income tax
rates. We may only make the tax distributions with respect to periods in which
we are treated as an S corporation. We made distributions of $3.8 million in
fiscal 2000 and $3.6 million in January 2001 and we expect to make additional
distributions in fiscal 2001 of approximately $4.0 million for fiscal 2000
earnings.
The tax payment agreement provides for adjustments of the amount of tax
distributions previously paid in respect of a year upon the filing of our
federal income tax return for that year, upon the filing of an amended federal
income tax return or as a result of an audit. In these circumstances, if it is
determined that the amount of tax distributions previously made for the year was
less than the amount computed based upon our federal income tax return, our
amended federal return or as adjusted based on the results of the audit, we may
make additional tax distributions which might include amounts to cover any
interest or penalties. Conversely, if it is determined in these circumstances
that the amount of tax distributions previously made for a year exceeded the
amount computed based on our federal income tax return, our amended federal
return or the results of an audit, as the case may be, our shareholders will be
required to repay the excess, with, in certain circumstances, interest. In
addition, our shareholders will be required to return, with interest, any tax
distributions previously distributed with respect to any taxable year for which
it is subsequently determined that we were not an S corporation.
75
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) (1) Consolidated Financial Statements
The following consolidated financial statements of Sbarro, Inc. and the
Report of Independent Auditors thereon are included in Item 8 above:
Page
Report of Independent Public Accountants 28
Consolidated Balance Sheets at December 31, 2000 and
January 2, 2000 29 - 30
Consolidated Statements of Income for each of the fiscal
years in the three-year period ended December 31, 2000 31
Consolidated Statements of Shareholders' Equity for each
of the fiscal years in the three-year period ended
December 31, 2000 32
Consolidated Statements of Cash Flows for each of the
fiscal years in the three-year period ended
December 31, 2000 33 - 34
Notes to Consolidated Financial Statements 35 - 66
(a) (2) Financial Statement Schedules
The following financial statement schedule is filed as a part of this
Report on Page S-2: Schedule II - Valuation and Qualifying Accounts for the
three fiscal years ended December 31, 2000. All other schedules called for by
Form 10-K are omitted because they are inapplicable or the required information
is shown in the financial statements, or notes thereto, included herein.
(a) (3) Exhibits
Exhibits incorporated herein by reference are identified with an * or
include a management contract or compensatory plan or arrangement are identified
with an "+".
76
Exhibits:
--------
*2.01 Agreement and Plan of Merger dated as of January 19,
1999 among the Company, Sbarro Merger LLC, a New York
limited liability company, Mario Sbarro, Joseph
Sbarro, Joseph Sbarro (1994) Family Limited
Partnership, Anthony Sbarro, and Mario Sbarro and
Franklin Montgomery, not individually but as trustees
under that certain Trust Agreement dated April 28,
1984 for the benefit of Carmela Sbarro and her
descendants. (Exhibit 2 to the Company Current Report
on Form 8-K dated (date of earliest event reported)
January 19, 1999, File No. 1-8881)
* 3.01(a) Restated Certificate of Incorporation of the
Company as filed with the Department of State of the
State of New York on March 29, 1985. (Exhibit 3.01 to
the Company's Registration Statement on Form S-1,
File No.
2-96807)
* 3.01(b) Certificate of Amendment to the Company's
Restated Certificate of Incorporation as filed with
the Department of State of the State of New York on
April 3, 1989. (Exhibit 3.01(b) to the Company's
Annual Report on Form 10-K for the year ended January
1, 1989, File No. 1-8881)
* 3.01(c) Certificate of Amendment to the Company's
Restated Certificate of Incorporation as filed with
the Department of State of the State of New York on
May 31, 1989. (Exhibit 4.01 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
April 23, 1989, File No. 1-8881)
* 3.01(d) Certificate of Amendment to the Company's
Restated Certificate of Incorporation as filed with
the Department of State of the State of New York on
June 1, 1990. (Exhibit 4.01 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
April 22, 1990, File No. 1-8881)
* 3.02 By-Laws of the Company, as amended. (Exhibit 3.1 to
the Company's Registration Statement on Form S-4,
File No. 333-90817)
*4.01 Indenture dated as of September, 28, 1999 among the
Company, the Restricted Subsidiaries of the Company
named therein, as guarantors, and Firstar Bank, N.A.,
including the form of 11% Senior Notes of the Company
to be issued upon consummation of the Exchange Offer
and the form of Senior Guarantees of the Guarantors.
(Exhibit 4.1 to the Company's Current Report on Form
8-K dated (date of earliest event reported) September
23, 1999, File No. 1-8881)
*4.02 Credit Agreement dated as of September 23, 1999 among
the Company, European American Bank, as agent, and
the Lenders party thereto (Exhibit 4.2 to the
Company's Current Report on Form 8-K dated (date of
earliest event reported) September 23, 1999, File No.
1-8881)
77
*10.01(a) Commack, New York Corporate Headquarters Sublease.
(Exhibit 10.04 to the Company's Registration
Statement on Form S-1, File No. 2-96807)
10.01(b) Amendment dated May 4, 2000 to the Company's Commack,
New York Corporate Headquarters Sublease
+ 10.02 Form of Indemnification Agreement between the
Company and each of its directors and officers.
(Exhibit 10.04 to the Company's Annual Report on Form
10-K for the year ended December 31, 1989, File No.
1-8881)
*10.03 Registration Rights Agreement dated as of September
28, 1999 among the Company, the Guarantors named
therein and Bear, Stearns & Co. Inc. (Exhibit 10.1 to
the Company's Current Report on Form 8-K dated (date
of earliest event reported) September 23, 1999, File
No. 1-8881)
*10.04 Tax Payment Agreement dated as of September 28, 1999
among the Company, Mario Sbarro, Joseph Sbarro,
Joseph Sbarro (1994) Family Limited Partnership,
Anthony Sbarro, and Mario Sbarro and Franklin
Montgomery, not individually but as Trustees under
that certain Trust Agreement dated April 28, 1984 for
the benefit of Carmela Sbarro and her descendants
(Exhibit 10.6 to the Company's Registration Statement
on Form S-4, File No. 333-90817)
12.01 Statement of computation of earnings to fixed charges
*21.01 List of subsidiaries.(Exhibit 21.01 to the Company's
Annual Report on Form 10-K for the year ended
January 2, 2000, File No. 333-90817)
- -----------------------------
* Incorporated by reference to the document indicated. + Management contract or
compensatory plan.
(b) Reports on Form 8-K
No Reports on form 8-K were filed by us during the fourth quarter of
our fiscal year ended December 31, 2000.
78
UNDERTAKING
We hereby undertake to furnish to the Securities and Exchange
Commission, upon request, all constituent instruments defining the rights of
holders of long-term debt of our us and our consolidated subsidiaries not filed
with this Report. Those instruments have not been filed since none are, nor are
being, registered under Section 12 of the Securities Exchange Act of 1934 and
the total amount of securities authorized under any of those instruments does
not exceed 10% of the total assets of us and our subsidiaries on a consolidated
basis.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on March
29, 2001.
SBARRO, INC.
By: /s/ MARIO SBARRO
-----------------------------------
Mario Sbarro, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ MARIO SBARRO Chairman of the Board March 29, 2001
- -----------------------------
Mario Sbarro (Principal Executive Officer)
and Director
/s/ ROBERT G. ROONE Senior Vice President and March 29, 2001
- ------------------------------
Robert G. Rooney Chief Financial Officer
(Principal Financial Officer)
/s/ JOSEPH SBARRO Director March 29, 2001
- ---------------------------
Joseph Sbarro
/s/ ANTHONY SBARRO Director March 29, 2001
- ----------------------------
Anthony Sbarro
80
Signature Title Date
/s/ STEVEN B. GRA Vice President and March 29, 2001
- ------------------------------
Steven B. Graham Controller (Principal
Accounting Officer)
/s/ HAROLD L. KESTENBAU Director March 29, 2001
- ---------------------------------
Harold L. Kestenbaum
/s/ RICHARD A. MANDELL Director March 29, 2001
- ---------------------------------
Richard A. Mandell
/s/ CARMELA SBARRO Director March 29 2001
- -------------------------------
Carmela Sbarro
/s/ TERRY VINCE Director March 29, 2001
- ------------------------------
Terry Vince
/s/ BERNARD ZIMMERMAN Director March 29, 2001
- ------------------------------
Bernard Zimmerman
81
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Sbarro, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Sbarro, Inc. and
subsidiaries included in this filing and have issued our report thereon dated
March 29, 2001. Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The accompanying schedule is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
New York, New York
March 29, 2001
S-1
SCHEDULE II
SBARRO, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
FOR THE THREE YEARS ENDED
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------ - -------- -------------- -------- --------
ADDITIONS
Balance Charged Charged to
at to Other Balance at
Beginning Costs and Accounts Deductions End of
Description of Period Expenses Describe Describe Period
- ----------- --------- -------- --------- --------------- ------
December 31, 2000
Allowance for doubtful ($120)(1)
accounts receivable $419 60 (2) ($148)(2) $211
==== ====== ====== ====
January 2, 2000:
Allowance for doubtful
accounts receivable $38 $381 $419
=== ==== ====
January 3, 1999:
Allowance for doubtful
accounts receivable $38 $38
=== ===
(1) Collection of previously reserved receivables
(2) Write off of uncollectible accounts
S-2
EXHIBIT INDEX
Exhibit Number Description
*2.01 Agreement and Plan of Merger dated as of January 19, 1999
among the Company, Sbarro Merger LLC, a New York limited
liability company, Mario Sbarro, Joseph Sbarro, Joseph Sbarro
(1994) Family Limited Partnership, Anthony Sbarro, and Mario
Sbarro and Franklin Montgomery, not individually but as
trustees under that certain Trust Agreement dated April 28,
1984 for the benefit of Carmela Sbarro and her descendants.
(Exhibit 2 to the Company Current Report on Form 8-K dated
(date of earliest event reported) January 19, 1999, File No.
1-8881)
*3.01(a) Restated Certificate of Incorporation of the Company as filed
with the Department of State of the State of New York on March
29, 1985. (Exhibit 3.01 to the Company's Registration
Statement on Form S-1, File No. 2-96807)
* 3.01(b) Certificate of Amendment to the Company's Restated
Certificate of Incorporation as filed with the Department of
State of the State of New York on April 3, 1989. (Exhibit
3.01(b) to the Company's Annual Report on Form 10-K for the
year ended January 1, 1989, File No. 1-8881)
*3.01(c) Certificate of Amendment to the Company's Restated
Certificate of Incorporation as filed with the Department of
State of the State of New York on May 31, 1989. (Exhibit 4.01
to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 23, 1989, File No. 1-8881)
*3.01(d) Certificate of Amendment to the Company's Restated
Certificate of Incorporation as filed with the Department of
State of the State of New York on June 1, 1990. (Exhibit 4.01
to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 22, 1990, File No. 1-8881)
* 3.02 By-Laws of the Company, as amended. (Exhibit 3.1 to the
Company's Registration Statement on Form S-4, File No.
333-90817)
*4.01 Indenture dated as of September, 28, 1999 among the Company,
the Restricted Subsidiaries of the Company named therein, as
guarantors, and Firstar Bank, N.A., including the form of 11%
Senior Notes of the Company to be issued upon consummation of
the Exchange Offer and the form of Senior Guarantees of the
Guarantors. (Exhibit 4.1 to the Company's Current Report on
Form 8-K dated (date of earliest event reported) September 23,
1999, File No. 1-8881)
*4.02 Credit Agreement dated as of September 23, 1999 among the
Company, European American Bank, as agent, and the Lenders
party thereto (Exhibit 4.2 to the Company's Current Report on
Form 8-K dated (date of earliest event reported) September 23,
1999, File No. 1-8881)
*10.01(a) Commack, New York Corporate Headquarters Sublease.
(Exhibit 10.04 to the Company's
Registration Statement on Form S-1, File No. 2-96807)
10.01(b) Amendment dated May 4, 2000 to the Company's Commack, New
York Corporate Headquarters Sublease
+ *10.02 Form of Indemnification Agreement between the Company
and each of its directors and officers. (Exhibit 10.04 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1989, File No. 1-8881)
*10.03 Registration Rights Agreement dated as of September 28, 1999
among the Company, the Guarantors named therein and Bear,
Stearns & Co. Inc. (Exhibit 10.1 to the Company's Current
Report on Form 8-K dated (date of earliest event reported)
September 23, 1999, File No. 1-8881)
*10.04 Tax Payment Agreement dated as of September 28, 1999 among the
Company, Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994)
Family Limited Partnership, Anthony Sbarro, and Mario Sbarro
and Franklin Montgomery, not individually but as Trustees
under that certain Trust Agreement dated April 28, 1984 for
the benefit of Carmela Sbarro and her descendants (Exhibit
10.6 to the Company's Registration Statement on Form S-4, File
No. 333-90817.
12.01 Statement of computation of earnings to fixed charges
*21.01 List of subsidiaries. (Exhibit 21.01 to the Company's
Annual Report on Form 10-K for the year ended January 2, 2000,
File No. 333-90817)
--------------------------
* Incorporated by reference to the document indicated. + Management contract or
compensatory plan.
EXHIBIT 10.01 (b)
FIRST AMENDMENT TO BUILDING LEASE
THIS AMENDMENT TO BUILDING LEASE (the "Amendment") dated this 4th day
of May, 2000, by and between SBARRO ENTERPRISES, L.P., a Delaware limited
partnership, having an address at 401 Broadhollow Road, Melville, New York 11747
("Landlord"), and SBARRO, INC., a New York corporation, having an address at 401
Broadhollow Road, Melville, New York 11747 ("Tenant").
W I T N E S S E T H :
WHEREAS, Landlord and Tenant's predecessor in interest, Sbarro
Licensing, Inc., entered into a certain Lease (hereinafter referred to as the
"Lease") pursuant to the terms of which Tenant leased from Landlord, subject to
the terms and provisions of a Ground Lease, those certain premises in Commack,
State of New York, known as 763 Larkfield Road, (said space being designated and
more fully described in the Lease and hereinafter referred to as the
"Property"); and
WHEREAS, Landlord and Tenant desire to amend the Lease as hereinafter
provided and to evidence Tenant's Assumption of all the obligation of said
Lease.
NOW, THEREFORE, Landlord and Tenant agree as follows:
1. Landlord and Tenant wish to confirm and document the original
Commencement and Expiration Date under the Lease, as follows:
The Commencement Date of the term of the Lease was June 1,
1986 and the Original Term thereunder expires on June 1, 2001.
2. Tenant hereby is electing to exercise the two (2) options to extend
the Original Term of the Lease, and Landlord is consenting to same. Each option
being for a term of five (5) years each, as granted by Landlord in Section 3.02
of the Lease.
3. Accordingly, the Lease term is hereby extended for an
additional ten (10) years and shall now expire on the 1st day of June, 2011.
4. Section 15.01 of the Lease is deleted in favor of the following:
Section 15.01(a) Subordination. This lease is subject and
subordinate to all ground or underlying leases, if any, and to all mortgages
which may now or hereinafter affect such leases or the real property of which
demises premises are a part and to all renewals, modifications, consolidations,
replacements and extensions of any such underlying leases and mortgages. This
clause shall be self-operative and no further instrument of subordination shall
be required by any ground or underlying lessor or by any mortgagee, affecting
any lease or the real property of which the demised premises are a part. In
confirmation of such subordination, Tenant shall execute promptly any
certificate that Landlord may request.
5. Section 15.02 of the lease is deleted in favor of the following: Any
first mortgage in Section 15.01 to which this lease is subordinate shall contain
language, the substance of which provides:
(a) that provided Mortgagee approves the assignment of this
lease to any third party pursuant to the mortgage, and that third party is not
in default under any obligations of this lease as assigned, any mortgagee upon
foreclosure shall acquire and accept the premises subject to this lease
provided, however, that such third party tenant hereby agrees to attorn to such
purchaser upon foreclosure sale of said first mortgage and to recognize such
purchaser as Landlord under this lease; and provided further that such
purchaser, upon foreclosure sale of said first mortgage, shall not be obligated
to accept this lease or the leasehold estate created hereby in the event such
third party tenant is in default in the performance of any of the terms and
provisions on tenant's part to be kept and performed under this lease
(b) that so long as tenant shall not be in default under this
lease, tenant shall be entitled to peaceful possession of the premises in
accordance with the provisions hereof during the term of this lease, and this
lease shall not be adversely affected or extinguished by the exercise of any
remedy of the mortgagee or trust under the aforedescribed mortgage.
6. Tenant hereby assumes all of the obligation under the Lease.
7. Except as otherwise expressly modified by the terms of this
Amendment, the Lease shall remain unchanged and in full force and effect.
8. This Amendment shall be binding upon and inure to the benefit
of the parties hereto and their respective successors, heirs and assigns.
IN WITNESS WHEREOF, Landlord and Tenant have executed this First
Amendment as o the date first above written.
LANDLORD: SBARRO ENTERPRISES, L.P.
WITNESS
__________________ By:_____________________________
SBARRO OF LARKFIELD, INC.
General Partner
By: Carmela Merendino,
Vice President
TENANT: SBARRO, INC.
WITNESS:
___________________ By:________________________
Robert Rooney
CFO
EXHIBIT 12.01
Sbarro, Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Thousands)
Fiscal Year
2000 1999 1998 1997 1996
Fixed charges:
Interest expense $30,243 $7,899 $0 $0 $0
Rental expense 22,412 21,845 20,552 18,899 17,030
------ ------ ------ ------ ------
Total fixed charges (1) $52,655 $29,744 $20,552 18,899 17,030
======= ======= ======= ====== ======
Earnings available for fixed charges:
Earnings (2) 20,113 48,156 57,136 58,100 60,466
Add fixed charges 52,655 29,744 20,552 18,899 17,030
------ ------ ------ ------ ------
Total earnings available
for fixed charges $72,768 $77,990 $77,688 76,999 $77,496
======= ======= ======= ====== =======
Ratio of earnings to
Fixed charges (3) 1.4 2.6 3.8 4.1 4.6
=== === === === ===
(1) Total fixed charges consist of interest and one-third of rent expense
(deemed to be a reasonable approximation of the interest factor).
(2) Earnings represents income before income taxes, cumulative effect of
change in method of accounting for start-up costs and before minority
interest and equity in net income (loss) of unconsolidated affiliates.
(3) The ratio of earnings to fixed charges has been computed based on
dividing Total earnings available for fixed charges by
Total fixed charges.